Income statement		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Est.
Sales		43,575	39,545	34,192	25,741	23,885	20,405	16,928	17,375	16,561	10,562	10,000
	YoY	-	-9.2%	-13.5%	-24.7%	-7.2%	-14.6%	-17.0%	2.6%	-4.7%	-36.2%	-5.3%
Gross profit		13,093	11,884	10,980	9,665	8,413	8,250	7,871	7,446	6,936	5,469
	YoY	-	-9.2%	-7.6%	-12.0%	-13.0%	-1.9%	-4.6%	-5.4%	-6.8%	-21.2%
	Gross profit margin	30.0%	30.1%	32.1%	37.5%	35.2%	40.4%	46.5%	42.9%	41.9%	51.8%
Operating profit		4,459	2,668	1,764	816	-1,440	1,919	3,596	2,423	2,036	1,162	0
	YoY	-	-40.2%	-33.9%	-53.7%	-	-	87.4%	-32.6%	-15.9%	-42.9%	-
	Operating profit margin	10.2%	6.7%	5.2%	3.2%	-6.0%	9.4%	21.2%	13.9%	12.3%	11.0%	-
Recurring profit		4,543	2,692	1,849	836	-1,383	1,945	3,594	2,419	2,027	1,258	0
	YoY	-	-40.7%	-31.3%	54.7%	-	-	84.8%	-32.7%	-16.2%	-38.0%	-
	Recurring profit margin	10.4%	6.8%	5.4%	3.2%	-5.8%	9.5%	21.2%	13.9%	12.2%	11.9%	-
Net income		4,573	1,598	900	293	-2,117	27	2,318	1,429	1,225	617	0
	YoY	-	-65.1%	-43.7%	-67.4%	-	-	-	-38.3%	-14.3%	-49.7%	-
	Net margin	10.5%	4.0%	2.6%	1.1%	-8.9%	0.1%	13.7%	8.2%	7.4%	5.8%	-
Per-share data (split-adjusted)
Shares issued (year-end; '000)		14,263	14,263	14,263	14,263	14,263	14,263	14,263	14,263	14,263	14,263
EPS		320.6	112.1	63.2	20.5	-148.5	2.0	162.6	100.3	87.3	45.3	0.0
EPS (fully diluted)		-	-	-	-	-	-	-	-	-	-
Dividend per share		60.0	60.0	60.0	60.0	60.0	30.0	35.0	35.0	35.0	35.0	35.0
Book value per share		2,881.7	2,930.5	2,933.2	2,893.7	2,684.3	2,654.0	2,771.4	2,836.2	2,919.1	3,009.6
Balance sheet (JPYmn)
	Cash and cash equivalents	24,848	26,731	32,009	25,020	25,529	23,475	26,000	32,099	29,649	25,851
Total current assets		51,055	51,567	56,522	45,284	43,934	40,015	40,038	46,428	38,439	34,228
Tangible fixed assets		2,369	2,120	2,193	1,486	776	469	373	333	343	367
Intangible assets		4,636	3,509	2,624	2,896	2,226	3,188	2,619	2,140	2,374	2,372
Investments and other assets		7,921	8,313	3,315	9,413	7,844	6,975	6,480	1,295	7,353	9,768
Total assets		65,983	65,510	64,655	59,081	54,781	50,648	49,511	50,197	48,511	46,736
	Accounts payable	4,423	3,675	3,040	2,211	2,402	2,019	1,334	1,598	1,306	652
	Short-term debt	-	-	-	-	-	-	-	-	-	-
	Unused card balance	3,308	2,770	2,660	2,591	2,530	2,335	2,143	1,968	1,800	1,597
Total current liabilities		13,905	13,183	13,448	10,107	10,363	7,932	6,188	6,425	4,929	3,952
	Long-term debt	-	-	-	-	-	-	-	-	-	-
Total fixed liabilities		10,977	10,528	9,370	7,702	6,132	4,862	3,795	3,319	2,968	2,636
Total liabilities		24,882	23,712	22,819	17,809	16,496	12,795	9,983	9,744	7,898	6,588
Total net assets		41,101	41,798	41,835	41,272	38,230	37,830	39,506	40,453	40,612	40,147
Total interest-bearing debt		-	-	-	-	-	-	-	-	-	-
Statement of cash flows (JPYmn)
Cash flows from operating activities		4,266	5,109	4,631	3,844	1,828	2,264	3,466	1,952	789	514
Cash flows from investing activities		-13,950	1,133	-1,146	-5,046	-841	1,381	-6,008	-240	3,346	-5,087
Cash flows from financing activities		-1,998	-2,360	-2,194	-1,799	-1,476	-699	-828	-654	-1,049	-1,223
Financial ratios
ROA (RP-based)		7.4%	4.1%	2.8%	1.4%	-2.4%	3.7%	7.2%	4.9%	4.1%	2.6%
ROE		11.1%	3.9%	2.2%	0.7%	-5.3%	0.1%	6.0%	3.6%	3.0%	1.5%
Equity ratio		62.3%	63.8%	64.7%	69.9%	69.8%	74.7%	79.8%	80.6%	83.7%	85.9%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures prior to FY03/12 are for Nippon Game Card.

Recent updates

Announcement of issuance of first stock acquisition rights via third-party allotment utilizing treasury stock

2021-10-12

Game Card-Joyco Holdings, Inc. announced the issuance of the first series of stock acquisition rights (including a clause for amendment of the exercise price and a clause for suspension of the exercise of rights) via a third-party allocation using treasury stock.

The company has decided to issue its first series of stock acquisition rights via a third-party allotment to SBI Securities Co., Ltd. If all the stock acquisition rights are exercised, the dilution to the company's total outstanding shares as of the end of September 2021 will be 6.3%.

Summary of the issue

Allotment date	October 28, 2021
Total number of stock acquisition rights to be issued	9,000 rights
Value	Gross JPY4.1mn
Number of dilutive shares	900,000 shares (100 shares per stock acquisition right)
Funds to be raised (Approximate net proceeds)	JPY1.1bn
Exercise price and provisions for amendment of exercise price	Initial exercise price: JPY1,251 The exercise price may be revised, but there is no upper limit. The lower limit is JPY876.
Offering and allotment method (Allottee)	To be allocated to SBI Securities via a third-party allotment.
Exercise period	From October 29, 2021 to October 30, 2023.

The company held 923,000 treasury shares as of the end of September 2021 and plans to allocate these treasury shares on a preferential basis as shares of common stock to be delivered following the exercise of the stock acquisition rights. On this basis, the company said the total number of outstanding shares would not increase as a result of the exercise of the stock acquisition rights.

Funds to be raised

Total amount to be paid: JPY4.1mn
Value of assets to be contributed: JPY1.1bn
Approximate issuance costs: JPY7.0mn
Estimated net proceeds: JPY1.1bn

Use of funds to be raised through the third-party allotment

Procurement of components required for the production of new card card-reading units and the production of new card-reading units (Planned period of expenditure, December 2021 to December 2022): JPY1.1bn

Pachinko and pachislot manufacturers are planning to release new types of machines, including "controlled machines (smart pachinko)" and "medal-less machines (smart pachislot)" (collectively referred to as "new machines") from spring 2022 or later. With machines and card-reading units to be rolled out in pachinko halls on an integrated basis, the company is developing new card-reading units for release at the same time as the new machines. As part of these preparations, it needs to keep its stocks of the new card-reading units at a certain level. However, due to the shortage of electronic parts and raw materials, mainly semiconductors, caused by COVID-19 amongst other factors, it is taking time to procure the parts necessary for the production of the new card-reading units. This may adversely affect the company's ability to provide a stable supply of the new card-reading units. As a countermeasure, therefore, the company needs to procure the components it needs for the production of the new card-reading units in advance and to hold higher levels of inventory than before.

The funds raised through the exercise of the stock acquisition rights will be used for purchasing electronic components for board mounting, complete sets of components for manufacturing card-reading units, and other materials necessary for the production of the new card-reading units. The funds required are expected to be at least approximately JPY3.2bn for electronic components for board mounting, approximately JPY3.0bn for component sets for manufacturing card-reading units, and approximately JPY800mn for other materials between December 2021 and December 2022, giving a total of approximately JPY7.0bn. Of this amount, at least about JPY600mn is likely to be needed for electronic components for board mounting by March 2022, about JPY3.0bn for component sets, and about JPY800mn for other materials, for a total of around JPY4.4bn.

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.
Sales		2,169	4,843	7,663	10,562	2,616	5,156			51.6%	10,000
	YoY	-46.4%	-41.6%	-41.5%	-36.2%	20.6%	6.5%				-5.3%
Gross profit		933	2,401	3,898	5,469	1,304	2,581
	YoY	-49.5%	-33.6%	-27.9%	-21.2%	39.7%	7.5%
	Gross profit margin	43.0%	49.6%	50.9%	51.8%	49.8%	50.1%
SG&A expenses		913	2,005	3,201	4,307	987	2,142
	YoY	-19.4%	-5.8%	-12.8%	-12.1%	8.1%	6.8%
	SG&A ratio	42.1%	41.4%	41.8%	40.8%	37.7%	41.5%
Operating profit		20	395	697	1,162	316	439			-	0
	YoY	-97.2%	-73.4%	-59.8%	-42.9%	-	11.1%				-
	Operating profit margin	0.9%	8.2%	9.1%	11.0%	12.1%	8.5%				-
Recurring profit		40	430	764	1,258	384	534			-	0
	YoY	-94.5%	-71.2%	-55.5%	-38.0%	857.0%	24.2%				-
	Recurring profit margin	1.8%	8.9%	10.0%	11.9%	14.7%	10.4%				-
Net income		1	199	365	617	142	191			-	0
	YoY	-99.7%	-77.8%	-66.0%	-49.7%	-	-4.0%				-
	Net margin	0.0%	4.1%	4.8%	5.8%	5.4%	3.7%				-
Quarterly		FY03/21				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales		2,169	2,674	2,820	2,899	2,616	2,540
	YoY	-46.4%	-37.0%	-41.4%	-16.0%	20.6%	-5.0%
Gross profit		933	1,468	1,497	1,571	1,304	1,277
	YoY	-49.5%	-17.0%	-16.2%	2.6%	39.7%	-13.0%
	Gross profit margin	43.0%	54.9%	53.1%	54.2%	49.8%	50.3%
SG&A expenses		913	1,092	1,196	1,106	987	1,155
	YoY	-19.4%	9.7%	-22.3%	-10.0%	8.1%	5.8%
	SG&A ratio	42.1%	40.8%	42.4%	38.2%	37.7%	45.5%
Operating profit		20	375	302	465	316	123
	YoY	-97.2%	-51.5%	23.3%	54.0%	1,472.0%	-67.2%
	Operating profit margin	0.9%	14.1%	10.7%	16.0%	12.1%	4.8%
Recurring profit		40	390	334	494	384	150
	YoY	-94.5%	-49.2%	49.8%	59.9%	857.0%	-61.5%
	Recurring profit margin	1.8%	14.6%	11.8%	17.0%	14.7%	5.9%
Net income		1	198	166	252	142	49
	YoY	-99.7%	-60.1%	-6.7%	66.9%	14,033.1%	-75.3%
	Net margin	0.0%	7.4%	5.9%	8.7%	5.4%	1.9%

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

Performance by product type

Cumulative			FY03/21				FY03/22
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
Sales			2,169	4,843	7,663	10,562	2,616
	YoY		-46.4%	-41.6%	-41.5%	-36.2%	20.6%
	Equipment sales		661	1,254	1,981	2,665	682
		YoY	-58.1%	-62.6%	-63.7%	-59.5%	3.1%
	Card sales		343	869	1,379	1,915	464
		YoY	-51.1%	-38.3%	-33.7%	-30.1%	35.3%
	System-usage fees		1,083	2,550	3,994	5,408	1,380
		YoY	-33.8%	-21.4%	-17.2%	-15.2%	27.4%
	Others		81	170	309	573	88
		YoY	-36.5%	-39.7%	58.2%	-33.5%	8.3%
Gross profit			933	2,401	3,898	5,469	1,304
	YoY		-49.5%	-33.6%	-27.9%	-21.2%	39.7%
	Gross profit margin		43.0%	49.6%	50.9%	51.8%	49.8%
SG&A expenses			913	2,005	3,201	4,307	987
	YoY		-19.4%	-5.8%	-12.8%	-12.1%	8.1%
	SG&A ratio		42.1%	41.4%	41.8%	40.8%	37.7%
Operating profit			20	395	697	1,162	316
	YoY		-97.2%	-73.5%	-59.8%	-42.9%	-
	Operating profit margin		0.9%	8.2%	9.1%	11.0%	12.1%
Quarterly			FY03/21				FY03/22
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
Sales			2,169	2,674	2,820	2,899	2,616
	YoY		-46.4%	-37.0%	-41.4%	-16.1%	20.6%
	Equipment sales		661	592	727	684	682
		YoY	-58.1%	-66.7%	-65.4%	-39.4%	3.1%
	Card sales		343	526	510	536	464
		YoY	-51.1%	-25.5%	-24.0%	-19.0%	35.3%
	System-usage fees		1,083	1,467	1,444	1,414	1,380
		YoY	-33.8%	-8.7%	-8.7%	-8.7%	27.4%
	Others		81	88	139	264	88
Gross profit			933	1,468	1,497	1,571	1,304
	YoY		-49.5%	-17.0%	-16.2%	2.6%	39.7%
	Gross profit margin		43.0%	54.9%	53.1%	54.2%	49.8%
SG&A expenses			913	1,092	1,196	1,106	987
	YoY		-19.4%	9.7%	-22.3%	-10.0%	8.1%
	SG&A ratio		42.1%	40.8%	42.4%	38.2%	37.7%
Operating profit			20	375	302	465	316
	YoY		-97.2%	-51.5%	23.3%	54.0%	-
	Operating profit margin		0.9%	14.1%	10.7%	16.0%	12.1%

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

Earnings-related metrics (cumulative)

Cumulative		FY03/21				FY03/22
		Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4
No. of equipment shipped ('000)		1.7	3.5	6.0	8.8	3.3
	YoY	-83.8%	-85.6%	-85.9%	-82.3%	91.5%
No. of member stores		3,094	3,047	3,000	2,908	2,849
	YoY change	-254	-248	-248	-271	-245
	YoY	-7.6%	-7.5%	-7.6%	-8.5%	-7.9%
	QoQ change	-85	-47	-47	-92	-59
	QoQ	-2.7%	-1.5%	-1.5%	-3.1%	-2.0%
Quarterly		FY03/21				FY03/22
		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4
No. of equipment shipped ('000)		1.7	1.7	2.5	2.9	3.3
	YoY	-83.8%	-87.0%	-86.3%	-61.7%	91.5%

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

1H FY03/22 results

Sales: JPY5.2bn (+6.5% YoY)
Operating profit: JPY439mn (+11.1% YoY)
Recurring profit: JPY534mn (+24.2% YoY)
Net income attributable to owners of the parent: JPY191mn (-4.0% YoY)

There was a tendency among pachinko hall operators, the company's main customers, to refrain from making capital investments due to uncertainties going forward, which were further compounded by the August 2021 announcement of the planned introduction of smart pachinko machines to the market from April 2022. The company conducted marketing activities with an eye toward FY03/23, as well as to respond to customer needs arising from dealing with countermeasures against COVID-19.

Full-year company forecasts

		FY03/21			FY03/22
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Act.	2H Est.	FY Est.
Sales		4,843	5,719	10,562	5,156	4,844	10,000
	YoY	-41.6%	-30.8%	-36.2%	6.5%	-15.3%	-5.3%
Cost of sales		2,442	2,651	5,093	2,575
Gross profit		2,401	3,068	5,469	2,581
	YoY	-33.6%	-7.5%	-21.2%	7.5%
	Gross profit margin	49.6%	53.6%	51.8%	50.1%
SG&A expenses		2,005	2,302	4,307	2,142
	SG&A ratio	41.4%	40.3%	40.8%	41.5%
Operating profit		395	767	1,162	439	-439	0
	YoY	-73.4%	40.2%	-42.9%	11.1%	-157.2%	-100.0%
	Operating profit margin	8.2%	13.4%	11.0%	8.5%	-9.1%	0.0%
Recurring profit		430	828	1,258	534	-534	0
	YoY	-71.2%	55.6%	-37.9%	24.2%	-164.5%	-100.0%
	Recurring profit margin	8.9%	14.5%	11.9%	10.4%	-11.0%	0.0%
Net income		199	418	617	191	-191	0
	YoY	-77.8%	27.1%	-49.6%	-4.0%	-	-100.0%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: “-” indicates that the year-on-year ratio exceeds 1000%.

			FY03/20	FY03/21	FY03/22
(JPYmn)			FY Act.	FY Act.	FY Est.
Sales			16,561	10,562	10,000
	YoY		-4.7%	-36.2%	-5.3%
	Equipment sales		6,585	2,665	2,841
		YoY	-5.2%	-59.5%	6.6%
	Card sales		2,738	1,915	1,675
		YoY	-7.6%	-30.1%	-12.5%
	System-usage fees		6,374	5,408	5,156
		YoY	-8.3%	-15.2%	-4.7%
	Other sales		862	573	328
Gross profit			6,936	5,469	4,419
	YoY		-6.8%	-21.2%	-19.2%
	Gross profit margin		41.9%	51.8%	44.2%
	Equipment sales		968	588
		YoY	31.5%	-39.3%
		Gross profit margin	14.7%	22.1%
	Card sales		1,651	1,243
		YoY	-12.6%	-24.7%
		Gross profit margin	60.3%	64.9%
	System-usage fees		4,065	3,275
		YoY	-12.5%	-19.4%
		Gross profit margin	63.8%	60.6%
	Other sales		250	363
SG&A expenses			4,899	4,307	4,419
	YoY		-2.5%	-12.1%	2.6%
	SG&A ratio		29.6%	40.8%	44.2%
	Personnel expenses		1,666	1,713	1,768
		YoY	5.6%	2.8%	3.2%
	R&D expenses		1,158	716	746
		YoY	-4.0%	-38.2%	4.2%
		R&D ratio	7.0%	6.8%	7.5%
	Other		2,077	1,878	1,905
		YoY	-	-9.6%	1.4%
Operating profit			2,036	1,162	-
	YoY		-16.0%	-42.9%	-100.0%
	Operating profit margin		12.3%	11.0%	0.0%

For FY03/22, the company forecasts sales of JPY10.0bn (-5.3% YoY), operating profit of JPY0mn (-JPY1.2bn YoY), recurring profit of JPY0mn (-1.3bn YoY), and net income attributable to owners of the parent of JPY0mn (-JPY617mn).

Key forecast assumptions

The company has assumed a more severe business environment for FY03/22 compared to the previous year, and expects lower sales and profits. This is based on the assumed impact on pachinko halls of consumers’ voluntary restraint from going out due to the pandemic, and a lower number of pachinko halls in operation compared to the previous fiscal year.

As a premise for the forecast, the company expects to sell 12,000 equipment units (+36.0% YoY). In the previous year, equipment sales declined to 8,821 units (-82.3% YoY) due to self-restraint on operations in April and May 2020 in accordance with the declaration of a state of emergency, as well as a decline in pachinko halls’ appetite for capital spending due to the pandemic. In addition to replacement demand, the company expects sales of counting machines to grow as pachinko halls look at ways of reducing labor costs.

The number of member halls is expected to decrease to 2,586 (-11.1% YoY); the pace of decline in the number of member halls over the past five years (up to FY03/2021) has been an annual average decline of 7.0%. In FY03/2021, however, the number of member halls decreased by 8.5% YoY. In the current year, the company expects the decline to be faster than the five year average and also greater than the decline in FY03/21.

Sales forecast for FY03/2022

By segment, the company expects equipment sales to increase, but card revenue and system usage fee revenue to decline.

Equipment sales are expected to increase by 6.6% YoY to JPY2.8bn, underpinned by increased equipment unit sales. Although the company expects unit sales to be up 36% YoY, it is only forecasting a 6.6% YoY increase the value of equipment sales. Shared Research assumes that the company is factoring in lower selling prices due to intensified competition.

Card sales are expected to be JPY1.7bn (-12.5% YoY). We expect information management fees to decline due to a decline in card consumption resulting from a decrease in the number of member halls.

System usage fee revenue of JPY5.2bn (-4.7% YoY). The company expects revenue to decline due to a decrease in the number of member halls. In Q1 FY03/21, the company discounted system usage fees during the period when pachinko halls refrained from operations. The company expects a recovery against a depressed comparative in Q1 of the current year.

Forecast gross profit and SG&A expenses

Gross profit is forecast to be JPY4.4bn (-19.2% YoY), reflecting the impact of lower sales and a decline in the gross profit margin (44.2%, -7.6% YoY). The overall gross profit margin is expected to decline due to an increase of relatively low-margin equipment sales in the sales mix.

SG&A costs are expected to be JPY4.4bn (+2.6% YoY). This includes personnel expenses of JPY1.8bn (+3.2% YoY), R&D costs of JPY746mn (+4.2% YoY) and other expenses of JPY1.9bn (+1.4% YoY). The company is investing in higher personnel expenses and R&D in order to drive future earnings growth.

Dividends

The company plans to pay a year-end dividend of JPY17.5 per share for a total annual dividend of JPY35.0 per share including the interim dividend of JPY17.5 per share in FY03/21. For FY03/22, the company plans to pay an interim dividend of JPY17.5 per share and a year-end dividend of JPY17.5 per share, for a total annual dividend of JPY35.0 per share.

Medium- to long-term Outlook

Gamecard-Joyco Holdings’ medium-term financial performance is primarily driven by:
Trends in installed pachinko and pachislot machine base;
Trends in pachinko hall sales;
Total number of pachinko halls (itself dependent on competition among halls and market contraction);
Market share of halls using its systems;
R&D expenses progress

As described later, Shared Research believes that regulatory amendment that took effect in February 2018 will pave the way for the introduction of “controlled machines,” and accordingly see prospects of replacement demand for card-reading units (devices from which game balls are borrowed) over the medium term.

Installed pachinko and pachislot machine base, market size, and total pachinko hall count

Installed pachinko and pachislot machine base, market size (pachinko hall sales) and total number of pachinko halls are external factors that the company cannot directly control. All three have continued to show a trend of long-term decline, contributing to a continued harsh operating environment in FY03/21 (see the Market and value chain section for more details).

Key indicators for pachinko/pachislot industry

Indicator	Key figures	CAGR	Reference
Key figures	8.9mn (2019)	-6.4% (past 10 years)	In a long-term downtrend
Pachinko/pachislot market size	JPY20.0tn (2019)	-3.4% (past 10 years)	Declining since 2005 along with game-playing population
Number of pachinko halls	9,035 (2020)	-3.2% (past 10 years)	Shrinking with pachinko/pachislot market Average number of machines installed per hall rising
Number of machines installed	4.0mn (2020	-1.3% (past 10 years)	In a mild downtrend

Source: Shared Research based on various sources

Market share of member halls

Thanks to its merger with JOYCO SYSTEMS Corp. the company was able to capture a majority share of the market for prepaid cards used at pachinko and pachislot halls. The number of member halls is trending down due to new market entrant Daikoku Denki (TSE1: 6430) gaining market share.

Number of member halls, market share

		Dec. 2009	Dec. 2010	Dec. 2011	Dec. 2012	Dec. 2013	Dec. 2014	Dec. 2015	Dec. 2016	Dec. 2017	Dec. 2018	Dec. 2019
Number of stores		5,451	5,429	5,047	4,974	4,836	4,529	4,272	4,020	3,778	3,482	3,248
	YoY	-3.1%	-0.4%	-7.0%	-1.4%	-2.8%	-6.3%	-5.7%	-5.9%	-6.0%	-7.8%	-6.7%
	Share	53.3%	53.3%	52.1%	51.7%	50.9%	48.7%	46.7%	45.1%	43.6%	42.0%

Source: Shared Research based on data from Prepaid System Association

R&D expenses

In response to the ongoing decline in sales that began in FY03/13, the company increased R&D spending steadily through FY03/16, developing new features for its G∞WIN’Z series, next-generation systems, and attempting to create new business areas. One major R&D project was the “inter-industry cooperation service.” The company had been hoping to establish the service, which was built around an electronic money service, but after a review of potential profitability and the return on investment, the company decided it would be difficult to continue and halted development in FY03/16. Due to the additional cost of cancelling this project, the company’s R&D spending swelled to JPY3.9bn in FY03/16.

R&D spending declined sharply to JPY906mn in FY03/17. The decline stemmed mainly from the dropout of expenditures related to the canceled project in FY03/16 and being more focused and selective in its R&D investments. In FY03/18, R&D expenses further dropped to JPY393mn. In FY03/19, R&D expenses rose to JPY1.2bn due to progress in the development of products equipped with addiction prevention features and compliant with new regulations, as well as product development and other measures geared toward providing stable services.

R&D spending was JPY1.2bn in FY03/20 and targeted the development of new products and services, as well as product development and other measures geared toward providing stable services.

R&D expenses

		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
Sales (JPYmn)		43,575	39,545	34,192	25,741	23,885	20,405	16,928	17,375	16,561	10,562
	YoY	-	-9.2%	-13.5%	-24.7%	-7.2%	-14.6%	-17.0%	2.6%	-4.7%	-36.2%
R&D expenses (JPYmn)		1,820	2,724	2,978	3,146	3,931	906	393	1,206	1,158	716
	YoY	-	49.7%	9.3%	5.6%	25.0%	-77.0%	-56.6%	206.9%	-4.0%	-38.2%
	% of sales	4.2%	6.9%	8.7%	12.2%	16.5%	4.4%	2.3%	6.9%	7.0%	6.8%

Source: Shared Research based on company data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures prior to FY03/12 are for Nippon Game Card.

Replacement demand for card-reading units driven by “controlled machines”

Shared Research understands that the regulatory amendment in February 2018 will pave the way for the introduction of “controlled machines” (see the Market and value chain section for details). Because “controlled machines” differ from conventional machines, a new card-reading unit (a device from which game balls are borrowed) is necessary when introducing “controlled machines”. This requirement may drive replacement demand for card-reading units over the medium term.

Regulatory amendment in February 2018 to pave the way for introduction of “controlled machines”

In the partial amendment to the Ordinance for Enforcement of the Act on Control and Improvement of Amusement Businesses and the Regulations Concerning Authorization and Model Approval for Amusement Machines (promulgated in September 2017, slated to take effect in February 2018), a machine equipped with a device that displays the number of game balls (i.e., a “controlled machine”) is added as a new gaming machine standard. Shared Research believes the amendment will pave the way for the introduction of “controlled machines,” which in turn may drive replacement demand for card-reading units (devices from which game balls are borrowed).

Differences between conventional and “controlled machines”

When using conventional machines, players borrow game balls from a card-reader unit (physical game balls are dispensed externally), which are then loaded and shot in the machine by operating a handle. If a game ball enters the prize-winning chucker (scoring hole), prize balls are dispensed externally from the machine. “Controlled machines,” on the other hand, adopt a structure in which there is no physical interaction between the players and the game balls. Our understanding at Shared Research is that instead of dispensing the game balls externally, game balls are managed through an electromagnetic system. In other words, the process of borrowing game balls via a card-reading unit is the same as for conventional machines, but game balls are no longer dispensed externally and the number of borrowed game balls corresponding to the purchased amount is indicated using an electromagnetic system. If the player wins prize balls, these are displayed as an increase in the total number of game balls.

Advantages of “controlled machines” over conventional machines

Shared Research understands that “controlled machines” offer several advantages over conventional machines such as a reduction in gambling addiction, prevention of fraud, enhanced freedom in machine layout, and cost reductions for pachinko halls.

Management of information regarding the number of borrowed game balls and balls dispensed by players should curb the gambling nature of pachinko machines and contribute to a reduction in gambling addiction

The adoption of a structure that removes physical interaction between the players and the game balls should support fraud prevention

Conventional machines re-use game balls across a number of machines by utilizing a supply device. “Controlled machines” re-use game balls in a single machine, eliminating the need for a supply device. This allows pachinko halls to have greater freedom in machine layout and lower costs

Game Machine Industry Association plans to launch "controlled machines"

In May 2020, the Japan Game Machine Industry Association, an association of pachinko machine manufacturers, reported on its business. It stated that it would keep pace with the introduction of medal-less machines being promoted by Nichidenkyo (Japan Electronic Amusement Machine Manufacturers' Association) and cooperate with organizations involved in the supply and manufacture of card-reading units to share information on and promote the introduction of controlled machines, which are expected to contribute to better management of machines and the prevention of gambling addiction. In addition, at the July 2021 meeting of the Japan Game Machine Industry Association, a resolution was passed preparing the industry for the market launch of controlled machines (smart pachinko machines) in April 2022.

Shared Research expects that the introduction of contolled machines will drive demand for replacement of card-reading units (machines that dispense pachinko balls), which will in turn expand profit opportunities for the company (see Medium-to Long-Term Outlook).

Business

Business description

Gamecard-Joyco Holdings Inc., a holding company founded in April 2011, operates a prepaid-card system business for pachinko machines and it is the market leader in terms of number of members (pachinko halls). Nippon Game Card is a 100% subsidiary under the holding company Gamecard Joyco Holdings Inc., which was established on April 1, 2021 (It merged with JOYCO SYSTEMS Corp. in April 1, 2021).

Business model

Nippon Game Card provides third-party issuer prepaid-card systems to pachinko halls (hereafter halls). As of the end of April 2021, there were 2,887 halls using JOYCO SYSTEMS’s card payment systems (market share of 39.2%).

Prepaid-card system and pachinko and pachislot machines

Most pachinko machines are card reader (CR) models. CR models rely on prepaid cards, and players obtain pachinko balls directly from the pachinko machine using their prepaid card.

There are two ways to play a CR model pachinko machine.

The first is when players purchase a prepaid card from a card-vending terminal.
The second, and predominant, way is to insert money directly into a card-reading unit installed next to the pachinko machine, which issues a prepaid card on the spot based on the balance shown on the prepaid card, and balls are then dispensed based on that information.
Customers can play on any machine with a card-reading unit installed.
When done playing, a refund can be obtained using the same card from a separate card-balance refund terminal. The company supplies all components of both systems, including equipment and cards themselves.

While CR model pachislot machines do not exist, there are a growing number of halls who install token-dispensing units for pachislot machines that allow use of the same prepaid-card system (and therefore the same card by individual players) for both pachinko and pachislot machines in the same hall.

Third-party issued card system vs. house-issued card system

There are two types of prepaid-card systems:
- Third-party issuer system: here the card company (i.e., the “third party”), is responsible for payment settlement between the hall and player.
- House-issuer system (proprietary issuance): the company offering the card system merely manages the information stored on cards. The hall operator issues cards and settles payments with players directly.

As of May 2021, Nippon Game Card was the only company in the industry operating a third-party issuer system.

Source: Shared Research based on company data

The advantages of the third-party issuer system compared to the house-issuer system are as follows:

Complete accounting transparency: all payments to the hall are made through the card company.

Superior consumer protection: even if a hall goes out of business, the card company will pay the remaining balance to card holders (However, when done playing, most players turn remaining balance in their cards into cash at a card-balance refund terminal installed at pachinko halls within the same day).

Improved convenience: Players can use their prepaid cards at all Nippon Game Card member halls.

The disadvantage of a third-party issuer system is higher development and running costs of the system. This is due to card companies being responsible for settlements so it has to ensure the security and reliability of the system, which increases the costs compared to house-issuer systems. Shared Research estimates the costs for third-party issuer systems are about 30% to 40% higher than house-issuer systems. Apart from this, Shared Research understands that functionally both types of systems are similar.

Relevant regulations

While the pachinko prepaid-card industry itself is not directly subject to any laws or regulations the company’s clients, halls, are governed by numerous regulations (Law on Control and Improvement of Amusement Businesses, National Public Safety Commission’s Rules, Prefectural Ordinances). In order to actually use a card-reading unit it is necessary to acquire permission from and notify the authorities. Consequently, in the event that any of the various laws and regulations governing pachinko halls are revised, the company’s business may be affected when selling and installing card units to halls.

Finally, in accordance with the Settlement of Funds Act (enacted on April 1, 2010; previously known as Act on Regulation, etc. of Advanced Payment Certificates) Nippon Game Card is registered with the Kanto Regional Financial Bureau as a “third-party issuer”. This regulation requires the company to deposit over 50% of the unused face value on its cards for card balance insurance purposes.

Main product

G∞WIN’Z

In March 2015, Gamecard-Joyco launched G∞WIN’Z, the successor to B∞LEX. As a feature, additional functions such as ball counting systems can be retrofitted (several versions are available). It is the company’s mainstay product as of May 2021. In addition to the features of B∞LEX, pachinko hall operators can select whether to use G∞WIN’Z with card subtraction or ball subtraction system machines (different methods of passing on consumption tax to customers). G∞WIN’Z also features a full-color 5-inch LC screen that can display and transmit original movies and still images, and transmit promotional movies for amusement machines. It also has a removable nozzle for dispensing balls into the trays of the amusement machines.

Two methods of collecting consumption tax: Shared Research understands that thus far ball and token lending charges included tax, with hall operators shouldering the tax burden. But new and renovated stores are increasingly installing equipment with systems designed to handle the consumption tax hike of April 2014. The card subtraction system maintains the same quantity of balls and tokens and subtracts the cost—plus the consumption tax—from the amount loaded on the user’s prepaid card. By contrast, the ball subtraction system keeps the cost the same, but reduces the amount of balls or tokens to compensate for consumption tax. The disadvantage of the card subtraction system is that prepaid card balances become too granular (units of a single yen) for the player to use the entire balance.

Ball-counting systems

Ball-counting systems are devices installed onto card-reading units connected to individual pachinko machines that measure the number of dispensed balls. In the past, players put dispensed balls into boxes at the end of play, and pachinko hall staff carried these boxes to and poured into an automated counting machine (known as a Jet Counter). However, a box full of balls is heavy and the staff needs to carry it for counting, particularly difficult and time-consuming task when large winnings are involved. Winning players also need new empty boxes, further increasing burden on personnel and driving up labor costs.
Amidst the challenging market environment, halls have taken to cost cutting as a means to boost profits, such as through reducing staff headcount and paring back on installation costs. This means that to sell well, prepaid-card systems too must contribute to reducing operating costs and enhancing customer satisfaction. The company claims it is possible to reduce pachinko hall staff to approximately one-half to one-third of their present amount by the introduction of ball-counting systems. Moreover, these systems would contribute to an improved working environment by eliminating the need for employees to carry heavy boxes of pachinko balls.

With the propagation of operations with low-priced balls such as one-yen pachinko, there have been calls for measures to prevent customers from taking balls won at one-yen machines and using them to play at four-yen machines (effectively borrowing low-price balls to play at machines delivering regular-price payouts) in pachinko halls that house both types of machine. Ball-counting systems also serve as a preventative measure against this kind of diversion.

G∞WIN’Z

(Pachinko) unit installation

(Pachislot) token dispenser installation

Source: Company data

Earnings structure

			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.
Sales			43,575	39,545	34,192	25,741	23,885	20,405	16,928	17,375	16,561	10,562
	YoY		-	-9.2%	-13.5%	-24.7%	-7.2%	-14.6%	-17.0%	2.6%	-4.7%	-36.2%
	Equipment sales		25,978	22,295	18,506	11,395	10,654	8,167	5,732	6,949	6,586	2,665
		YoY	-	-14.2%	-17.0%	-38.4%	-6.5%	-23.3%	-29.8%	21.2%	-5.2%	-59.5%
		% of total	59.6%	56.4%	54.1%	44.3%	44.6%	40.0%	33.9%	40.0%	39.8%	25.2%
	Card sales		5,530	5,587	4,854	4,229	3,957	3,609	3,170	2,963	2,738	1,915
		YoY	-	1.0%	-13.1%	-12.9%	-6.4%	-8.8%	-12.2%	-6.5%	-7.6%	-30.1%
		% of total	12.7%	14.1%	14.2%	16.4%	16.6%	17.7%	18.7%	17.1%	16.5%	18.1%
	System-usage fees		11,581	11,230	10,409	9,612	8,808	8,148	7,584	6,950	6,375	5,408
		YoY	-	-3.0%	-7.3%	-7.7%	-8.4%	-7.5%	-6.9%	-8.4%	-8.3%	-15.2%
		% of total	26.6%	28.4%	30.4%	37.3%	36.9%	39.9%	44.8%	40.0%	38.5%	51.2%
	Other sales		485	432	422	503	465	479	440	514	862	573
Gross profit			13,093	11,884	10,980	9,665	8,413	8,250	7,871	7,446	6,936	5,469
	YoY		-	-9.2%	-7.6%	-12.0%	-13.0%	-1.9%	-4.6%	-5.4%	-6.8%	-21.2%
	Gross profit margin		30.0%	30.1%	32.1%	37.5%	35.2%	40.4%	46.5%	42.9%	41.9%	51.8%
	Equipment sales		3,757	2,569	2,356	1,187	554	673	703	737	969	588
		YoY	-	-31.6%	-8.3%	-49.6%	-53.3%	21.5%	4.5%	4.8%	31.5%	-39.3%
		Gross profit margin	14.5%	11.5%	12.7%	10.4%	5.2%	8.2%	12.3%	10.6%	14.7%	22.1%
		% of total	28.7%	21.6%	21.5%	12.3%	6.6%	8.2%	8.9%	9.9%	14.0%	10.8%
	Card sales		3,199	3,285	2,952	2,811	2,468	2,261	2,029	1,889	1,651	1,243
		YoY	-	2.7%	-10.1%	-4.8%	-12.2%	-8.4%	-10.3%	-6.9%	-12.6%	-24.7%
		Gross profit margin	57.8%	58.8%	60.8%	66.5%	62.4%	62.6%	64.0%	63.8%	60.3%	64.9%
		% of total	24.4%	27.6%	26.9%	29.1%	29.3%	27.4%	25.8%	25.4%	23.8%	22.7%
	System-usage fees		6,261	6,028	5,600	5,523	5,340	5,169	5,022	4,648	4,066	3,275
		YoY	-	-3.7%	-7.1%	-1.4%	-3.3%	-3.2%	-2.8%	-7.4%	-12.5%	-19.5%
		Gross profit margin	54.1%	53.7%	53.8%	57.5%	60.6%	63.4%	66.2%	66.9%	63.8%	60.6%
		% of total	47.8%	50.7%	51.0%	57.1%	63.5%	62.7%	63.8%	62.4%	58.6%	59.9%
	Other		-125	0	71	143	50	145	116	173	250	363
SG&A expenses			8,633	9,216	9,216	8,848	9,854	6,331	4,274	5,023	4,899	4,307
	SG&A ratio		19.8%	23.3%	27.0%	34.4%	41.3%	31.0%	25.2%	28.9%	29.6%	40.8%
	Personnel expenses		2,206	2,228	2,278	2,164	2,163	2,139	1,611	1,578	1,666	1,713
	R&D expenses		1,820	2,724	2,978	3,146	3,931	906	393	1,206	1,158	716
	Other		4,607	4,264	3,960	3,538	3,760	3,286	2,270	2,239	2,075	1,878
Operating profit			4,459	2,668	1,764	816	-1,440	1,919	3,596	2,423	2,036	1,162
	YoY		-	-40.2%	-33.9%	-53.7%	-	-	87.4%	-32.6%	-16.0%	-42.9%
	Operating profit margin		10.2%	6.7%	5.2%	3.2%	-6.0%	9.4%	21.2%	13.9%	12.3%	11.0%

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

Sales

The company’s revenues comprise four main components:
▷ Equipment sales
▷ Card sales
▷ System-usage fee revenue
▷ Other revenues (such as, equipment installation and maintenance)
Shared Research thinks the company’s business resembles that of a mobile network operator. The company’s equipment sales roughly correspond to handset sales by mobile network operators while card sales are comparable to network operators’ usage-based tariffs, such as call rates and data usage fees, while system-usage fees mirror network operators’ basic monthly fees.

Source: Shared Research based on company data

Note: Unembossed-cards refer to prepaid cards yet to be encoded with the required information.

Equipment sales (25.2% of total sales, 10.8% of total gross profit in FY03/21)

The company sells via distributors, card systems, token dispensers, and card-balance refund terminals to halls. Equipment sales are calculated by multiplying the amount of equipment units sold in each category by the prices for each type of equipment. The number of equipment units sold changes based on openings and closures of pachinko halls, equipment replacement demand, and market competition. The selling price fluctuates according to the company’s sales strategy.

Card systems: Devices located between (CR model) pachinko machines. They dispense balls and are necessary to calculate card cash balances.
Token dispensers: Devices that dispense pachislot tokens.
Card-balance refund terminals: Devices that calculate card balances after play is finished and refund any remaining balances to players.

Card systems and token dispensers, which are the company’s main product, are procured from Mamiya-OP Co. (TSE1: 7991), International Card System Co. (a subsidiary of Sankyo Co. [TSE1: 6417]) and other companies.

According to the company, the standard replacement cycle for equipment in pachinko halls is roughly five to ten years, with additional capex beyond the replacement cycle driven by equipment upgrades as new functionality comes into the market (e.g., new ball-counting systems etc.).

Equipment sales and number of equipment shipped

Note: Equipment sales are represented by the solid line (in units of JPY1mn) and the number of equipment shipped is represented by the dotted line (in units of 1,000 equipment units delivered)

		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
No. of equipment shipped ('000)		251.7	209.0	177.1	103.4	110.5	70.7	43.6	61.7	49.8	8.8
	YoY	-	-17.0%	-15.3%	-41.6%	6.9%	-36.0%	-38.3%	41.5%	-19.3%	-82.3%
Equipment sales (JPYmn)		25,978	22,295	18,506	11,395	10,654	8,167	5,732	6,949	6,586	2,665
	YoY	-	-14.2%	-17.0%	-38.4%	-6.5%	-23.3%	-29.8%	21.2%	-5.2%	-59.5%

Source: Shared Research based on company data

Card sales (18.1% of total sales, 22.7% of total gross profit in FY03/21)

Card sales are comprised of the sale of actual cards, information management fees, and booking of unredeemed card balances.

Card sales denote the purchase of prepaid cards at pachinko halls and mainly moves according to the number of prepaid cards sold.

Information management fees denote the fees the company receives from pachinko halls when a card settlement occurs after a customer plays pachinko. These fees are determined by the amount spent by players on their cards. Gross profit related to information management fees accounts for most gross profit associated with card sales.

Booking of unredeemed card balances denotes a practice in accordance with The Corporation Tax Act, which stipulates that after four years any unused balances on issued cards purchased by players should be booked as income. Both unused balances and corresponding income have been declining as the industry moved from magnetic card to IC card use. This is because more players using IC cards tend to cash out their unused balances compared to players using magnetic cards.

Prepaid cards are information recording media used to manage pachinko hall sales (ball and token fees). Since 2000 contactless IC cards have superseded one-time use magnetic cards as the industry standard.

Card sales and number of units installed

		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
No. of units installed ('000)		1,879	1,914	1,919	1,836	1,784	1,715	1,532	1,474	1,419	1,348
	YoY	-	1.9%	0.3%	-4.3%	-2.8%	-3.9%	-10.6%	-3.8%	-3.7%	-5.0%
Card sales (JPYmn)		5,530	5,587	4,854	4,229	3,957	3,609	3,170	2,963	2,738	1,915
	YoY	-	1.0%	-13.1%	-12.9%	-6.4%	-8.8%	-12.2%	-6.5%	-7.6%	-30.1%

Source: Shared Research based on company data

System-usage fees (51.2% of total sales, 59.9% of total gross profit in FY03/21)

The company receives a recurring system-usage fee from member halls based on the number of prepaid card systems installed. This varies in accordance with the number of member halls.

The company’s prepaid-card system is based on a design by NTT Data Corp. (TSE1: 9613) and system modifications, such as improvements and addition of new functions, are outsourced to NTT Data. NTT Data also handles the collection of card usage information and data processing.

System-usage fees and number of member halls

		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
No. of pachinko halls		5,006	4,917	4,772	4,443	4,184	3,957	3,674	3,401	3,179	2,908
	YoY	-	-1.8%	-2.9%	-6.9%	-5.8%	-5.4%	-7.2%	-7.4%	-6.5%	-8.5%
System-usage fees (JPYmn)		11,581	11,230	10,409	9,612	8,808	8,148	7,584	6,950	6,375	5,408
	YoY	-	-3.0%	-7.3%	-7.7%	-8.4%	-7.5%	-6.9%	-8.4%	-8.3%	-15.2%

Source: Shared Research based on company data

Others (equipment installation and maintenance)

Equipment installation (card-reading units etc.) and maintenance is conducted by the company’s distributors, such as SANKYO, based on contracts with halls. Installation of network communication equipment for prepaid-card systems (known as a “T-BOX”) is outsourced to separate contractors, and the company then invoices halls for the installation cost.

A T-BOX (Terminal Box) is a data-collection unit used in the prepaid-card systems the company provides to halls. The T-BOX collates sales information and other data from the installed card-reading units and token-dispensing units within a hall. This information is then transmitted to a data center, which consolidates all the data for management of halls.

Gross profit

Gamecard-Joyco’s GPM fluctuates in the range of 30–50%, changing based on the sales breakdown. Card sales and system-usage fees command higher GPMs than the other categories.

In card sales, the majority of gross profit comes from information management fees (handling commissions for account settlements of card balances). The gross profit margin for card sales generally exceeds 60%. Given that for information management fees the gross profit margin is 100%, it is possible to further infer that sales of prepaid cards (booked as a “media fee”) are relatively unprofitable for the company.

Gross profit margin for system-usage fees tends to exceed 60%, with this part of the business contributing about 60% to the overall gross profit. System usage fee income fluctuates according to the number of member halls.

In contrast, in FY03/21, the GPM for equipment sales was only 25.2%, lower than other income sources. Even though equipment sales comprise 22.1% of the company’s overall sales they accounted for only 10.8% of gross profit. Shared Research believes that although the impact on profits of a decline in equipment unit sales will be limited, the number of machines installed in pachinko halls fluctuates and that company generates information management fees based on the number of machines installed.

SG&A expenses

The company’s SG&A expenses are mainly personnel expenses (39.8% of SG&A expenses in FY03/21) and R&D expenses (16.6%), but also include rent, depreciation, commission expenses, etc.
Over the ten-year period from FY03/12 through FY03/21, SG&A expenses peaked at JPY9.6bn in FY03/16 and fell substantially until FY03/18. In FY03/17 and FY03/18, the company cut back on overall costs.

Personnel expenses

Personnel expenses decreased significantly in FY03/18, falling 32.6% YoY due to implementation of a voluntary retirement program in April 2017.

Personnel expenses and number of employees

		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
No. of employees		294	295	298	297	294	279	188	194	194	198
	YoY	-	0.3%	1.0%	-0.3%	-1.0%	-5.1%	-32.6%	3.2%	0.0%	2.1%
Personnel expenses (JPYmn)		2,206	2,228	2,278	2,164	2,163	2,139	1,611	1,578	1,666	1,713
	YoY	-	1.0%	2.2%	-5.0%	0.0%	-1.1%	-24.7%	-2.0%	5.6%	2.8%

Source: Shared Research based on company data

R&D expenses

R&D expenses grew through FY03/16, but sharply decreased in FY03/17 and FY03/18 as the company reviewed its product development system and refined its development projects.

R&D expenses

		FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
R&D expenses (JPYmn)		1,820	2,724	2,978	3,146	3,931	906	393	1,206	1,158	716
	YoY	-	49.7%	9.3%	5.6%	25.0%	-77.0%	-56.6%	206.9%	-4.0%	-38.2%
	% of sales	4.2%	6.9%	8.7%	12.2%	16.5%	4.4%	2.3%	6.9%	7.0%	6.8%

Source: Shared Research based on company data

Strengths and weaknesses

Strengths

Leading company within the industry. The company has the largest market share both in terms of number of halls using its systems and the overall card settlement value. Shared Research thinks this gives the company an advantage in identifying customer needs and factoring these needs into new product development ahead of the competition.

Pachinko/pachislot manufacturers as major shareholders. The company’s major shareholders are leading pachinko/pachislot machine manufacturers, such as SANKYO Co. (TSE1: 6417), Sammy Inc. (a subsidiary of Sega Sammy Holdings Inc. (TSE1: 6460)), and Heiwa Corp. (TSE1: 6412). For a company that develops critical ancillary features for pachinko machine manufacturers, such as prepaid-card systems and card-reading units, these capital ties provide it with an advantageous position in co-operating with pachinko/pachislot machine manufacturers

Specialization in prepaid-card systems. Unlike its competitors, who also deal with other peripheral devices (such as prize exchange systems, membership systems and call lights) for both pachinko and pachislot machines, the company specializes purely in prepaid-card systems. This means it can collaborate with other leading companies in other areas who produce different types of peripheral devices. If new halls were opening up systematically, this could allow companies offering a one-stop shop model bundling a variety of peripheral pachinko devices together plenty of scope to increase market share, however, this is not the case. Instead, demand is currently driven by upgrades of existing facilities and even then, equipment tends to be upgraded in piece-meal fashion. Nippon Game Card’s cross-compatibility with other peripheral device makers’ products in this environment may be thus seen as advantageous.

Weaknesses

Shrinking market. The pachinko market is continuing to shrink. As the dominant player within the industry the company is easily affected by market trends.

Single source of income. The company’s core market is shrinking and while the company could theoretically move into other businesses to grow, it is currently focused on the core business. As of May 2021, the company had only one source of revenue: the pachinko prepaid card system business. This makes its results highly susceptible to the vagaries of the pachinko market.

Regulated industry: The company’s client base of halls is strictly regulated by laws such as the Law on Control and Improvement of Amusement Businesses. By extension, the company’s financial performance is also affected by such regulations.

Market and value chain

Market overview

As for the company’s earnings, trends in the installed pachinko machine base affect its Equipment Sales segment; revenues for card sales (essentially, information management fees or handling commissions for account settlements of card balances) are affected by pachinko hall sales trends; while hall numbers are the swing factor for system-usage fees. Therefore, when looking at the company’s earnings structure it is necessary to focus on the earnings environment and competitive pressure among halls, in addition to trends in the overall size of the pachinko market.

The Japan Productivity Center estimated the total domestic leisure market at JPY72.3tn (+0.6% YoY) in fiscal 2019 (source: White Paper on Leisure 2020). Pachinko/pachislot market (total lending charge of pachinko balls) was estimated at JPY20.0tn (-3.4% YoY). The pachinko/pachislot market has created a large presence to account for around 27.7% of the overall leisure market.

Industry trend

Shared Research focuses on the following indicators to gauge the state of the pachinko/pachislot industry.

Key indicators for pachinko/pachislot industry

Indicator	Key figures	CAGR	Reference
Number of players	8.9mn (2019)	-6.4% (past 10 years)	In a long-term downtrend
Pachinko/pachislot market size	JPY20.0tn (2019)	-3.4% (past 10 years)	Declining since 2005 along with game-playing population
Number of pachinko halls	9,035 (2020)	-3.2% (past 10 years)	Shrinking with pachinko/pachislot market Average number of machines installed per hall rising
Number of machines installed	4.0mn (2020)	-1.3% (past 10 years)	In a mild downtrend

Source: Shared Research based on various sources

Downward trend in player population and declining number of pachinko halls

The pachinko industry has been experiencing a gradual long-term decline in the player base and market size. The player base fell to 8.9mn in 2019 compared to 29.0mn in 1995.

Until 2005, the market size grew despite a shrinking player population as average annual spend per player was growing. The market size (total lending charge of pachinko balls) peaked in 2005 at JPY34.8tn, and fell to JPY20.0tn in 2019.

Pachinko players and market size

	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019
Player population (10,000 people)	2,020	1,930	2,120	1,740	1,790	1,710	1,660	1,450	1,580	1,720	1,670	1,260	1,110	970	1,150	1,070	940	900	950	890
Market size (JPYtn)	28.9	29.2	30.4	32.4	33.9	34.9	33.6	30.2	28.8	28.2	26.0	25.5	25.7	25.0	24.5	23.2	20.4	21.4	20.7	20.0

Source: Shared Research based on White Paper on Leisure

Diverging trends among halls

The number of pachinko halls declined to 9,035 in 2020 from 17,773 in 1997 (source: National Police Agency).

Despite the growing downward trend in the number of pachinko halls, the decline in the number of installed machines has been gentle, dropping to 4.0mn in 2020 from 4.7mn in 1997. On the other hand, hall sizes have become larger, increasing to an average of 443 installed machines per hall in 2020 from 268 machines in 1997.

A decrease in the amount of cash flow available for new investments has forced some smaller operators to sell or shut operations, while larger chains appear to be gaining scale, highlighting continued polarization of the market.

Number of pachinko halls and installed pachinko machines per hall

	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020
Number of pachinko halls	16,988	16,801	16,504	16,076	15,617	15,165	14,674	13,585	12,937	12,652	12,479	12,323	12,149	11,893	11,627	11,310	10,986	10,596	10,060	9,639	9,035
Installed machines per hall (units)	280	285	295	304	318	323	337	338	350	356	365	372	378	388	395	405	412	419	428	435	443

Source: Shared Research based on National Police Agency

Industry regulations

Current gaming machine regulations that may affect the company’s earnings are as follows. To curb excessive gambling nature, voluntary regulations and a regulatory amendment for pachinko and pachislot machines have been implemented since 2015.

The industry association implemented voluntary regulations for pachinko machines in November 2015 and on pachislot machines in December 2015. Further voluntary regulations were introduced for pachislot machines in October 2017.

In February 2018, following the passage of the Bill for the Promotion of Integrated Resort Facilities as a measure to curb gambling addiction, a partial amendment to the Ordinance for Enforcement of the Act on Control and Improvement of Amusement Businesses and the Regulations Concerning Authorization and Model Approval for Amusement Machines was enforced. The proposed amendment includes a change in the number of pachinko balls released per play.

Effect of measures to curb the gambling nature of pachinko machines
In an effort to reduce the attraction of pachinko as a form of gambling and restore it as a form of entertainment, the pachinko machine manufacturers association (the Japan Game Machine Industry Association) agreed to change the lower limit of the pachinko machine jackpot probability range (the chance of “winning big”) to 1/320 (from 1/400 as of May 2015). Effective November 2015, this self-imposed regulatory change meant that game machine manufacturers would no longer be able to sell and newly install extremely competitive “max-type” machines (jackpot probability of 1/370–1/399 but with bigger winnings) that were the mainstay at pachinko halls prior to October 2015.

From May 2016, the Game Machine Industry Association also voluntarily introduced a lower maximum occurrence of a game feature called “probability fluctuation” (the jackpot rate after a successful jackpot) from around 80% to 65% (yet the rules for pachinko machines were changed again in November 2018 and the 65% limit to maximum occurrence of probability fluctuation was removed.)

This latest self-regulatory move was precipitated by pachinko halls increasingly installing “max-type” machines (reached more than 40% of all machines in pachinko halls at one point) to meet demand from hard-core pachinko players. As max-machines pushed up the average cost of playing pachinko, the number of players declined. The industry sought to tighten standards to reduce the addictive gambling aspect of pachinko, with the hope of bringing back more players into pachinko halls.

Impact of voluntary industry restrictions on pachislot machines

Voluntary industry restrictions on pachislot machines (Regulation 5.5)

Voluntary industry restrictions on pachislot machines (Regulation 5.5)
In September 2014, the Security Communication Association changed its testing methodology for pachislot machines. Previously, pachislot machines had to register a minimum payout rate of 55% (at least 11 out of 20 tokens inserted) during a random test run. The new standard called for the same minimum payout rate while testing under a play mode set for the lowest possible payout rate. That same month, the pachislot machine manufacturers association (the Japan Game Machine Industry Association) adopted a new standard that would prohibit penalty features from irregular pressing of machines and also mandated that machine makers switch to motherboards with AT/ART functionality.

Prior to this change, pachislot machines incorporated a main circuit board and a sub board, both of which controlled the payout rate of game tokens. Effective December 2015, the new industry standard requires the sub-board program that controls game token discharge to be incorporated into the main circuit board.

AT Machine: An abbreviation of Assist Time, an AT Machine is a type of pachislot machine. During regular play, even if the user selects the winning icons, they do not match up on the screen because of the push-order rule. However, when the AT function is installed, if the machine selects the AT mode, a display screen on the pachislot machine will indicate the order of the buttons to press to match up the icons on the screen, allowing the user to increase their coins.

ART Machine: An abbreviation of Assist Replay Time, an ART Machine is a type of pachislot machine. When this function is installed, if the machine enters ART mode, the odds of a replay increase, allowing the user to continue playing without using up coins.

Voluntary industry restrictions on pachislot machines (Regulation 5.9)

In June 2016, Liaison Conference of Pachislot Machine Manufacturers explained that they would implement voluntary regulations, which limit ART functions for pachislot machines installed after October 2017, and classified pachislot machines that comply with these voluntary regulations as 5.9 models. New units of the current 5.5 machine models can only be installed up to the end of September 2017.

Shared Research understands that for 5.9 models there will be two sections related to the indicated navigation function (such as the push-order): a regular section, which will prohibit the ART mode, and a section in which the ART mode is allowed. Machines randomly select the transition from the regular to the ART mode, and the ART mode section will limit the total amount of tokens released to 3,000 by ending the game after a maximum of 1,500 games. The chance of the ART mode being selected is limited to under 70%.

Partial amendment to the Ordinance for Enforcement of the Act on Control and Improvement of Amusement Businesses and the Regulations Concerning Authorization and Model Approval for Amusement Machines

In September 2017, the NPA promulgated a partial amendment to the Ordinance for Enforcement of the Act on Control and Improvement of Amusement Businesses and the Regulations Concerning Authorization and Model Approval for Amusement Machines, which was brought into effect in February 2018.

The proposed amendment, which aims to reduce the addiction of pachinko as a form of gambling, limits the game ball-releasing capacity of amusement machines as well as the maximum number of game balls released per jackpot. It also introduces a “settings” feature for pachinko machines.

Tightening regulations on the number of balls released

The amendment newly stipulates a rule which curbs the ball-releasing capacity of amusement machines over a set playing span of four hours.

Under this rule, the total number of game balls released during a four-hour play must be less than 1.5 times the total number of game balls shot by the player.

A pachinko machine releases 100 balls in one minute, therefore it will release 24,000 in four hours (100 balls x 240 minutes). As this new rule stipulates that the amount of balls won must be no greater than 150% the number of balls released, in this example the maximum balls won is 36,000 (24,000 x 1.5). Subtracting 12,000 balls, that would be roughly a JPY50,000 payout (assuming one ball is 4 yen).

Existing technical specifications and standards for one hour and 10 hours were also tightened to the same degree so that the total number of game balls released was reduced to about 2/3 of the current level.

For pachislot machines, a new regulation similar to that of pachinko machines also for a four-hour playing span (1,600 shots in the case of pachislot machines) was put in place.

Regulations on the number of game balls released per jackpot

For pachinko machines, the maximum number of game balls released per jackpot was reduced from the current upper limit of 2,400 to 1,500.

For pachislot machines, the maximum number of game tokens was reduced from 480 to 300.

Addition of gaming machine specifications that allow easy access to information on game balls released

Gaming machine specifications that allow easy access to information on game balls released will be set with an aim to prevent excessively heightened addiction.

The Definitions of Terms Used in Technical Standards section of Appended Table 2 of the Regulations Concerning the Certification of Gaming Machines and Model Inspections, Etc., included in the partial amendment to the Ordinance for Enforcement of the Act on Control and Improvement of Amusement Businesses and the Regulations Concerning Authorization and Model Approval for Amusement Machines (promulgated in September 2017), added the definition for Game Ball Number Display Device as “a device installed in gaming machines that adopt a structure that removes physical interaction between players and game balls, and in which the total number of balls that can be shot by a player is recorded using an electromagnetic system and can be displayed accordingly.” This definition refers to “controlled machines”.

Addition of managers’ operations

Pachinko hall managers will be required to provide information to customers and take other necessary measures to prevent customers’ excessive game playing.

Regulatory change schedule

Pachislot machines that passed model tests prior to January 2018 (pachislot 5.9) will be legally marketable until January 2021. Pachislot machines (pachislot 6.0) which meet the new regulations that went into effect in February 2017 were introduced to the market in October 2018.

Pachinko machines formatted on the old rules (those releasing 2,400 balls) that passed model tests prior to January 2018 were also planned to be legally marketable until January 2021 (However, Japan’s National Public Safety Commission amended supplementary regulations attached to the revised Act on Control and Improvement of Amusement Business, etc. in May 2020, and these amendments extended the deadline for removing non-compliant machines by one year). Pachinko machines fit to the new regulations were introduced to the market in August 2018.

Barriers to entry

Barriers to entry are extremely high given that the company operates in an oligopolistic market and its client base of pachinko halls is subject to strict regulations, such as the Law on Control and Improvement of Amusement Businesses.

Competitive environment

Number of member halls using prepaid-card systems and market share

As of end-April 2021, 7,367 halls used prepaid-card systems, representing approximately 80% of the total 9,035 halls in Japan (as of end December 2018; 10,596 halls at end December 2017). The penetration rate for prepaid-card systems among halls has not changed much.

Halls using prepaid-card systems and market share

			FY03/16	FY03/17	FY03/18	FY03/19
Halls using prepaid-card systems			9,044	8,830	8,491	8,168
	Nippon Game Card and JOYCO SYSTEMS		4,184	3,957	3,674	3,401
		Share	46.3%	44.8%	43.3%	41.6%
	Glory Nasca		2,098	2,076	2,044	2,006
		Share	23.2%	23.5%	24.1%	24.6%
	Mars Engineering		2,051	2,011	1,948	1,891
		Share	22.7%	22.8%	22.9%	23.2%
	Daikoku Denki		527	616	679	743
		Share	5.8%	7.0%	8.0%	9.1%
Total number of halls			11,310	10,986	10,596	10,060

Source: Shared Research based on data from the National Police Agency’s Community Safety Bureau and the Prepaid System Association.
Note: Total number of halls represent the number at end December of each year.

The pachinko prepaid-card industry is an oligopoly dominated by three companies: Gamecard-Joyco Holdings, GLORY NASCA Ltd. (a subsidiary of Glory Ltd. (TSE1: 6457) created from an April 2011 merger with Creation Card Co.), and Mars Engineering Corp. (TSE1: 6419).

Based on sales as of the end of April 2021, the company had 39.2% market share of halls using its prepaid-card system, making it the largest company in the space. GLORY NASCA followed with 24.8%, and Mars Engineering had 23.3%.

The main difference between Nippon Game Card and its competitors is the company’s business model is based on a third-party issuer card system, while the other two provide predominantly house-issuer card systems. (JOYCO SYSTEMS actually sells house-issuer card system but for the company as whole third-party issuer card systems are the dominant system). Additionally, the other two companies sell equipment used outside of the pachinko and pachislot space, whereas Nippon Game Card specializes purely in providing pachinko pre-paid card systems.

Please refer to the Business section for a detailed explanation on the differences between third-party issuer and house-issuer card systems. It is hard to judge whether Nippon Game Card’s strategy of solely focusing on prepaid-card systems and collaborating with other companies for peripheral devices (for example, Daikoku Denki Co. [TSE1: 6430]) is superior to providing clients with other peripheral devices, as GLORY NASCA Ltd. and Mars Engineering do. Some halls, such as top-tier hall DYNAM (operates 399 halls nationwide as of April 2021), exclusively use Mars Engineering’s systems, leaving no room for Nippon Game Card or other peripheral device manufacturers. Nonetheless, not all halls rely solely on one equipment maker, as DYNAM does. Moreover, GLORY NASCA and Mars Engineering’s market shares for peripheral devices are not particularly dominant. Thus, focusing on its core business and partnering with other dominant specialist companies does have its advantages.

After 2012, Daikoku Denki, which has the top market share in computer systems used in pachinko and pachislot halls, entered the prepaid-card systems market. Despite being a latecomer to the market, Daikoku Denki has steadily built up its following, and as of the e