Alinco 5933
アルインコ
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Osaka head office
Yodoyabashi Dai Bldg, 4-4-9 Koraibashi, Chuo-ku, Osaka
Tokyo head office
Nihonbashi Plaza Bldg 14F, 2-3-4 Nihonbashi, Chuo-ku, Tokyo
Main store
1-1-1 Mishimae, Takatsuki City, Osaka
Summary
Alinco’s core business is the development, manufacture, sale, and rental of scaffolding equipment used in construction work.
Scaffolding equipment includes a temporary platform structure used to perform at-height work of two meters or more, and
related equipment such as fall protection systems to protect against flying or falling objects. Founded as an ironworks, Alinco
has been manufacturing steel scaffolds and other work site equipment for over half a century. It also manufactures and sells
aluminum ladders and stepladders, fitness equipment, commercial radio communication equipment (transceivers), and
wireless modules. Each of the company’s diversified businesses has grown into a stable source of revenue, providing a means
of risk diversification.
Machinery
Key dates
2021-05-31
Coverage initiation
Executive summary
Business overview
Alinco’s core business is the development, manufacture, sale, and rental of scaffolding equipment used in construction work. Scaffolding equipment includes a temporary platform structure used to perform at-height work of two meters or more, and related equipment such as fall protection systems to protect against flying or falling objects. Founded as an ironworks, Alinco has been manufacturing steel scaffolds and other work site equipment for over half a century. It also manufactures and sells aluminum ladders and stepladders, fitness equipment, commercial radio communication equipment (transceivers), and wireless modules. Each of the company’s diversified businesses has grown into a stable source of revenue, providing a means of risk diversification.
In FY03/21, the company posted revenue of JPY53.3bn (-4.1% YoY) and recurring profit of JPY2.9bn (-17.0% YoY), with a recurring profit margin (RPM) of JPY5.4% (6.2% in FY03/20). It reported the following segment earnings: Construction Materials (revenue of JPY17.4bn, 32.6% of overall revenue; 55.3% of recurring profit; 7.0% RPM), Scaffolding Material Rental (revenue of JPY15.3bn, 28.6% of overall revenue; 2.2% of recurring profit; 0.4% RPM), Home Equipment (revenue of JPY16.9bn, 31.7% of overall revenue; 40.4% of recurring profit; 6.0% RPM), and Electronic Equipment (revenue of JPY3.8bn, 8.5% of overall revenue; 2.1% of recurring profit; 1.4% RPM).
The Construction Materials segment is where Alinco generates more than 70% of its recurring profit. The segment consists of development, manufacture, and sale of scaffolding equipment (accounting for just under 80% of segment revenue) and logistics equipment (primarily steel racks; just over 20% of segment revenue). The primary customers are equipment leasing and rental companies. Scaffolding equipment accounts for about 60% of the total domestic inventory of temporary construction equipment (inventory held by users). The company notes that most of the conventional prefabricated frame scaffolding currently in use is nearing replacement time, and demand for updating to Alinco’s new Albatross system scaffolding as well as new customers drawn in by Albatross are emerging as growth drivers. The company aims to capture additional market share in the temporary construction equipment market with Albatross by expanding business with existing customers and acquiring new customers.
Metal scaffolding equipment has a service life of as long as 20 years and rarely undergo frequent replacement. Every single product from every single manufacturer must obtain certification from the Scaffolding and Construction Equipment Association of Japan before it can be sold. Scaffolding manufacturers attempt to lock in customers by developing and manufacturing certified products that cannot be used in combination with other companies’ products. The long service life of scaffolding also means that, once a manufacturer gets its products in the customer’s door, there is rarely much change in market share. However, the early 2000s gave rise to a movement to switch over from conventional prefabricated frame scaffolding to “new system scaffolding” designed to meet tighter safety standards and accommodate the taller average height of the Japanese population today. Conventional frame scaffolds and new system scaffolds use completely different structures, with the latter closely aligned with the needs of the market. Hence, in Shared Research’s assessment, those companies who seize the opportunity during the current replacement phase to get a head start on marketing new system scaffolding will be strategically positioned to win market share away from lagging competitors.
In its Scaffolding Material Rental segment, the company mainly rents scaffolds from its own production lines directly to end users. It also provides assembly and removal services on scaffolding for low-rise buildings. Unlike a pure rental business, Alinco is also a manufacturer and hence uses rentals as a marketing tool, showcasing its products and promoting new product uptake. The company determines rental fees based on work schedule durations, and books them on a monthly basis in rental revenue. The main cost items in the segment are storage/maintenance and depreciation. The company has been building up its rental assets since 2018 and expanding rentals of new system scaffolds as it estimates that replacement time is approaching for scaffolding in general. Thanks to long-term relationships with its existing customers, Alinco has a number of products with dominant market share and strong customer endorsement, such as the Aluminum Asagao fall protection system (with 80% market share by the company estimation) and the SK Panel suspended scaffolding system (90% market share). Alinco further aims to obtain new customers in its rental business by enticing them away from its competitors.
In the Housing Equipment segment, the company sells home-use aluminum ladders/stepladders and fitness equipment through DIY stores, mail order, and e-commerce. The majority of products are imported from manufacturing subsidiaries and subcontractors in China. The cost of merchandise purchased equals approximately 50% of revenue. Alinco is one of the three major suppliers of aluminum ladders/stepladders in Japan, and has the largest share of indoor treadmills (priced in the range of several thousand yen). The company began selling home-use aluminum ladders through DIY stores in the 1970s, and was a pioneer in developing such sales channel for the product. Shared Research understands that this channel has also enabled the high market share of home-use fitness equipment Alinco enjoys today.
In its Electronic Equipment segment, the company manufactures and sells radio communication equipment. Electronic Equipment accounts for less than 10% of the company’s overall revenue and profit, but the segment includes high-market-share products. The lineup consists primarily of “specified low-power radios” (commercial transceivers) and also includes municipal emergency radios and wireless modules (electronic components with wireless capabilities). Specified low-power radio devices may be used without a license, just like Wi-Fi devices. The company says it has pioneered the market for transceivers used mainly in restaurants and retail stores and has the top market share. The devices are priced at around JPY10,000 and are manufactured by the company’s subsidiaries and partner companies in Japan and overseas. In 2012, Alinco also became the first company in Japan to supply digital radio devices for firefighters to local governments. In FY03/16, thanks to Alinco’s efforts to capitalize on the move to digital in municipal fire emergency radios, it recorded a segment recurring profit margin of 15.2% (8.4% on a companywide basis).
Earnings trends
In FY03/22, the company reported revenue of JPY55.3bn (+3.6% YoY), operating profit of JPY1.1bn (-56.2% YoY), recurring profit of JPY1.1bn (-60.8% YoY), and net income attributable to owners of the parent of JPY451mn (-72.9% YoY). The company posted EBITDA (defined as recurring profit + depreciation + goodwill amortization) of JPY4.4bn (-30.7% YoY).
The company achieved revenue growth by steadily expanding its market share in its core business. The new Albatross scaffolding system was adopted by major construction companies and shipments began, and the utilization rate in the scaffolding rental business also recovered to the pre-pandemic levels. These factors absorbed a decline in fitness equipment sales, which were robust in the previous year due to strong stay-at-home demand. Profits declined due to multiple cost-increasing factors such as higher international commodity prices (steel and aluminum prices) and purchase prices from overseas (due to yen depreciation and rising freight charges), offsetting the effect of price increases.
For FY03/22, the company forecasts revenue of JPY58.0bn (+5.0% YoY), operating profit of JPY1.5bn (+37.6% YoY), recurring profit of JPY1.7bn (+47.4% YoY), and net income attributable to parent company shareholders of JPY1.1bn (+123.8% YoY).
Medium-term business plan: Dubbed Medium-term Business Plan 2024, Alinco's medium-term plan (covering the three-year period from FY03/22 through FY03/24) targets FY03/24 consolidated revenue of JPY61.0bn (representing an average annual growth rate of 4.6%) and recurring profit of JPY4.3bn (average annual growth rate of 14.1%), with a recurring profit margin target of 7.0% (versus 5.4% margin in FY03/21), and ROE target of 9.0% (versus 6.2% in FY03/21). The company plans to maintain a diversified business portfolio by developing new products that can win the top share of their respective niche markets. At its core scaffolding businesses, the company plans to promote upgrades to its new Albatross system scaffolding and with this capture the top share of this market as well. In other business areas (logistics equipment, home equipment, and electronic equipment), expansion plans include launching new products and entering new markets. The company plans to keep its equity ratio around 50%, giving it a solid financial position that will show client companies that it can be counted on as a reliable supplier of scaffolding.
Strengths and weaknesses
Strengths:
1) Effective strategies in mainstay scaffolding business. Alinco has promptly brought out new products to grab opportunities presented by health and safety code revisions and the taller average height of the Japanese population today. It has earned the endorsement of customers in the scaffolding industry where track record and safety are paramount, creating a virtuous cycle for growing market share.
2) In-house manufacturing boosts customer confidence. In contrast to pure rental businesses, Alinco makes its own scaffolding equipment in house, thus providing direct assurance of product quality and safety.
3) Cross-selling provides added opportunity advantage. Alinco’s scaffolding lineup features a number of aluminum items in addition to steel components, and cross-selling presents it with more opportunities for market share gains and profit growth than typical steel-only scaffolding manufacturers.
Weaknesses:
1) Plans for expansion in the rental business face constraints in terms of maintaining customer relationships with the leasing and rental companies Alinco currently supplies.
2) Current market share of 80–90% in fall protection systems and suspended scaffolding means essentially no remaining room for further market share gains.
3) Efforts to diversify its business portfolio by expanding into home fitness equipment and radio communication equipment have been successful, but they are unlikely to generate synergies with the core scaffolding businesses.
Key financial data
Trends and outlook
Quarterly trends and results
Notes: Figures may differ from company materials due to differences in rounding methods.
Notes: Figures may differ from company materials due to differences in rounding methods.
Full-year FY03/22 results (out May 2, 2022)
Overview
Takeaways
Full-year revenue of JPY55.3bn was up 3.6% YoY. In the construction and housing industries, there were signs of a recovery, as shown by continued year-on-year growth in the floor space of construction starts. At its mainstay scaffolding equipment business, revenue ran ahead of year-ago levels thanks to strong sales of its leading product, Albatross, a new type of scaffolding system. In the Home Equipment business, sales of home fitness equipment, which had been particularly robust in FY03/21, slowed down, but this was offset by higher revenue from the core businesses.
Operating profit of JPY1.1bn was down 56.2% YoY, reflecting greater-than-expected cost increases due to multiple factors, such as higher international commodity prices (steel and aluminum prices) and purchase prices from overseas (due to yen depreciation and rising freight charges). These factors offset the effect of price increases.
Recurring profit was JPY1.1bn, down 60.8% YoY, due partly to equity-method investment losses recorded under non-operating expenses in relation to PT. Kaprindo Sentana Baja, an equity-method affiliate in the Republic of Indonesia.
Net income attributable to parent company shareholders of JPY451mn was down 72.9% YoY. Extraordinary gains and losses booked during the period included JPY176mn in subsidy income received in connection with the construction of its Fukuchiyama logistics center, JPY68mn in extraordinary gains from the sale of certain cross-shareholdings, and an JPY8mn in losses on the disposal of tangible fixed assets.
Versus plan
The achievement rate in FY03/22 results against the company's full-year forecast was 98.6% for revenue (102.5% in FY03/21 vs. full-year results) and 112.6% for recurring profit (122.8%).
Breakdown of results by segment
Construction Materials segment
Revenue: JPY19.9bn (+14.3% YoY; 105.7% of full-year forecast; 102.8% in FY03/21)
Segment recurring profit: JPY1.3bn (-4.4% YoY)
Segment revenue was JPY19.9bn (+14.3% YoY). Sales to new customers and additional purchases from existing customers rose, as the new scaffolding system, Albatross, was adopted by a leading construction company. Sales of racks for distribution warehouses also remained strong.
Segment profit of JPY1.4bn was down 4.4% YoY, hurt by the rising cost of raw materials and shipping.
Rental segment
Revenue: JPY15.9bn (+4.5% YoY, 96.0% of full-year forecast; 100.6% in FY03/21)
Segment recurring profit: JPY87mn (+54.6% YoY)
Segment revenue of JPY15.9bn was up 4.5% YoY. The revenue growth by driven by higher utilization rates of rental equipment for medium- and high-rise building construction, and a recovery in demand for event-related rental scaffolds, which had been impacted by COVID-19, due to Olympic-related orders.
Segment recurring profit of JPY87mn was up 54.6% YoY.
Home Equipment segment
Revenue: JPY15.1bn (-11.0% YoY; 91.6% of full-year forecast; 103.0% in FY03/21)
Segment recurring loss: JPY201mn (versus profit of JPY1.0bn in FY03/21)
Segment revenue of JPY15.1bn was down 11.0% YoY. Sales of fitness equipment, which were robust in FY03/21 due to strong stay-at-home demand, were down YoY.
Segment loss of JPY201mn reflects lower revenue, higher raw material prices due to yen depreciation, and higher purchasing costs reflecting a rise in freight charges.
Electronic Equipment segment
Revenue: JPY4.4bn (+16.1% YoY, 104.5% of full-year forecast; 106.9% in FY03/21)
Segment recurring profit: JPY154mn (+185.7 YoY)
Segment revenue of JPY4.4bn was up 16.1% YoY, reflecting a rebound in corporate demand for low-power radios and professional-use transceivers and the successful rollout of new products.
Segment recurring profit of JPY154mn was up 185.7% YoY.
For details on previous quarterly and annual results, please refer to the Historical financial statements section.
Company forecast for FY03/23 (out May 2, 2022)
Source: Shared Research based on company data
Source: Shared Research based on company data
Overview of full-year company forecast for FY03/23
The company's forecast for FY03/22 earnings is as follows:
The company expects YoY revenue growth in all segments. On the profit front, the company's assumes that it will eventually be able to pass along the increases in its own costs (including the rise in materials costs and cost increases resulting from the weaker yen), but does not expect the improvement in its margins to be evident until the latter half of the fiscal year.
The company's FY03/23 forecast is broken down by segment as follows:
Construction Materials segment
Revenue: JPY21.3bn (+7.3% YoY)
Segment recurring profit: JPY1.3bn (-1.5% YoY)
Rental segment
Revenue: JPY16.1bn (+0.8% YoY)
Segment recurring profit: JPY73mn (-15.9% YoY)
Home Equipment segment
Revenue: JPY15.4bn (+1.9% YoY)
Segment recurring profit: JPY21mn (versus loss of JPY201mn in FY03/22)
Electronic Equipment segment
Revenue: JPY5.3bn (+20.8% YoY)
Segment recurring profit: JPY117mn (-23.9% YoY)
Medium-term business plan
Overview
On April 30, 2021, Alinco unveiled its Medium-Term Business Plan 2024 for the three years from FY03/22 to FY03/24. The company plans to further develop its core scaffolding equipment businesses, aiming in particular to expand its market share of the new scaffolding system. In other businesses (logistics equipment, home equipment, and electronic equipment), it will work to expand business by launching new products and entering new markets.
Numerical targets
For FY03/24, the company targets revenue of JPY61.0bn (versus JPY53.3bn in FY03/21), recurring profit of JPY4.3bn (versus JPY2.9bn), a recurring profit margin of 7.0% (versus 5.4%), and ROE of 9.0% (versus 6.2%). It thus targets record-high revenue and recurring profit. It also aims for an equity ratio of 50.0% (versus 49.8%) to maintain its stable financial condition.
Key initiatives
The company breaks down its key initiatives under its medium-term plan by segment.
Key initiatives for core business
The company’s core business consists of its manufacture, sales, and rental of construction materials (scaffolding equipment). For the construction materials business (in the Construction Materials segment), the plan targets revenue CAGR of 10.8% for the three-year duration of the plan. Key initiatives are:
Obtain top market share in new system scaffolding by promoting the changeover from frame scaffolding to new Albatross scaffolding system
Offer a broad range of Albatross option components and expand into the civil engineering field (e.g., shoring applications)
Further cultivate demand for SK Panel suspended scaffolding for highway repair work
Expand new product lineup such as aluminum workbenches
Cultivate scaffolding markets and raise profit margins in Asia (outside Japan; achieve pre-amortization profitability by tapping into local businesses)
For the Scaffolding Material Rental segment, the plan targets revenue CAGR of 3.1%. Key initiatives are:
Vigorously market the new Albatross scaffolding system, and collaborate with the sales division to expand market share
Develop new areas of shoring, civil engineering, contracting/leasing, etc.
Reconfigure asset holdings portfolio for greater focus on new system scaffolding and high-margin items
Expand deployment of Octo System (one-stop service for scaffold delivery, assembly, and removal) from low-rise buildings to more profitable mid- to high-rise buildings
Alinco views industry changes as a boon for the company
The company plans to promote the safety and cost benefits of switching over from traditional frame scaffolding to the new Albatross scaffolding system.
This strategy is based on the acknowledgement of three forces for change in today’s scaffolding industry.
More stringent scaffolding safety standards are forcing users and scaffolding leasing/rental companies to make a choice between adding additional safety components (guardrails) to existing scaffolding or switching to new system scaffolding (in which guardrails are standard equipment).
Contractual obligations on public construction projects require scaffolding tiers to be erected in order of guardrails first. Private sector contracts are gradually following suit.
For new system scaffolding, users and rental companies must decide on which specific manufacturers or specifications they will use. Scaffolding components and materials made by different suppliers are usually not intercompatible. Securing safety requires using only same-standard equipment at a given worksite.
Alinco highlights two main priority considerations for users and rental companies when selecting scaffolding.
High safety levels: Guardrails-first erection to prevent fall accidents (particularly during assembly) and minimal gaps between components to reduce the risk of fall accidents
Reliable, long-term supply: Since scaffolding is used for nearly 20 years and components from different manufacturers are usually not intercompatible, securing safety requires the reliable supply of same-standard equipment.
Maintain high utilization rates for rental assets and continual investments
In mid- to high-rise building scaffolding, the company will work to boost its products’ brand recognition as well as maintain high utilization for its rental assets by providing rentals at affordable rates to its customers. In low-rise buildings, the company aims to expand beyond the housing market to non-housing industries as well.
Alinco plans to make continual investments in rental assets. Since rental assets are depreciated under a five-year straight line schedule, depreciation charges put a strain on recurring profit in the first two years, but the company nevertheless intends to make use of investment in rental assets as a means of expanding the market share of new system scaffolding.
Key initiatives in logistics business
In the logistics business, the medium-term plan calls for mild decline in revenue (CAGR of -0.2%). This is a cautious target considering that FY03/21 revenue surged 35% to a record high. Wholly owned subsidiary Sofuku Koki Co., Ltd. manufacturers and sells warehousing equipment (largely steel racks) and steel flooring. The company’s three-year key initiatives are:
Flexibly respond to growing demand for the construction of major logistics facilities driven by e-commerce business expansion
Meet the high quake-resistance and precision requirements of the sophisticated multi-function warehousing systems demanded for large-scale logistics facilities
In the field of logistics, the company’s customers demand high-frequency, short-term, small-lot, and quick-turnaround service. It also acknowledges, though, that there is an ongoing rush to build large-scale, sophisticated, multi-function logistics facilities. In addition, Japan’s declining birth rate and aging population and the resulting shrinking workforce and rising labor costs have led to a push for greater automation and labor-saving in ground-level logistics operations. In warehousing operations, the company expects further automation and labor-saving in parcel sorting, storage, and disposal.
Regarding the steel racks manufactured by subsidiary Sofuku Koki, the company acknowledges the need for more advanced functionality to meet the demands of next-generation logistics storage systems, such as automated warehouses* and storage shuttle systems**. Steel racks used in these advanced systems require high quake resistance as well as sufficient precision for high-speed picking shuttles.
Key initiatives for Home Equipment segment
The Home Equipment segment consists of home equipment (aluminum ladders and stepladders) and fitness equipment (exercise treadmills). In home equipment, the medium-term plan targets revenue CAGR of 3.6%. Key initiatives are:
Boost market share by launching a diverse array of new products in its solid existing sales network in B2C (DIY stores, mass merchandisers, etc.) and B2B (hardware suppliers, machine tool distributors, etc.) routes
Deploy sales engineers to expand orders for custom-made products
Pursue synergies between existing business units and recently acquired subsidiaries from production through sales
In fitness equipment, the medium-term plan calls for minimal revenue growth. In Shared Research’s assessment, this forecast assumes that revenue will temporarily level off after the growth driven by the stay-at-home demand experienced in FY03/21. Key initiatives are:
Launch new products and further expand sales through the growing e-commerce and mail-order channels
Establish sales routes to nursing homes and other nursing care facilities
Develop rental business
Expand new product categories such as beauty/hairdressing merchandise and gym machines
Key initiatives for Electronic Equipment segment
The company aims to strengthen existing business (fire emergency radio, digital convenience radio, and specified low-power radio) and to expand into new markets. The medium-term plan targets revenue CAGR of 10.3% in the segment. Key initiatives are:
Strategically engage in IoT business by promoting new product genres (i.e., expanding into new markets), specifically Push-to-Talk over Cellular (PoC) IP radios, app-based push-to-talk (PTT), and sensor modules that fuse existing radio communication technologies with internet and mobile phone communications infrastructure
Develop subscription business to drive new genre expansion
PoC IP radios use mobile phone networks for two-way radio communication. This gives them nearly unlimited range, enabling long-distance talk outside out of range of conventional low-power or commercial radio reception. App-based PTT (push to talk) enables smartphones to be used as a two-way radio with the installation of a PTT app. Smartphone phone PTT offers the same nearly unlimited range of IP radio devices.
Other key initiatives
Build positive stakeholder relations
The company aims to achieve three goals in this area: stabilize business transactions by implementing rigorous compliance, enhance dialog with investors, and build mutually beneficial relations with local communities.
Cultivate talent and adapt to new work styles
The company has adopted three objectives in this area: recruit personnel for new product and business development (see investment plans described below), train new workers to succeed the company’s existing technology/skills and cultivate new leadership, and provide a safe and secure working environment.
Enhance corporate governance
The company has adopted two objectives in this area: strengthen corporate governance to adopt to the Tokyo Stock Exchange’s new market segmentation, and enhance ESG practices.
The company has implemented following ESG measures:
Environment: Use of natural ventilation and natural sunlight at factories, promotion of energy saving by switching to LED lighting
Social: Pursuit of worksite safety and security; support for healthy growth of youth through athletics sponsorship
Governance: Transition to a company with an audit & supervisory committee in 2016; implementation of board of directors effectiveness evaluations since 2017; adoption of restricted stock compensation scheme in 2019; establishment of nominating and compensation committee in 2021; release of earnings results disclosures in English starting in March 2021; and adoption of entrusted executive officer system in June 2021.
Investment plans
Alinco’s medium-term plan includes a three-year investment budget of JPY15.3bn, earmarked as follows:
JPY6.1bn for rental assets: Primary allocations are aggressive outlays for expansion of new system scaffolding market share, and raising the percentage of high- value-added equipment held.
JPY3.0bn for productivity and capacity increase: Primary allocations are logistics center upgrades and streamlining, and automation of manufacturing processes.
JPY1.6bn for new product development: Primary allocations are new product development for multi-application deployment of new system scaffolding, investment to expand custom order products, and investment in IoT products.
JPY4.5bn for M&A: Aimed at acquisitions of or alliances with companies that have niche market leader advantages and good prospects for synergies with Alinco’s existing business portfolio.
JPY100mn for personnel: Aimed at recruiting high-level professionals.
Management policy
Alinco’s medium-term plan lays out the following management policy.
Aims to be a niche market leader
One of Alinco’s goals is to supply top-market-share products in each line of its business. It already has products with top domestic market shares in the lines of business it entered back in the 1980s, such as scaffolding and home fitness equipment. In radio communication equipment as well, the company aims for a top share of niche markets such as commercial transceivers (license-free specified low-power radios) and municipal emergency radio receivers. The company’s strategy is to create niche markets on its own, become the leader in those markets, and erect barriers to market entry, thus generating steady earnings.
Achieved top share by being a pioneer
Alinco was a late entrant into the market for steel scaffolding equipment, which had been dominated by well-capitalized major steel manufacturers. However, Shared Research understands that the company has since gained market share for a wide variety of products through solutions-based development and sales that successfully linked technology with the user/ground-level perspective. The company’s new system scaffolding and suspended scaffolding are typical examples.
Multifaceted approach to business
Alinco’s roots lie in manufacturing and selling steel scaffolding, but it has also diversified its business portfolio to include aluminum products, home fitness equipment, and radio communication devices. Having multiple profit sources ensures a stable earnings structure, and the company has grown without relying on any specific industry. With its latest medium-term plan, it aims to continue diversifying over the longer term. The difference, though, is that whereas it had previously used diversification as a means of balancing out earnings fluctuation, it now aims to use it to generate new business opportunities.
Use of M&A
Up till 2006, the company’s approach to business diversification consisted of internally launching new business units and subsidiaries (except for the 1991 acquisition of Kosugi Electric Co., Ltd. [current Alinco Toyama Co., Ltd.; unlisted]). Since 2007, it has acquired six companies in Japan as subsidiaries, starting with Hikari Molding Co., Ltd. (unlisted), augmenting its product offerings. When considering new acquisitions, Alinco looks for companies with around a 10% recurring profit margin.
Other objectives (KPI)
Maintain around a 50% equity ratio
Financial stability is one of Alinco’s key performance indicators (KPI). Specifically, it achieved a 50% equity ratio in FY03/10, and has maintained the ratio at around 50% ever since. The company considers financial stability as a hedge against cashflow risks during recessionary periods. It claims this enables it to provide a steady, continual supply of scaffolding equipment.
Rationale for emphasis on equity ratio
The company’s emphasis on maintaining a high equity ratio is born of experience. In FY03/99, it had an equity ratio of 26.3%, prompting speculation that the company was in jeopardy, which led to a decline in sales of Alinco products. Scaffolding typically has a useful life of 20 years, and since components made by different suppliers are usually not intercompatible, replacement components (even if only minor) must come from the same supplier. Most customers therefore insist on reliable long-term supply, and tend to avoid using products from companies in vulnerable condition that may not be able to ensure stable supply.
Sustained growth in EBITDA (recurring profit + depreciation + goodwill amortization)
Since the company has racked up investments in rental assets, depreciation charges are expected to increase over the next few years. Given the potential for recurring profit to appear weak, the company says EBITDA provides a more accurate barometer of its actual earnings performance.
The drop in fitness equipment sales due to the falloff of the previous year's stay-at-home demand was more pronounced than the company had expected. Fitness equipment sales in 1H of JPY2.6bn were even below the 1H FY03/20 sales of JPY2.9bn, before the COVID-19 outbreak. On the profit front, despite the impact of the weak yen and rising raw material prices and logistics costs, the company failed to implement price revisions by way of introducing new product models. The company employees' overseas travel was restricted by the pandemic, causing delays in new product development at overseas contract manufacturing sites.
Business
Business overview
Alinco’s core business is the development, manufacture, sale, and rental of scaffolding equipment used in construction work. Its business portfolio also includes sales of work equipment (mainly aluminum ladders/stepladders), home fitness equipment, and the manufacture and sale of commercial radio communications equipment. The company has products with top domestic market shares in each line of its business.
For FY03/21, the company reported revenue of JPY53.3bn (-4.1% YoY) and recurring profit of JPY2.9bn (-17.0% YoY) with a recurring profit margin (RPM) of JPY5.4% (6.2% in FY03/20). Revenue is generated by the following four business segments.
Construction Materials (revenue of JPY17.4bn, 32.6% of overall revenue; 55.3% of recurring profit; 7.0% RPM): Develops, manufactures, sources, and sells scaffolding equipment*. According to the company, it has roughly 20% domestic market share in scaffolding for high-rise buildings and 80–90% share in some specialized scaffolding equipment (e.g., suspended scaffolds used in highway construction). In 2018, the segment expanded into the manufacture and sale of logistics equipment (primarily steel racks).
Scaffolding Material Rental (revenue of JPY15.3bn, 28.6% of overall revenue; 2.2% of recurring profit; 0.4% RPM): Rents scaffolding and other equipment to end users consisting of major construction companies and home builders. Also provides assembly and removal services on scaffolding for low-rise building construction.
Home Equipment (revenue of JPY16.9bn, 31.7% of overall revenue; 40.4% of recurring profit; 6.0% RPM): Sells aluminum ladders/stepladders and home fitness equipment at DIY retailers and online shopping sites. Has 40% domestic market share in home fitness equipment.
Electronic Equipment (revenue of JPY3.8bn, 7.0% of overall revenue; 2.1% of recurring profit; 1.4% RPM): Manufacturers, sells, and rents license-free two-way radios (specified low-power radio***), municipal emergency radio devices, radio power supply units.
Business segments
Construction Materials (32.6% of revenue, 55.3% of recurring profit in FY03/21)
Business model
In Construction Materials, Alinco develops, manufactures, sources, and sells scaffolding equipment. It also manufactures and sells logistics equipment. Its main customers are scaffolding leasing and rental businesses throughout Japan. The 10 biggest customers (by scale of sales) account for around 65% of overall segment revenue.
The company also holds some of its products for rental to its customers (see Scaffolding Material Rental segment). In March 2017, Alinco expanded its Construction Materials business to include manufacture and sale of logistics equipment (primarily steel racks).
Revenue and cost structure
Segment revenue was JPY17.4bn in FY03/21. The breakdown of revenue was 62.4% for scaffolding equipment and 37.6% for logistics equipment. Roughly 50% of scaffolding equipment revenue was accounted for by steel components, 30% by aluminum components, and 20% by other items. These other items include temporary structure equipment outside of Alinco’s own product lineup, such as work site protective netting, which the company obtains from third-party vendors for sale to its customers as needed.
The main raw materials are steel pipes, steel plates, and aluminum, which are purchased from partner factories. Shared Research believes that raw material costs are linked closely to conditions in the hot rolled steel market.
In the event that raw material prices fluctuate more than the company expects, it will mitigate the impact by revising product prices. According to the company, it takes about six months for changes in raw material prices to be reflected in product prices.
Historical business performance
Alinco’s scaffolding equipment production value (including overseas production) has risen for ten straight years through FY03/20 after bottoming at JPY4.5bn in FY03/10. That works out to 10-year CAGR of 13.6%, thus outpacing the 4.3% CAGR for construction investment in Japan (note: figures for FY2018 and FY2019 are estimates by the Ministry of Land, Infrastructure, Transport and Tourism).
In addition to capitalizing on scaffolding demand arising from new construction investments, in 2011 the company launched the new Albatross system scaffolding (detailed later) to cash in on demand for replacement of existing scaffolding, and has been expanding sales since then. The new system scaffolding offers cost advantages of roughly 40–50% over conventional scaffolding in terms of labor and transportation. Alinco estimates that new system scaffolding has currently achieved only around 20% market penetration in Japan, and it aims to capitalize on latent demand by promoting switchovers from conventional scaffolding (see Medium-term management plan).
Segment profit (recurring profit) maintained consistent growth from FY03/10 through FY03/20. Recurring profit margin (RPM) increased from a FY03/10 bottom of 4.2% to a 10-year high of 11.0% in FY03/20. In Shared Research’s assessment, profit margins benefitted from falling costs as factory automation investment played out in FY03/18 and also from revenue growth driven by rising sales of new products.
Lower revenue and profit amid COVID-19 pandemic
In FY03/21, revenue fell 13.2% YoY and recurring profit fell 42.7%, with recurring profit margin dropping to 8.1% (12.3% in FY03/20). This is attributable to impact of the COVID-19 pandemic, notably interruptions and delays in construction work in 1H. In some months, the utilization rates of scaffolding equipment owned by leasing and rental companies, the company’s main customers, fell below 50% (new scaffolding purchases generally increase when utilization rates reach 60 to 65%).
Manufacture and sale of scaffolding equipment
Scaffolding equipment
Definition
Scaffolding equipment collectively refers to a temporary structure (scaffold) erected around buildings to perform at-height work on construction sites, and related equipment such as fall protection systems, safety netting, soundproof sheeting, and other accessory components. Scaffolding is dismantled and removed once construction work is completed, and in most cases it is reused on other worksites following routine maintenance and any necessary repairs. The majority of scaffolding equipment uses metal components (made of either galvanized steel or aluminum) to achieve sufficient structural integrity.
Temporary structures consist of light- and heavy-duty load rating varieties. The heavy-duty types are largely used in civil engineering projects, and include H-beams, sheet piles, and steel liner plates. Heavy-duty temporary structures are capable of providing internal structural support. Although such temporary structures are usually removed after construction, in some cases they are left in place to form part of the permanent structure.
The scaffolding covered in this report are temporary structures of the light-duty variety.
Scaffolds account for 60% of scaffolding equipment in circulation
Scaffolding equipment include scaffold, formwork, shoring, piping, and protective material, among others. Scaffold accounts for roughly 60% of overall scaffolding equipment (based on the value of equipment owned by scaffolding businesses in FY2020, according to research by the Scaffolding and Construction Materials Leasing Association of Japan).
Source: Shared Research based on data from the Scaffolding and Construction Materials Leasing Association of Japan
Scaffolding is crucial for construction, but accounts for just 1% of building costs
The use of scaffolding on construction work is a mandatory requirement for ensuring work crew safety at heights under the Ordinance on Industrial Safety and Health (Article 518*), the enforcement order of the Industrial Safety and Health Act by the Ministry of Health, Labour and Welfare.
According to Alinco, scaffolding equipment accounts for just 1% of the total construction costs. Construction companies generally try to reduce costs, which means constant pressure to reduce material prices. However, Shared Research understands that there is only limited pressure to lower scaffolding prices. This is because there is hardly any room to cut costs since scaffolding accounts for just 1% of overall construction costs, and also because using equipment with safety certification from the Scaffolding and Construction Equipment Association (see below) takes precedence over any potential benefits on the pricing front.
Certification system for objective safety assurance
Scaffolding in Japan requires certification and approval by the Scaffolding and Construction Equipment Association (SCEA). The SCEA tests scaffolding for structural integrity and screens production plants for quality management. Scaffolding that passes certification is issued a seal of approval, which is one of the criteria that customers and leasing/rental businesses look for when deciding to purchase or renting equipment. According to Alinco, civil engineering projects and major construction companies use almost exclusively certified scaffolding.
The SCEA was founded in 1967. Membership consists of 118 first-class regular members (equipment manufacturers), 318 second-class regular members (leasing/rental and repair companies), and 54 supporting members (organizations/companies that support the goals of the association). Alinco’s chairman, Yusaku Inoue, serves as the association’s deputy chairman (as of end-December 2020). The certification system started in 1969.
Obtaining SCEA certification requires scaffolding to undergo random sample strength testing and production plants to be screened for proper quality control. Therefore, Shared Research understands that nearly all of the scaffolding in distribution in Japan is made domestically by Japanese manufacturers.
Little intercompatibility between different scaffolding manufacturers
Equipment manufacturers can individually obtain SCEA certification for their own standards. Therefore, even if two base jacks have the same quality, there is little compatibility between manufacturers since each company has its own different set of standards (dimensions, shape of joints, etc.). Consequently, construction sites will typically only use scaffolding made by a single manufacturer. Leasing and rental companies also prefer scaffolding from manufacturers in frequent use so as to maximize rental asset utilization. Eventually, scaffolding from companies with low-market share tend to get weeded out.
According to Alinco, since scaffolding has a long useful product life of up to 20 years, leasing/rental companies are unlikely to replace rental assets after only a few years. Therefore, the company explains, scaffolding manufacturers are making additional efforts on the sales front to boost their market share during the current phase of transition from frame scaffolding to new system scaffolding.
Alinco leads the next-generation scaffolding charge with new Albatross scaffolding
The majority of scaffolding equipment in Japan consists of either prefabricated frame scaffolding (also known as tubular welded frame scaffolding) or wedge lock scaffolding. Prefabricated frame scaffolding has been used in high-rise building work since the 1960s. Wedge lock scaffolding, on the other hand, has conventionally been used for low-rise buildings (houses, etc.). Since the 2000s, the industry has witnessed a trend pioneered by Alinco to launch new upgraded wedge lock scaffolding systems (or simply "new system scaffolding," which is the term used in this report) with enhanced integral strength for use on high-rise construction sites.
Difference between prefabricated frame scaffolding and wedge lock scaffolding
The primary structural difference between prefabricated frame scaffolding and wedge lock scaffolding is the type of vertical struts or “standards” used. Prefabricated frame scaffolding uses standard arch or “walk through” frames (like those in the illustration above), made of steel piping pre-welded in shape. With wedge lock scaffolding, on the other hand, frames are assembled by fixing the wedge-tipped ends of the ledgers (horizontal pipes) into corresponding pockets on the standards, or by wedge clamping the ledger tips into the flanges or disks on the standards (similar to a ring lock system) hence the name “wedge lock” scaffolding.
Alinco launched the new wedge lock system scaffolding Triple Ace in 2008 and its upgraded version, Albatross, in 2011.
What “new system” means
Alinco’s new Albatross scaffolding features two important upgrades. The first one is height. For decades, prefabricated frame scaffolding in Japan came in just one industry standard height: 170cm. Albatross scaffolding, however, is made with 180cm standards (uprights), so crews no longer have to work hunched over. Prefabricated frame scaffolding has been in use in Japan since the 1960s, and 170cm was considered a reasonable standard height at the time. Over the decades since then, however, Japanese people have grown taller on average, and working with prefabricated frame scaffolding has become harder on the body as many crews are no longer able to stand up straight while working.
Second, in new system scaffolding, guardrails are assembled in advance on the next level above the one on which the assembler is standing (guardrail presetting method). This contrasts with conventional prefabricated frame scaffolding which typically required crews to climb to the next level first before they could install a new guardrail, meaning they had to temporarily work without any fall protection. Operators who wished to attach guardrails first had the choice of purchasing an optional provisional guardrail frame, but the additional work required would have driven up materials and labor costs.
Albatross was one of the earliest scaffolding systems to incorporate the guardrail presetting method, but it initially failed to resonate much with the customers since the method was relatively unknown at the time, and Alinco says that most customers just kept on using the same low-priced prefabricated frame scaffolding.
Nevertheless, the company continued to make safety a priority, and in 2014 it decided to make the guardrail presetting a standard procedure (by using its new system scaffolding) for work projects in its scaffolding leasing business (see Scaffolding Material Rental segment below). The company worked to win over its customers by footing the bill for switching to the new system scaffolding (not just the cost of the equipment, but also the initial costs of learning assembly methods).
Stronger measures were adopted to prevent falls from scaffolds in 2015 when the Ministry of Health, Labour and Welfare compiled its Guidelines for Guardrail Presetting Method. For one thing, the guardrail presetting method was made mandatory on scaffolding used in public works projects. The company says the Ministry’s guidelines played a big part in promoting its new system scaffolding.
In addition to safety, new system scaffolding offers cost benefits as well. The company explains that adopting the new Albatross system scaffolding leads to reductions of roughly 50% in labor costs, 5% in materials costs, 40% in transportation costs, and 25% in total construction costs. It also helps reduce supply yard storage costs, since Albatross enables the dismantling of sections corresponding to the main arch frames in prefabricated frame scaffolding (which take up quite a bit of width) thus requiring less storage space.
Production
Alinco manufactures its scaffolding equipment primarily at its Hyogo Plant in Japan as well as at its subsidiary production plants in China and Thailand.
For construction site scaffolds, it makes components such as standards, battens, and guardrails out of steel given the strength required to ensure work safety. For indoor scaffolds and fall protection systems, aluminum and fiber-reinforced plastic (FRP) are used for weight saving in addition to steel.
Manufacturing process for steel parts
The company uses steel pipe for scaffolding standards and guardrails, and steel plate for battens. For standards manufacturing, Alinco first procures steel pipes from partner companies, which its production plant uses to weld flanges to enable the attachment of guardrails (made of a separate steel pipe). It then sends the components out to be galvanized (using hot-dip galvanization) for rust-proofing.
The steel pipe the company uses is quite heavy, usually of the 48.6mm diameter variety. Scaffolding faces the conflicting needs of both safety and weight savings. Due to its heavy emphasis on safety, Alinco uses heavier and wider pipe than any of its competitors to ensure the strength of individual components and the assembled scaffolding.
Regarding the steel that goes into the scaffolding battens, the company purchases coiled steel, which it then runs through its own factory’s forming lines to machine into useable product. The steel coil it uses is high-tensile steel, which is both light weight and rugged.
Manufacturing process for aluminum parts
The ladders work crews use to move between scaffold levels are made of aluminum. Alinco purchases aluminum profiles (pre-shaped aluminum) which it then cuts and assembles at its production facilities. It connects aluminum parts together using shape-memory alloy coupling or riveting*.
Make-to-stock production
The company mainly runs make-to-stock production based on annual demand forecasts. The lead time for raw materials is three to six months from order placement. In terms of scaffolding equipment demand, first of all, scaffolding equipment (stock) generally has a product life of around 20 years, and since it is organically depleted at a rate of around 5% each year, Shared Research infers that an equivalent amount of new demand can be expected.
Additionally, the company also formulates predictions for scaffolding equipment utilization rates and potential customer demand by exchanging information with construction companies and other users of its main products (regular scaffolding and suspended scaffolding) and it reflects those predictions in its production plans. To quantify the demand for scaffolding, for example, the company says it obtains information from construction companies and leasing/rental companies about the surface area of scaffolding to be assembled for each construction project, and from that it works out estimated quantities for the required components.
Product lines
The new Albatross system and other scaffolds account for roughly a third of Alinco’s overall production. Other types of scaffolding equipment include:
SK Panel suspended scaffolding used in highway and bridge renovation projects. Work is performed on steel platforms hung on chains from an overhead structure, which is why it is called “suspended scaffolding.” Alinco estimates that it has around 90% market share.
Aluminum Asagao fall protection systems: The product gets its name from its external appearance, which resembles morning glory flowers (asagao in Japanese). Conventional fall protection systems were made of steel, with each section weighing 30kg. Alinco, however, succeeded in reducing weight while maintaining strength by switching to aluminum alloy and FRP materials. It says the reduced weight improved worker safety. In addition, the company explains that the product’s sky-blue exterior has been commended for contributing to the aesthetics of the urban cityscape. It estimates its market share at roughly 80%.
Others: Loading platforms (made of galvanized steel); portable workbenches (made of aluminum alloy; for interior platforms)
Why Alinco has many high-market share products
Alinco has around 90% market share in suspended scaffolding and roughly 80% in fall protection systems. The company attributes its ability to develop such high-market share products to meticulous information sharing with its customers in the construction industry, and its successful development of safe and user-friendly products. The company describes the creation of a virtuous cycle, as major market share naturally attracts reviews and feedback from a wide variety of users, which is put to use in new product development.
According Alinco, its Aluminum Asagao fall protection system attracted attention when it was first used by one of the construction majors. Customers remarked on the innocuous effect the Asagao system had on the townscape, thanks to its sky-blue exterior color. Subsequently, other major construction companies began using Alinco’s Asagao line as well.
In Shared Research’s assessment, the company’s ability to take the lead in technological development also contributed to its capture of market share. For example, Alinco initially brought its SK Panel suspended scaffolding to market in 1992, and they were used in the Hanshin Expressway restoration work after the Great Hanshin-Awaji Earthquake in 1995. In 2010, SK Panel was registered with the Ministry of Land, Infrastructure, Transport and Tourism’s New Technology Information System (NETIS)*, which helped promote its use in public works. In 2014, renewal plan for the Metropolitan Expressway was drawn up, and Alinco products were used front and center in the construction work.
Other suspended scaffolding manufacturers have followed in Alinco’s footsteps and registered with NETIS. The V-Max line of suspended scaffolding made by Hory Corporation (unlisted; currently merged into Takamiya Co., Ltd.) obtained NETIS registration in 2013. Nippon Steel Metal Products’ (unlisted) Neo-Bespa and OEM Spider Panels were registered in 2016. Alinco had several years head start on both of these would-be competitors, which, in Shared Research’s assessment, worked to Alinco’s advantage in terms of gaining market share.
Externally sourced items
For scaffolding equipment not-manufactured in house, such as metal piping and protective netting, Alinco purchases such items from external vendors for resale to its customers. Sales of purchased items totaled JPY2.0bn in FY03/21, accounting for 11.7% of Construction Materials revenue.
Sales methods
Products are supplied primarily to leasing and rental companies, and partially to Alinco’s own rental assets
In FY03/21, Construction Materials revenue from external customers was JPY17.4bn, and internal revenue (on in-house produced products allocated to Alinco’s own rental assets) was JPY2.6bn.
The end users of scaffolding equipment are construction companies (construction majors, subcontractors, home builders, etc.), but the customers that Alinco directly supplies are equipment leasing and rental companies. Up till the 1990s, construction companies mostly owned their own scaffolding, but when Japan’s asset bubble burst and construction demand receded, these companies sold off their scaffolding as part of asset liquidation measures, and turned to leasing or renting scaffolding when required. In 2018, roughly 90% of all scaffolding in Japan was supplied through leasing or rental arrangements (according to research by the Scaffolding and Construction Materials Leasing Association of Japan).
The company says that sales to major leasing and rental companies throughout Japan accounted for approximately 60% of scaffolding equipment revenue in FY03/21.
Customer appeal
Leasing and rental companies (the actual scaffolding owners) seek from manufacturers quality (assured safety), cost-effectiveness, and the ability to provide stable supply.
According to the company, once purchased, scaffolding equipment is generally held for 20 years. With 5% annual renewal demand (replacement due to aging or damage/loss on site), leasing and rental companies will continue to purchase products from the same manufacturer, given the typically non-intercompatible nature of scaffolding equipment. Since the manufacturer’s ability to provide stable supply affects the stability of operations at leasing and rental companies, Alinco maintains an equity ratio of around 50% and attaches great importance to financial stability. For example, the company’s equity ratio over the past 10 years (FY03/12–FY03/21) averaged 50.6%.
Logistics equipment
Alinco also operates logistics equipment business under its Construction Materials segment. The business consists of the development, manufacture, and sale of warehousing equipment (mainly steel racks) and steel flooring, handled by wholly owned subsidiary Sofuku Koki Co., Ltd. (unlisted).
Sofuku Koki was founded in 1963 as a wholesaler of steel shelves and completed its own production line in 1969. In 2005, it became a wholly owned subsidiary of Sumitomo Corporation (TSE1: 8053), and in 2017, Alinco acquired 51.0% of voting rights and made it a subsidiary (in Alinco’s FY03/18). In June 2020, the company acquired Sumitomo Corporation’s stake in Sofuku Koki, making it a wholly owned subsidiary.
Sofuku Koki has its own R&D structure and handles everything from development to manufacturing and sales. Some of its products are made to order. Its factory is attached to its head office in Mie prefecture, and it conducts end-to-end processing of supplied steel, including pressing, rolling, and coating.
Shared Research infers that a major factor behind Alinco’s decision to expand into the logistics business is its intention to grow and stabilize its earnings base through expansion of business domain. The company says that Sofuku Koki has been able to capture demand for construction and renewal of logistics warehouses as the e-commerce market expands.
Sofuku Koki recorded FY03/20 revenue of JPY4.9bn and recurring profit of JPY590mn, with a recurring profit margin of 12.0%. In FY03/21, it received a large order and reported revenue of JPY6.5bn (+33.1% YoY), recurring profit of JPY1.1bn (+94.3% YoY), and a recurring profit margin of 17.5%, improving at every level.
Scaffolding Material Rental (28.6% of revenue, 2.0% of recurring profit in FY03/21)
Business model
In this business, Alinco holds part of the in-house manufactured scaffolding equipment as its own assets (recorded as rental assets on the balance sheet) and rents it to end users such as construction companies. Alinco’s rental assets is divided into scaffolding for mid- to high-rise building construction and that for low-rise building construction, and the company also offers assembly service for the latter (the Octo System). Customers of mid- to high-rise scaffolding are mostly major construction companies, while low-rise scaffolding customers are primarily home builders and smaller local building contractors.
The Scaffolding Material Rental business was launched in 1979. It initially included assembly and dismantling service for home building (low-rise building construction). Mid- to high-rise scaffolding rental business expanded during the recessionary period following the oil crisis, as construction companies began switching from owning to leasing or renting scaffolding.
Revenue and cost structure (as of FY03/20)
The Scaffolding Material Rental segment had FY03/20 revenue of JPY17.2bn and recurring profit of JPY556mn, with a recurring profit margin of 3.2%. Mid- to high-rise scaffolding accounted for 51% of revenue, and low-rise scaffolding 49%. The majority of revenue is in principle determined by rental rates multiplied by rental duration (number of days). Duration depends on the work schedule, and is a year or more in some cases.
The main cost items are rental asset depreciation (JPY2.5bn, 19.5% of rental costs), and shipping and warehousing costs (JPY2.1bn on a companywide basis, 17.4% of companywide SG&A expenses). Rental assets is depreciated by straight line method over five years, and the company’s buildup of its rental assets between FY03/18 and FY03/19 resulted in higher depreciation charges in FY03/20.
The buildup of rental assets shows up as increases in the segment’s tangible and intangible assets, which in FY03/18 totaled JPY3.2bn, up 42.8% YoY, and in FY03/19 came to JPY3.1bn, which, although down 1.6% YoY, is still a high figure compared to the historical average (JPY1.7bn from FY03/10 to FY03/17).
Based on Alinco’s disclosure of data for rental income and rental costs, the Scaffolding Material Rental segment’s gross profit margin was 24.5% for FY03/20 (Shared Research estimate). Prior to the company’s rental asset buildup, the gross profit margin averaged 28.8% from FY03/10 to FY03/17, and dipped to 23.8% for the three-year period since FY03/18.
Source: Shared Research based on company data
Business positioning
Rentals as a tool for growing purchases and gaining market share
By operating a rental business, Alinco believes it can provide its in-house products to end users quickly and at low cost, and raise new product visibility through organic sales efforts. By solidifying end user endorsements through rentals, it can raise incentives among its immediate customers, leasing and rental companies, to purchase and own its products.
Since the late 2010s, when Alinco’s competitors began bringing out new system scaffolding of their own, the company has stepped up its sales pitch activities to encourage scaffolding users and leasing/rental companies to switch from prefabricated frame scaffolding to its new system scaffolding. In addition, by building up its rental assets between FY03/18 and FY03/19, the company has increased opportunities to supply rentals of new system scaffolding.
Measures to expand market share through collaboration between scaffolding sales and rental businesses
The company expects that the scaffolding inventory of its core customers, which are major leasing and rental companies, will be a mix of conventional scaffoldings and new system scaffoldings for the next 5 to 10 years, but will gradually shift toward new sytem scaffoldings. According to the company, replacing the conventional scaffoldings with new system scaffoldings in a short period of time is not feasible as it will cause financial strain on its customers. In addition, most of the existing conventional scaffoldings are fully depreciated assets, and replacing all of them with new system scaffolds at once would increase depreciation costs. The company thus expects to continue selling the new system scaffoldings to the same customers for 5 to 10 years.
The company encourages customers to purchase the new system scaffoldings while renting out its own assets to cover for scaffoldings that its customers need but cannot purchase right away. It expanded investment in rental assets in FY03/18–19 and built a system that enables it to quickly supply what its customers need. The company believes that this will help to quickly attract more users and job sites to use its products, which in turn will help to boost the market share of its new system scaffolding.
Home Equipment (35.8% of revenue, 28.5% of recurring profit in FY03/21)
Business model
In its Home Equipment segment, the company sells aluminum ladders/stepladders (for home and business use) and home fitness equipment (treadmills, massagers, etc.). The majority of the main products are imported, largely from Chinese subsidiaries or subcontractors, who manufacture the products based on specifications determined by Alinco. In addition, the company has expanded its product lineup by acquiring a total of four companies since FY03/08.
Alinco’s Home Equipment business originates from the aluminum ladder manufacturing and sales business launched in 1972. The company got into the business to expand its revenue sources by handling aluminum products. This marked the entry point for the company’s pursuit of business diversity. It has since expanded into the handling of home fitness equipment and radio communication equipment (see Electronic Equipment segment below).
Revenue and cost structure
The Home Equipment business had FY03/21 revenue of JPY16.9bn, consisting of JPY9.5bn in aluminum ladders and stepladders and JPY7.4bn in home fitness equipment.
Alinco supplies its aluminum ladders and stepladders to nationwide DIY stores, hardware and tool wholesalers, and distributors. It supplies home fitness equipment also to DIY stores across the country, as well as to mail-order businesses and e-commerce sellers. All revenue is recorded at the point of shipment to the customer.
The majority of Alinco’s aluminum ladders/stepladders and home fitness equipment are imported from manufacturing subsidiaries and subcontractors in China. The cost of merchandise purchased equals approximately 50% of revenue (54.1% in FY03/20). Gross profit margins on aluminum ladders and stepladders supplied to hardware wholesalers (including custom-made products) are around 10% higher than the consumer models supplied to DIY stores.
Shared Research understands that the aluminum ladders/stepladders and home fitness equipment sold at DIY stores or by mail order are generally priced in the JPY10,000–90,000 range. Some of its treadmills sell for over JPY100,000.
It should also be noted that since these imports are conducted in US dollars, fluctuation in JPY/USD exchange rates can affect procurement costs and cause forex gains/losses.
Source: Shared Research based on company data
Product lineup
Aluminum ladders and stepladders (FY03/21: Revenue of JPY9.5bn, 56.1% of segment revenue)
DIY store channel: (revenue approximately JPY4.0bn, by Shared Research estimate based on company data)
Sells aluminum ladders, stepladders, and footstools used in DIY projects. Also sells aluminum building supplies used in home repair and improvement work. Handles brown rice cold storage units for farmhouses.
Hardware wholesaler channel (revenue approximately JPY5.0bn, by Shared Research estimate based on company data)
Handles commercial ladders and stepladders used at construction sites, trolleys for transporting materials, and workbenches used for equipment maintenance. Also manufactures custom-made products to suit factory equipment.
Expanding product range through M & A
Alinco has acquired the following four companies to expand its product range.
Home fitness equipment (FY03/21: Revenue of JPY7.4bn, 43.9% of segment revenue)
Revenue by sales channel: DIY stores and mass merchandisers approx. JPY3.0bn, mail order approx. JPY2.0bn, e-commerce approx. JPY2.5bn (Shared Research estimates based on company data). The company handles a wide of range of product offerings, including treadmills, exercise bikes, exercise equipment, and massagers (see table below).
Expanded business with pioneering efforts
The company started in-house development and production of home fitness equipment in the 1980s, and started selling those products at DIY stores, which had become the sales channel for its aluminum ladders and stepladders. The company was a pioneer in the sale of home fitness equipment. The company also explains that at that time, being able to collaborate on the sale of fitness equipment with DIY stores and tele-shopping operators (both of which were new business forms) raised its profile and led to business expansion.
Alinco’s home fitness products are sold on the mail-order site Japanet Takata. For example, when searching for treadmills, six of the eight hit results are Alinco products (as of April 8, 2021, the same applies below). All three varieties of indoor exercise bikes sold are Alinco products, and the only product listed in the pull-up racks category is the Alinco brand.
Electronic Equipment (7.0% of revenue, 2.1% of recurring profit in FY03/21)
Business model
In its Electronic Equipment segment, Alinco manufactures and sells radio communication devices. Its lineup consists largely of license-free radios (specified low-power radios), simple service work-site radios, business-use radios, and special radio equipment (municipal emergency radios, etc.). Main sources of revenue are specified low-power radios (commercial transceivers) and accessories (microphones, battery chargers, etc.). Specified low-power radios may be used without a license. The company says it has the top market share for commercial transceivers, used mainly in restaurants and retail stores.
Special radio equipment refers to digital fire rescue radio receivers, municipal emergency radio receivers, emergency rescue broadcasting systems for small communities, and wireless modules.
What are wireless modules?
Electronic components with functions required for wireless communication. Wireless modules include wireless chips, peripheral circuits, and software, so devices and products can be equipped with wireless communication functions simply by incorporating such modules. The company supplies wireless modules for surveying equipment and construction machinery of other companies that are promoting ICT support.
Revenue and cost structure
In FY03/21, the Electronic Equipment business had revenue of JPY3.8bn and recurring profit of JPY54mn, with a recurring profit margin of 1.4%. Segment earnings has fluctuated since FY03/17.
The segment had recurring profits of JPY113mn in FY03/17 and JPY106mn in FY03/18, but recurring loss of JPY89mn in FY03/19 due to a drop in revenue caused by a postponement of municipal emergency radio deliveries.
In FY03/20, municipal emergency radio deliveries started to get moving, but 2H earnings were affected by fallback from the rush demand before the consumption tax hike in October 2019 in commercial transceivers.
FY03/21 saw a decline in sales of commercial radio communication equipment in Q1 due to the impact of the COVID-19 pandemic. Q2 onward saw deliveries of municipal emergency radios and growth in sales of wireless modules and new specified low-power radio devices.
Commercial transceivers account for approximately 85% of revenue, and the majority of them are priced at less than JPY10,000. Alinco handles product design and development directly, with manufacturing handled by subsidiaries and subcontractors mostly in China and the Philippines. Emergency radio equipment, on the other hand, are priced in the JPY50,000–100,000 range and are mainly manufactured by Alinco and its domestic subsidiary (Alinco Toyama Co., Ltd. [unlisted]).
The company says that gross profit margins are approximately 50% for commercial transceivers and municipal emergency radio equipment, and approximately 70% for wireless modules.
Delivered first digital radios for firefighters in Japan
The revisions to Japan’s radio legislation in 2008 mandated the transition to digital for fire rescue radio communications by May 2016. In response, in 2012, Alinco delivered the first portable digital radio receiver in Japan to the Higashi Mikawa Fire Department in Aichi Prefecture. By 2016, the company delivered those receivers to local governments nationwide, including cities such as Osaka, Kobe, Kawasaki, and Yokohama. The company says it has acquired nearly 50% market share for fire rescue radio receivers.
Market and value chain
Scaffolding equipment market
Since there are no statistics covering the manufacturing and shipping values of all manufacturers, we estimated the size of Japan’s scaffolding equipment market based on value of scaffolding equipment owned by leasing and rental companies, as compiled by the Scaffolding and Construction Materials Leasing Association of Japan.
At end-FY2020, scaffolding equipment assets held by leasing and rental companies in Japan totaled JPY657.1bn. Framework scaffolding accounted for roughly 60% of all scaffolding equipment assets, and a little less than 50% of which were prefabricated frame scaffolding (nearly 30% of overall assets).
The asset value of prefabricated frame scaffolding grew 22.4% from FY2018 to FY2020. Wedge lock scaffolding, including new system scaffolding, increased 67.0%. Shared Research infers that demand from leasing and rental companies is shifting to new system scaffolding.
Shared Research sees that the asset value of suspended scaffolding has been rising in tandem wit the full-scale repair work on the Metropolitan Expressway since 2014.
Source: Shared Research, based on data from the Scaffolding and Construction Materials Leasing Association of Japan
Affiliated companies (as of November 9, 2021)
At the board of directors meeting held on August 4, 2021, the company resolved to acquire all of the issued shares of Higashi Electronics Industry Co., Ltd. (unlisted) and make it a subsidiary.
Overview of Higashi Electronics Industry
At its Board of Directors' meeting held on November 9, 2021, the company decided to purchase outstanding shares of Uekin Co., Ltd. and make it a subsidiary.
Overview of Uekin
Strengths and weaknesses
Strengths
Effective strategies in mainstay scaffolding business. The company has promptly brought out new products to grab opportunities presented by health and safety code revisions and the taller average height of Japanese. It has earned the endorsement of customers in the scaffolding industry where track record and safety are paramount, creating a virtuous cycle for growing market share.
Alinco came out with the new Albatross system scaffolding in 2011. It was a new product featuring improvements in both labor productivity and safety. Its 180cm standard height is designed for the taller average height of Japanese people today, thus freeing work crews from the constraints of conventional prefabricated frame scaffolds (which are 170cm tall). It also uses the guardrail presetting method (see Business section) to improve assembler’s safety. With Albatross, the company says it aims to come out on top in the competition for next-generation scaffolding market share.
The company has built up a track record in the manufacture of steel prefabricated frame scaffolding going back to the 1960s and forged solid customer relations in the process. Shared Research infers that the customer endorsement for Alinco’s new system scaffolding is based on both product specs and confidence in the Alinco brand.
In-house manufacturing boosts customer confidence. In contrast to pure rental businesses, Alinco makes its own scaffolding equipment in house, thus providing direct assurance of product quality and safety.
At pure rental businesses, scaffolding supplies are mostly purchased from brand-name vendors or built by OEM contractors. Alinco, however, makes its new system scaffolding in-house at its own production facilities. In terms of quality control and safety assurance, this gives it the advantage of seamless information sharing with the factory floor and detailed production process control, leading to increased customer confidence.
Cross-selling provides added opportunity advantage. Alinco’s scaffolding lineup features a number of aluminum items in addition to steel components, and cross-selling presents it with more opportunities for market share gains and profit growth than typical steel-only scaffolding manufacturers.
Nearly all of Alinco’s competitors in the scaffolding industry make exclusively steel products, while no other aluminum ladder or stepladder manufacturers make steel scaffolding. In short, Alinco is the only company in Japan that manufacturers both steel scaffolding for construction sites and aluminum scaffolding equipment. It was the company’s aluminum machining technology that enabled it to develop its Aluminum Asagao line of stronger and lighter weight fall protection systems (which it says have 80% market share in Japan). Alinco also makes portable indoor workbenches for work site use. In Shared Research’s assessment, cross-selling to construction companies and leasing/rental businesses affords Alinco an advantage in terms of opportunities for market share gains and profit growth compared to manufacturers of exclusively steel and exclusively aluminum equipment.
Weaknesses
Plans for expansion in the rental business face constraints in terms of maintaining customer relationships with the leasing/rental companies Alinco currently supplies.
The company is working to build a business model that would leverage expansion in the rental business to achieve further product penetration at the work site level, and by extension deliver benefits to the leasing and rental companies that it supplies as well. Alinco would need to amass a larger rental assets in order to compete with its rivals in the rental business, but the accompanying increase in depreciation charges would strain profits. Expanding its rental business would also put it in competition with the customers it currently has in the leasing/rental market. In Shared Research’s assessment, even if the company were to expand its rental business, it would most likely encounter some degree of constraint in terms of its customer relationships.
Current market share of 80–90% in fall protection systems and suspended scaffolding means essentially no remaining room for further market share gains
Even aside from its new system scaffolding lineup, the company has other scaffolding equipment product lines in which it has essentially cornered the market. Notably, it stands unrivaled in its SK Panel suspended scaffolding and Aluminum Asagao fall protection systems, with market share of 90% and 80%, respectively. These figures indicate that there is hardly any room to expand sales by winning market share away from other companies. In the markets for fall protection systems and suspended scaffolding, Shared Research infers that Alinco’s business prospects will primarily rely on replacement demand.
Efforts to diversify its business portfolio by expanding into home fitness equipment and radio communication equipment have achieved only “unrelated diversification,” which is unlikely to generate synergies with the company’s mainstay scaffolding business.
During the 1980s, the company diversified beyond scaffolding equipment, by expanding into the sales of household aluminum products and home fitness equipment sold mostly through DIY stores. It also began manufacturing and marketing radio equipment. Each of those business grew to become steady sources of revenue. This concurrently provided risk diversification in Alinco’s business portfolio as well. However, in Shared Research’s assessment, home fitness equipment and radio communication equipment constitute “unrelated diversification,” and these businesses are unlikely to generate synergies with the company’s mainstay scaffolding equipment business, either through sharing management resources or through cross-selling.
Historical results and financial statements
Balance sheet