Income statement		FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22	FY03/23
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Est.
Sales		39,545	34,192	25,741	23,885	20,405	16,928	17,375	16,561	10,562	11,447	13,000
	YoY	-9.2%	-13.5%	-24.7%	-7.2%	-14.6%	-17.0%	2.6%	-4.7%	-36.2%	8.4%	13.6%
Gross profit		11,884	10,980	9,665	8,413	8,250	7,871	7,446	6,936	5,469	5,385
	YoY	-9.2%	-7.6%	-12.0%	-13.0%	-1.9%	-4.6%	-5.4%	-6.8%	-21.2%	-1.5%
	Gross profit margin	30.1%	32.1%	37.5%	35.2%	40.4%	46.5%	42.9%	41.9%	51.8%	47.0%
Operating profit		2,668	1,764	816	-1,440	1,919	3,596	2,423	2,036	1,162	1,120	700
	YoY	-40.2%	-33.9%	-53.7%	-	-	87.4%	-32.6%	-15.9%	-42.9%	-3.6%	-37.5%
	Operating profit margin	6.7%	5.2%	3.2%	-6.0%	9.4%	21.2%	13.9%	12.3%	11.0%	9.8%	5.4%
Recurring profit		2,692	1,849	836	-1,383	1,945	3,594	2,419	2,027	1,258	1,270	700
	YoY	-40.7%	-31.3%	54.7%	-	-	84.8%	-32.7%	-16.2%	-38.0%	1.0%	-44.9%
	Recurring profit margin	6.8%	5.4%	3.2%	-5.8%	9.5%	21.2%	13.9%	12.2%	11.9%	11.1%	5.4%
Net income		1,598	900	293	-2,117	27	2,318	1,429	1,225	617	1,262	500
	YoY	-65.1%	-43.7%	-67.4%	-	-	-	-38.3%	-14.3%	-49.7%	104.5%	-60.4%
	Net margin	4.0%	2.6%	1.1%	-8.9%	0.1%	13.7%	8.2%	7.4%	5.8%	11.0%	3.8%
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		112.1	63.2	20.5	-148.5	2.0	162.6	100.3	87.3	45.3	93.9	36.6
EPS (fully diluted)		-	-	-	-	-	-	-	-	-	-
Dividend per share		60.0	60.0	60.0	60.0	30.0	35.0	35.0	35.0	35.0	35.0	35.0
Book value per share		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	3,090.0
Balance sheet (JPYmn)
	Cash and cash equivalents	26,731	32,009	25,020	25,529	23,475	26,000	32,099	29,649	25,851	26,642
Total current assets		51,567	56,522	45,284	43,934	40,015	40,038	46,428	38,439	34,228	36,673
Tangible fixed assets		2,120	2,193	1,486	776	469	373	333	343	367	426
Intangible assets		3,509	2,624	2,896	2,226	3,188	2,619	2,140	2,374	2,372	1,808
Investments and other assets		8,313	3,315	9,413	7,844	6,975	6,480	1,295	7,353	9,768	9,278
Total assets		65,510	64,655	59,081	54,781	50,648	49,511	50,197	48,511	46,736	48,186
	Accounts payable	3,675	3,040	2,211	2,402	2,019	1,334	1,598	1,306	652	2,280
	Short-term debt	-	-	-	-	-	-	-	-	-	-
	Unused card balance	2,770	2,660	2,591	2,530	2,335	2,143	1,968	1,800	1,597	-
Total current liabilities		13,183	13,448	10,107	10,363	7,932	6,188	6,425	4,929	3,952	3,605
	Long-term debt	-	-	-	-	-	-	-	-	-	-
Total fixed liabilities		10,528	9,370	7,702	6,132	4,862	3,795	3,319	2,968	2,636	2,402
Total liabilities		23,712	22,819	17,809	16,496	12,795	9,983	9,744	7,898	6,588	6,007
Total net assets		41,798	41,835	41,272	38,230	37,830	39,506	40,453	40,612	40,147	42,179
Total interest-bearing debt		-	-	-	-	-	-	-	-	-	-
Cash flow statement(JPYmn)
Cash flows from operating activities		5,109	4,631	3,844	1,828	2,264	3,466	1,952	789	514	1,513
Cash flows from investing activities		1,133	-1,146	-5,046	-841	1,381	-6,008	-240	3,346	-5,087	-4,012
Cash flows from financing activities		-2,360	-2,194	-1,799	-1,476	-699	-828	-654	-1,049	-1,223	-214
Financial ratios
ROA (RP-based)		4.1%	2.8%	1.4%	-2.4%	3.7%	7.2%	4.9%	4.1%	2.6%	2.7%
ROE		3.9%	2.2%	0.7%	-5.3%	0.1%	6.0%	3.6%	3.0%	1.5%	3.1%
Equity ratio		63.8%	64.7%	69.9%	69.8%	74.7%	79.8%	80.6%	83.7%	85.9%	87.5%

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

Recent updates

Start of preparation for new business launch

2022-03-18

On March 18, 2022, Gamecard-Joyco Holdings, Inc. announced that it would start preparing for the launch of a new business.

The company will begin preparing for the launch of the cashless business, leveraging its expertise as a payment settlement company. It plans to establish NCL Inc. as a preparatory company on April 1, 2022. Preparations will be handled by NCL.

Trends and outlook

Quarterly trends and results

Earnings (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	8,444	11,447	114.5%	10,000
	YoY	-46.4%	-41.6%	-41.5%	-36.2%	20.6%	6.5%	10.2%	8.4%		-5.3%
Gross profit		933	2,401	3,898	5,469	1,304	2,581	4,009	5,385
	YoY	-49.5%	-33.6%	-27.9%	-21.2%	39.7%	7.5%	2.8%	-1.5%
	Gross profit margin	43.0%	49.6%	50.9%	51.8%	49.8%	50.1%	47.5%	47.0%
SG&A expenses		913	2,005	3,201	4,307	987	2,142	3,150	4,264
	YoY	-19.4%	-5.8%	-12.8%	-12.1%	8.1%	6.8%	-1.6%	-1.0%
	SG&A ratio	42.1%	41.4%	41.8%	40.8%	37.7%	41.5%	37.3%	37.2%
Operating profit		20	395	697	1,162	316	439	858	1,120	-	0
	YoY	-97.2%	-73.4%	-59.8%	-42.9%	-	11.1%	23.1%	-3.6%		-
	Operating profit margin	0.9%	8.2%	9.1%	11.0%	12.1%	8.5%	10.2%	9.8%		-
Recurring profit		40	430	764	1,258	384	534	977	1,270	-	0
	YoY	-94.5%	-71.2%	-55.5%	-38.0%	857.0%	24.2%	27.9%	1.0%		-
	Recurring profit margin	1.8%	8.9%	10.0%	11.9%	14.7%	10.4%	11.6%	11.1%		-
Net income		1	199	365	617	142	191	370	1,262	-	0
	YoY	-99.7%	-77.8%	-66.0%	-49.7%	-	-4.0%	1.4%	104.5%		-
	Net margin	0.0%	4.1%	4.8%	5.8%	5.4%	3.7%	4.4%	11.0%		-
Earnings (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	3,288	3,003
	YoY	-46.4%	-37.0%	-41.4%	-16.0%	20.6%	-5.0%	16.6%	3.6%
Gross profit		933	1,468	1,497	1,571	1,304	1,277	1,428	1,376
	YoY	-49.5%	-17.0%	-16.2%	2.6%	39.7%	-13.0%	-4.6%	-12.4%
	Gross profit margin	43.0%	54.9%	53.1%	54.2%	49.8%	50.3%	43.4%	45.8%
SG&A expenses		913	1,092	1,196	1,106	987	1,155	1,008	1,114
	YoY	-19.4%	9.7%	-22.3%	-10.0%	8.1%	5.8%	-15.7%	0.7%
	SG&A ratio	42.1%	40.8%	42.4%	38.2%	37.7%	45.5%	30.7%	37.1%
Operating profit		20	375	302	465	316	123	419	262
	YoY	-97.2%	-51.5%	23.3%	54.0%	-	-67.2%	38.7%	-43.7%
	Operating profit margin	0.9%	14.1%	10.7%	16.0%	12.1%	4.8%	12.7%	8.7%
Recurring profit		40	390	334	494	384	150	443	293
	YoY	-94.5%	-49.2%	49.8%	59.9%	857.0%	-61.5%	32.6%	-40.7%
	Recurring profit margin	1.8%	14.6%	11.8%	17.0%	14.7%	5.9%	13.5%	9.8%
Net income		1	198	166	252	142	49	179	892
	YoY	-99.7%	-60.1%	-6.7%	66.9%	14,033.1%	-75.3%	7.8%	254.0%
	Net margin	0.0%	7.4%	5.9%	8.7%	5.4%	1.9%	5.4%	29.7%

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	5,156	8,444
	YoY		-46.4%	-41.6%	-41.5%	-36.2%	20.6%	6.5%	10.2%
	Equipment sales		661	1,254	1,981	2,665	682	1,266	2,581
		YoY	-58.1%	-62.6%	-63.7%	-59.5%	3.1%	1.0%	30.3%
	Card sales		343	869	1,379	1,915	464	953	1,470
		YoY	-51.1%	-38.3%	-33.7%	-30.1%	35.3%	9.7%	6.6%
	System-usage fees		1,083	2,550	3,994	5,408	1,380	2,734	4,064
		YoY	-33.8%	-21.4%	-17.2%	-15.2%	27.4%	7.2%	1.8%
	Others		81	170	309	573	88	201	328
Gross profit			933	2,401	3,898	5,469	1,304	2,581	4,009
	YoY		-49.5%	-33.6%	-27.9%	-21.2%	39.7%	7.5%	2.8%
	Gross profit margin		43.0%	49.6%	50.9%	51.8%	49.8%	50.1%	47.5%
SG&A expenses			913	2,005	3,201	4,307	987	2,142	3,150
	YoY		-19.4%	-5.8%	-12.8%	-12.1%	8.1%	6.8%	-1.6%
	SG&A ratio		42.1%	41.4%	41.8%	40.8%	37.7%	41.5%	37.3%
Operating profit			20	395	697	1,162	316	439	858
	YoY		-97.2%	-73.5%	-59.8%	-42.9%	-	11.1%	23.1%
	Operating profit margin		0.9%	8.2%	9.1%	11.0%	12.1%	8.5%	10.2%
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	3,288
	YoY		-46.4%	-37.0%	-41.4%	-16.1%	20.6%	-5.0%	16.6%
	Equipment sales		661	592	727	684	682	584	1,315
		YoY	-58.1%	-66.7%	-65.4%	-39.4%	3.1%	-1.4%	80.9%
	Card sales		343	526	510	536	464	489	517
		YoY	-51.1%	-25.5%	-24.0%	-19.0%	35.3%	-25.5%	1.4%
	System-usage fees		1,083	1,467	1,444	1,414	1,380	1,354	1,330
		YoY	-33.8%	-8.7%	-8.7%	-8.7%	27.4%	-7.7%	-7.9%
	Others		81	88	139	264	88	113	127
Gross profit			933	1,468	1,497	1,571	1,304	1,277	1,428
	YoY		-49.5%	-17.0%	-16.2%	2.6%	39.7%	-13.0%	-4.6%
	Gross profit margin		43.0%	54.9%	53.1%	54.2%	49.8%	50.3%	43.4%
SG&A expenses			913	1,092	1,196	1,106	987	1,155	1,008
	YoY		-19.4%	9.7%	-22.3%	-10.0%	8.1%	5.8%	-15.7%
	SG&A ratio		42.1%	40.8%	42.4%	38.2%	37.7%	45.5%	30.7%
Operating profit			20	375	302	465	316	123	419
	YoY		-97.2%	-51.5%	23.3%	54.0%	-	-67.2%	38.7%
	Operating profit margin		0.9%	14.1%	10.7%	16.0%	12.1%	4.8%	12.7%

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 member halls		3,094	3,047	3,000	2,908	2,849	2,802	2,768
	YoY change	-254	-248	-248	-271	-245	-245	-232
	YoY	-7.6%	-7.5%	-7.6%	-8.5%	-7.9%	-8.0%	-7.7%
	QoQ change	-85	-47	-47	-92	-59	-47	-34
	QoQ	-2.7%	-1.5%	-1.5%	-3.1%	-2.0%	-1.6%	-1.2%

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

Full-year FY03/22 results

Sales: JPY11.4bn (+8.4% YoY)
Operating profit: JPY1.1bn (-3.6% YoY)
Recurring profit: JPY1.3bn (+1.0% YoY)
Net income attributable to owners of the parent: JPY1.3bn (+104.5% YoY)

Pachinko hall operators, which comprise the company's primary customer base, generally maintained a cautious stance toward capital expenditures in light of the upcoming introduction of smart pachinko and pachislot machines, although there were some hall renovations associated with machine replacement. Against this backdrop, the company actively conducted proposal-based marketing to existing customers, and equipment sales increased YoY as a result.

Full-year company forecasts

		FY03/22			FY03/23
(JPYmn)		1H Act.	2H Act.	FY Act.	FY Est.
Sales		5,156	6,291	11,447	13,000
	YoY	6.5%	10.0%	8.4%	13.6%
Cost of sales		2,575	3,487	6,062
Gross profit		2,581	2,804	5,385
	YoY	7.5%	-8.6%	-1.5%
	Gross profit margin	50.1%	44.6%	47.0%
SG&A expenses		2,142	2,122	4,264
	SG&A ratio	41.5%	33.7%	37.2%
Operating profit		439	681	1,120	700
	YoY	11.1%	-11.2%	-3.6%	-37.5%
	Operating profit margin	8.5%	10.8%	9.8%	5.4%
Recurring profit		534	736	1,270	700
	YoY	24.2%	-11.1%	1.0%	-44.9%
	Recurring profit margin	10.4%	11.7%	11.1%	5.4%
Net income		191	1,071	1,262	500
	YoY	-4.0%	156.2%	104.5%	-60.4%

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%.

For FY03/23, the company forecasts sales of JPY13.0bn (+13.6% YoY), operating profit of JPY700mn (-37.5% YoY), recurring profit of JPY700mn (-44.9bn YoY), and net income attributable to owners of the parent of JPY500mn (-60.4% YoY).

The company expects continued decline in the number of pachinko and pachislot halls. Further, it says the introduction of smart pachinko and pachislot machines planned for 2H or later will have an impact on industry trends.

Dividends

Year-end dividend was JPY17.5 per share; adding the interim dividend of JPY17.5, the total annual dividend in FY03/22 came to JPY35.0 per share. For FY03/23, 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
No. of member halls		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%
	Market 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 "token-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)　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 end of April 2020, had 832 member halls for a 11.3% market share. Daikoku Denki, like Mars Engineering, appears to be retaining clients by providing them with other peripheral devices.

Historical earnings results

Cumulative Q3 FY03/22 results

Sales: JPY8.4bn (+10.2% YoY)
Operating profit: JPY858mn (+23.1% YoY)
Recurring profit: JPY977mn (+27.9% YoY)
Net income attributable to owners of the parent: JPY370mn (+1.4% YoY)

Business environment and company initiatives

Pachinko hall operators, which are the company's primary customer base, maintained a cautious stance toward capital expenditures. However, equipment sales were up due to increased hall renovations associated with replacement of pachinko and pachislot machines.

In Q1 FY03/22 (April–June 2021), sales were JPY2.6bn (+20.6% YoY), and operating profit was JPY316mn (versus operating profit of JPY20mn in Q1 FY03/21). Sales and operating profit grew YoY in reaction to a deterioration in Q1 FY03/21 (April–June 2020) when pachinko halls curtailed operations amid the pandemic.

In Q2 FY03/22 (July–September 2021), sales were JPY2.5bn (-5.0% YoY), and operating profit was JPY123mn (-67.2% YoY). Sales fell YoY, while operating profit also fell due to an increase in SG&A expenses.

In Q3 FY03/22 (October–December 2021), sales were JPY3.3bn (+16.6% YoY), and operating profit was JPY419mn (+38.7% YoY). Sales and operating profit rose YoY as equipment sales grew due to increased hall renovations, and the utilization rate for pachinko and pachislot machines improved.

Progress against full-year forecast for FY03/22

Versus the full-year FY03/22 forecast, the progress rate for cumulative Q3 was 84.4% for sales, while the company recorded operating profit of JPY858mn, compared to a full-year forecast of 0mn.

Cumulative Q3 results showed that the company was ahead of plan for its full-year forecast. However, no changes have been made to the forecast. The company noted that the impact in Q4 from global shortages of raw materials and electronic components such as semiconductors caused by the COVID-19 pandemic remained uncertain.

Sales by product type

Equipment sales: JPY2.6bn (+30.3% YoY). In Q1 FY03/21 (April–June 2020), unit sales declined YoY as a result of pachinko halls refraining from operations in April–May 2020 in response to the declaration of a state of emergency, which reduced pachinko halls' appetite for capital investment and led to a reduction in sales activities by the company. In cumulative Q3 FY03/22, however, pachinko halls were not asked to close due to the state of emergency declaration. The number of units sold grew due to increased hall renovations following machine replacement. Pachinko halls moved to install more pachinko machines to replace pachislot machines. Pachinko machines dispense balls faster than pachislot machines.

Card sales: JPY1.5bn (+6.6% YoY). Information management fees increased in line with an increase in the total value of issued cards (amount spent by players on usage). The number of member halls, a key indicator in understanding medium-to-long term trends for the total value of issued cards, declined further to 2,768 (a reduction of 232 halls, 7.7% YoY). In Q1 FY03/21, the value of issued cards per member hall declined YoY as a result of voluntary restraint on business activity by pachinko halls. In cumulative Q3 FY03/22, however, the total value of issued cards increased YoY due to the higher utilization rates of machines at pachinko halls.

Card sales in Q1 FY03/22 were JPY464mn (+35.3% YoY). This increase in card sales was partly due to a rebound from a decline in card sales that occured in Q1 FY03/21 as pachinko halls curtailed operations in response to the COVID-19 pandemic.

Card sales in Q2 FY03/22 were JPY489mn (-25.5% YoY). In Q2 FY03/21, pachinko halls resumed operations and the utilization rates of pachinko and pachislot machines began to recover. The YoY decline in card sales during Q2 FY03/22 was partly due to a decrease in member halls.

Card sales in Q3 FY03/22 were JPY517mn (+1.4% YoY). The number of member halls declined YoY but card sales increased YoY due to a recovery in the machine utilization rate.

System-usage fee revenue: JPY4.1bn (+1.8% YoY). In Q1 FY03/21, the company discounted system-usage fees when pachinko halls scaled back their operations. In cumulative Q3 FY03/22, there was an impact from a decline in the number of member halls, but there was no discounting, so system-usage fee revenue increased YoY.

System-usage fee revenue was JPY1.4bn (+27.4% YoY) in Q1 FY03/22, JPY1.4bn (-7.7% YoY) in Q2, and JPY1.3bn (-7.9% YoY) in Q3.

Others (equipment installation and maintenance): JPY328mn (+6.1% YoY)

Gross profit

Gross profit was JPY4.0bn (+2.8% YoY), and the gross profit margin was 47.5% (-3.4pp YoY). The decline in the GPM primarily reflected decreases in higher margin card sales and system-usage fees in the sales mix.

Gross profit in Q1 FY03/22 was JPY1.3bn (+39.7% YoY), and the gross profit margin was 49.8% (+6.8pp YoY). In Q1 FY03/21, as mentioned above, the GPM fell 49.5% YoY as the company discounted system-usage fees. In Q1 FY03/22, the company did not discount system-usage fees, and both profit and GPM increased YoY.

Gross profit in Q2 was JPY1.3bn (-13.0% YoY), and the gross profit margin was 50.3% (-3.6pp YoY). The GPM fell in part because sales declined YoY and in part because system-usage fees, which are associated with relatively high rates of profitability, accounted for a lower ratio of overall sales.

Gross profit in Q3 was JPY1.4bn (-4.6% YoY), and the gross profit margin was 43.4% (-9.7pp YoY). Sales rose but gross profit declined due to a lower GPM. The GPM fell as equipment sales, which have relatively low margins, accounted for a greater share of overall sales.

SG&A expenses

SG&A expenses were JPY3.2bn (-1.6% YoY).

As a result, all profit categories increased YoY in cumulative Q3 FY03/22.

Other: Game Machine Industry Association plans to launch "controlled machines"

The Japanese government has announced its plan to issue new banknotes in 2024. The company believes this will drive demand for upgrades of card-reading units.

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)

Business environment and company initiatives

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.

In Q1 FY03/22 (April–June 2021), sales were JPY2.6bn (+20.6% YoY), and operating profit was JPY316mn (versus operating profit of JPY20mn in Q1 FY03/21), while in Q2 FY03/22 (July–September 2021), sales were JPY2.5bn (-5.0% YoY), and operating profit was JPY123mn (-67.2% YoY). Sales decreased YoY in Q2, while operating profit fell due to an increase in SG&A expenses. Sales in Q2 also dropped QoQ, and profit decreased due to the rise in SG&A expenses.

Progress against full-year forecast for FY03/22

Versus the full-year FY03/22 forecast, 1H progress rate was 51.6% for sales, while the company recorded operating profit of JPY439mn, compared to a full-year forecast of 0mn.

1H results showed that the company was ahead of plan for its full-year forecast, which remained unchanged. In 2H, the company plans to increase its R&D spending associated with "controlled machines" (smart pachinko and smart pachislot machines) that are scheduled to be introduced in the spring of 2022 or later. Meanwhile, the company has also noted that impact stemming from the global shortages of raw materials and semiconductors and other electronic components caused by the COVID-19 pandemic remains uncertain.

Sales by product type

Equipment sales: JPY1.3bn (+1.0% YoY). In Q1 FY03/21 (April–June 2020), unit sales declined YoY as a result of pachinko halls refraining from operations in April–May 2020 in response to the declaration of a state of emergency, which reduced pachinko halls' appetite for capital investment and led to a reduction in sales activities by the company. In 1H FY03/22, however, pachinko halls were not asked to close following the declaration of state of emergency, and equipment sales increased.

Card sales: JPY953mn (+9.7% YoY). Information management fees increased in line with an increase in the total value of issued cards (amount spent by players on usage). The number of member halls, a key indicator in understanding medium-to-long term trends for the total value of issued cards, declined further to 2,802 (a reduction of 245 halls, 8.0% YoY). In Q1 FY03/21, the value of issued cards per member hall declined YoY as a result of voluntary restraint on business activity by pachinko halls. In 1H FY03/22, however, the total value of issued cards increased YoY due to the higher utilization rates of machines at pachinko halls.

System-usage fee revenue: JPY2.7bn (+7.2% YoY). In Q1 FY03/21, the company discounted system-usage fees when pachinko halls scaled back their operations. In 1H FY03/22, there was an impact from a decline in the number of member halls, but there was no discounting, so system-usage fee revenue increased YoY.

System-usage fee revenue was JPY1.4bn (+27.4% YoY) in Q1 FY03/22 and JPY1.4bn (-7.7% YoY) in Q2.

Others (equipment installation and maintenance): JPY201mn (+18.2% YoY)

Gross profit

Gross profit was JPY2.6bn (+7.5% YoY), and the gross profit margin was 50.1% (+0.5pp YoY). The increase in the gross profit margin primarily reflected an increase in higher margin card sales and system-usage fees in the sales mix.

Gross profit in Q1 FY03/22 was JPY1.3bn (+39.7% YoY), and the gross profit margin was 49.8% (+6.8pp YoY). In Q1 FY03/21, as mentioned above, GPM fell 49.5% YoY as the company discounted system-usage fees. In Q1 FY03/22, the company did not discount system-usage fees, and both profit and GPM increased YoY.

Gross profit in Q2 was JPY1.3bn (-13.0% YoY), and the gross profit margin was 50.3% (-3.6pp YoY). GPM fell in part because sales declined YoY and in part because system-usage fees, which are associated with relatively high rates of profitability, accounted for a lower ratio of overall sales.

SG&A expenses

SG&A expenses were JPY2.1bn (+6.8% YoY). Personnel expenses increased due to an increase in the number of employees. R&D expenses were JPY300mn (+2.0% YoY).

As a result, operating and recurring profits increased YoY in 1H FY03/22.

Other: Game Machine Industry Association plans to launch "controlled machines"

Other: Issuance of the first series of stock acquisition rights via third-party allotment utilizing treasury stock

In October 2021, the company decided to issue its first series of stock acquisition rights (9,000 acquisition rights) via a third-party allotment to SBI Securities Co., Ltd. If all rights are exercised, 900,000 shares will be issued, representing a 6.3% dilution of the company's total outstanding shares as of September 30, 2021. The company plans to use funds generated through these stock acquisition rights (estimated net proceeds of JPY1.1bn) to produce new card-reading units and procure parts necessary for this production (associated expenditures planned for December 2021–December 2022).

Pachinko and pachislot manufacturers are planning to release new pachinko and pachislot machines called "contolled machines" (smart pachinko machines) and "token-less machines" (smart pachislot machines) in the spring of 2022 or later. When installed at pachinko halls, these new machines will come equipped with card-reading units. Accordingly, the company is developing new card-reading units and preparing to release them at the same time as these new machines.

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 approximately JPY3.2bn for electronic components for board mounting, JPY3.0bn for component sets for manufacturing card-reading units, and JPY800mn for other materials between December 2021 and December 2022, giving a total of JPY7.0bn. Of this amount, about JPY600mn is likely to be needed for electronic components for board mounting by March 2022, JPY3.0bn for component sets, and JPY800mn for other materials, for a total of JPY4.4bn.

Q1 FY03/22 results

Sales: JPY2.6bn (+20.6% YoY)
Operating profit: JPY316mn (profit of JPY20mn in Q1 FY03/21)
Recurring profit: JPY384mn (profit o JPY40mn in Q1 FY03/21)
Net income attributable to owners of the parent: JPY142mn (net income of JPY1mn in Q1 FY03/21)

Business environment and company initiatives

Pachinko hall operators, which comprise the company's primary customer base, maintained a cautious stance toward capital expenditures due to uncertainties going forward. However, sales and profits in Q1 increased YoY, in part because there were no government requests to close pachinko halls as there were following the state of emergency declared in Q1 FY03/21.

Outline of Q1 results for FY03/22

In Q1 FY03/21, equipment sales and system-usage fee revenue declined YoY (compared to Q1 FY03/20) due to the voluntary suspension of operations by pachinko halls in response to the declaration of the state of emergency. In Q1 FY03/22, there were no government requests for pachinko halls to close due to the state of emergency, and sales increased YoY.

In terms of profits, gross profit was up YoY due to higher card sales and system-usage fee revenue, and each profit line below operating profit showed a YoY increase.

Progress against full-year forecast for FY03/22

Versus the full-year FY03/22 forecast, Q1 progress rate was 26.2% for sales, while the company recorded operating profit of JPY316mn, compared to a full-year forecast of 0mn.

Q1 results showed that the company was ahead of plan for its full-year forecast. At this stage, the company left the full-year forecast unchanged. In terms of risks to trading conditions from Q2 onward, it referred to a decline in the number of member halls due to pachinko hall closures and uncertainties over the operational status of machines in pachinko halls.

Sales by product type

Equipment sales: JPY682mn (+3.1% YoY). Equipment sales increased due to an increase in the number of units sold (3,340 units, +91.5% YoY). In Q1 FY03/21, the number of equipment sold declined YoY as a result of pachinko halls refraining from operations in April–May 2020 in response to the declaration of a state of emergency, which reduced pachinko halls' appetite for capital investment and led to a reduction in sales activities by the company. In Q1 FY03/22, however, pachinko halls were not asked to close following the declaration of state of emergency, and the number of units sold increased.

Card sales: JPY464mn (+35.3% YoY). Information management fees increased in line with an increase in the total value of issued cards (amount spent by players on usage). The number of member halls, a key indicator in understanding medium-to-long term trends for the total value of issued cards, declined further to 2,849 (a reduction of 245 halls, -7.9% YoY). In Q1 FY03/21, the value of issued cards per member hall declined YoY as a result of voluntary restraint on business activity by pachinko halls. In Q1 FY03/22, however, the total value of issued cards increased YoY due to the higher utilization rates of machines at pachinko halls.

System-usage fee revenue: JPY1.4bn (+27.4% YoY). In Q1 FY03/21, the company discounted system-usage fees when pachinko halls scaled back their operations. In Q1 FY03/22 there was an impact from a decline in the number of member halls, but there was no discounting, so system-usage fee revenue increased YoY.

Others (equipment installation and maintenance): JPY88mn (+8.3% YoY)

Gross profit

Gross profit was JPY1.3bn (+39.7% YoY), and the gross profit margin was 49.8% (+6.8pp YoY). The increase in the gross profit margin primarily reflected an increase in higher margin card sales and system-usage fees in the sales mix.

SG&A expenses

SG&A expenses were JPY987mn (+8.1% YoY). Personnel expenses increased due to an increase in the number of employees. R&D expenses were JPY81mn (-24.3% YoY).

As a result, each profit line below operating profit showed a YoY increase.

Other: 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 "token-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.

Full-year FY03/21 results

Sales: JPY10.6bn (-36.2% YoY)
Operating profit: JPY1.2bn (-42.9% YoY)
Recurring profit: JPY1.3bn (-38.0% YoY)
Net income*: JPY617mn (-49.7% YoY)
*Net income attributable to owners of the parent

Business environment and company initiatives

Gamecard-Joyco Holdings says that pachinko hall operators, which comprise its primary customer base, had to temporarily close their halls nationwide in compliance with requests from respective prefectural governments after the first state of emergency was declared. Once the emergency declaration was lifted, pachinko halls resumed operations with thorough infection prevention measures in place, leading to recovery in earnings. However, pachinko hall operators continued to maintain a cautious stance toward capital investment amid ongoing uncertainties surrounding the removal of non-compliant machines as well as the resurgence of COVID-19 cases.

To maintain and increase the share of its member halls, the company revised its sales strategies and carried out marketing activities that addressed issues facing its customers. Specifically, it sold new merchandise including products to counter COVID-19 infections, and made proposals for the replacement of old equipment as well as the installation of units with ball-counting systems to streamline pachinko hall operations. Despite these efforts, due to diminished appetite for capital investment amid ongoing uncertainties as well as the contraction of the market, equipment sales and system-usage fees at the company dropped substantially YoY.

* A ball-counting system is a system that counts the number of balls dispensed using a card-reading unit installed on each pachinko machine.

Summary of annual results FY03/21

Sales were down YoY due to the temporary closure of pachinko halls in April–May 2020 in response to the government’s declaration of a state of emergency and a decline in the number of member halls amid an ongoing contraction in the pachinko and pachislot market.

Gross profit fell 21.2% YoY on a drop in card sales and system-usage fees. SG&A expenses declined 12.1% YoY, but profit items from the operating line down deteriorated sharply on a YoY basis.

In Q1 (April–June 2020), sales amounted to JPY2.2bn (-46.4% YoY) and operating profit JPY20mn (-97.2% YoY); in Q2 (July–September 2020), sales were JPY2.7bn (-37.0% YoY) and operating profit JPY375mn (-51.5% YoY); in Q3 (October–December 2020), sales came to JPY2.8bn (-41.1% YOY) and operating profit JPY302mn (+23.3% YOY); in Q4 (January-March 2021) sales were JPY2.9bn and operating profit was JPY465.0mn (+54.0%). Sales and profit declined in Q1 due to the self-restraint on sales activities by pachinko halls in accordance with the state of emergency declaration in April–May 2020. Both sales and profit declined YoY but rose QoQ. This contrast occurred because client pachinko halls reopened for business starting in June and the visits from pachinko players gradually returned to normal. In Q3 and Q4, although sales were down YoY, R&D expenses shrank and operating profit increased.

Achievement rates versus the company’s full-year FY03/21 forecast

In February 2021, the company announced a revision of its full-year company forecasts for FY03/21. The revised company forecasts are for sales of JPY10.0bn (-39.6% YoY), operating profit of JPY1.0bn (-50.9% YoY), recurring profit of JPY1.1bn (-45.7% YoY), and net income attributable to owners of the parent of JPY550mn (-55.1% YoY). The company revised sales downward from the previous forecast by JPY2.0bn, while revising profit items upward—operating profit was upgraded by JPY600mn, recurring profit by JPY700mn, and net income attributable to owners of the parent by JPY550mn.

Cumulative full year achievement rates versus the company’s revised full-year FY03/21 forecast stood at 105.6% for sales, 116.2% for operating profit and 114.4% for recurring profit. Net income attributable to owners of the parent achieved 112.2% of full-year forecast (87.7%). Sales of counting machines, products to counter COVID-19 infections, and other labor-saving products exceeded the company’s plan.

Sales by product type

Equipment sales: JPY2.7bn (-59.5% YoY). Equipment sales were down YoY on lower unit sales (8,821 units, -82.3% YoY). Unit sales declined YoY due to limitations of sales activity at the company and a more cautious stance on the part of pachinko halls with regard to capital investment amid temporary closures in response to the government’s declaration of a state of emergency in April and May 2020.

Card sales: JPY1.9bn (-30.1% YoY). Information management fees fell, accompanying a drop in the total value of issued cards (amount spent by players on usage). Actual card sales were also down. The number of member halls, a key indicator in forecasting trends for the total value of issued cards over the medium to long term, continued to decline, dropping by 271 locations YoY (-8.5% YoY), to 2,908. The closure of pachinko halls in line with the declaration of a state of emergency resulted in a sharp drop in the value of issued cards per member hall.

Card sales in Q1 were JPY343mn (-51.1% YoY). The sales fell as pachinko halls closed temporarily in response to the COVID-19 pandemic.

Q2 card sales were JPY526mn (-25.5% YoY), while Q3 sales were JPY510mn (-24.0% YOY). Q4 sales were JPY536mn (-19.0% YOY). Pachinko halls reopened for business since Q2 and the utilization rate for pachinko and pachislot machines trended back upward. As a result, information management fees, which are calculated in proportion to the volume of player usage, declined YoY but improved compared to Q1.

System-usage fees: JPY5.4bn (-15.2% YoY). In addition to the effects from a reduced number of member halls, system-usage fees were impacted by temporary pachinko hall closures conducted in response to the COVID-19 pandemic.

System-usage fees came to JPY1.1bn (-33.8% YoY) in Q1, JPY1.5bn (-8.7% YOY) in Q2, JPY1.4bn (-8.7% YOY) in Q3 and JPY1.4bn (-8.7% YOY) in Q4. Results in Q1 incurred strong impact from temporary pachinko hall closures due to a voluntary restraint on operations.

Others (equipment installation and maintenance): JPY573mn (-33.5% YoY).

Gross profit by product type

Gross profit was JPY5.5bn (-21.2% YoY), with GPM at 51.8% (+9.9pp YoY). Overall GPM increased YoY because sales of equipment with a relatively low GPM declined and accounted for a lower portion of overall sales.

Equipment sales: Gross profit of JPY588mn (-39.3% YoY) and GPM of 22.1% (+7.4pp YoY).

Card sales: Gross profit of JPY1.2bn (-24.7% YoY) and GPM of 64.9% (+4.6pp YoY).

Gross profit from card sales in Q1 was JPY242mn (-45.0% YoY), and the corresponding GPM was 70.1% (+7.6pp YoY). Profit declined YoY due to the self-restraint on sales activities by pachinko halls in accordance with the state of emergency declaration.

From Q2 onwards, pachinko halls resumed operations, and this drove a recovery compared to Q1. Gross profit from card sales in Q2 was JPY340mn (-20.4% YoY), and the corresponding GPM was 64.9% (+4.5pp YoY). Gross profit from card sales in Q3 was JPY329mn (-14.5% YoY), and the corresponding GPM was 64.5% (+7.1pp YoY). Gross profit for Q4 was JPY333mn (-17.4% YoY), and the GPM was 62.1% (+1.2pp YoY).

System-usage fee revenue: Gross profit of JPY3.3bn (-19.5% YoY) and GPM of 60.6% (-3.2pp YoY). The declines in gross profit and GPM were due to temporary pachinko hall closures.

In Q1, gross profit from system-usage fee revenue was JPY530mn (-51.4% YoY), and the corresponding GPM was 48.9% (-17.7pp YoY).

From Q2 onwards, pachinko halls resumed operations and visits from pachinko players increased. Profits were down YoY, but were still ahead of Q1. In Q2, the company generated JPY923mn in gross profit from system-fee usage revenue (-10.1% YoY) and a corresponding GPM of 62.9% (-0.9pp YoY), while in Q3, it generated JPY930mn (-6.8% YoY) and a corresponding GPM of 64.4% (+1.3pp YoY). In Q4, it generated JPY893mn (-6.3% YoY) and a corresponding GPM of 63.2% (+1.7pp YoY).

SG&A expenses

SG&A expenses were JPY4.3bn (-12.1% YoY), comprising JPY1.7bn (+2.8% YoY) in personnel expenses and JPY716mn (-38.2% YoY) in R&D expenses. Travel expenses also declined as a result of the company limiting sales activities due to the spread of COVID-19.
As a result, operating profit, recurring profit, and net income were all down YoY.

For details on previous quarterly and annual results, please refer to the Historical earnings results section.

Other information

History

Nippon Game Card

Early period (1989 to 1994)

At the time of Nippon Game Card’s establishment in Osaka in August, 1989, pachinko halls were under the spotlight for tax evasion, fraud and other issues. As part of a drive to clean up the pachinko industry’s image the industry regulator, the National Police Agency, decided to introduce prepaid-card systems which enabled card companies to monitor pachinko hall sales in order to increase hall operator transparency.
Based on this, three main companies—all with capital ties to Japan’s leading trading houses—were established to develop and implement the prepaid-card initiative:
▷ Nihon Leisure Card System K.K.: Established in 1988, largest initial shareholder was Mitsubishi Corp. (TSE1: 8058)
▷ Nippon Game Card: Established in 1989, largest initial shareholder was Sumitomo Corp. (TSE1: 8053)
▷ Nihon Advanced Card System K.K.: Established in 1995, largest initial shareholder was Mitsui & Co. (TSE1: 8031)

From 1993 onward the company grew rapidly as CR model (prepaid-card system) pachinko machines proliferated.

Turmoil (1995 to 2001)

By 1996 the pachinko industry had become plagued by card counterfeiting. The company had to focus on prevention of counterfeiting while combating the growing fallout from it. At the same time, numerous new market entrants had appeared, offering house-issuer card systems with lower running costs—Mars Engineering Corp. (entering the market in 1999), JOYCO SYSTEMS Corp. (see section below), Seta Corp. (which entered the market in 2000 and is now known as Universal Entertainment Corp. (JASDAQ: 6425)), as well as Nasca Corp. and Creation Card Information System Co. (both of whom entered the market in 1998), which have since merged to form Glory Nasca Ltd.

Rebuilding (2001 onward)

In 2001, pachinko/pachislot machine manufacturer SANKYO Co. replaced Sumitomo Corp. as the company’s largest shareholder. The company used this change as an opportunity to refocus its business on meeting pachinko halls’ business needs.

The company also merged with former third-party card issuer competitors Nihon Advanced Card System in October 2003, and with Nihon Leisure Card System in April 2008. In April 2006, the company listed on the JASDAQ Securities Exchange (now merged with the Tokyo Stock Exchange).

JOYCO SYSTEMS Corp.

JOYCO SYSTEMS Corp. was established in March 2001. Unlike Nippon Game Card, it provides house-issuer prepaid-card systems. Relatively cheap maintenance costs of its system initially allowed it to grow market share among halls in the prepaid-card market. However, as a late industry entrant the company faced a shrinking market early on, slowing its momentum. It then fell behind competitors in launching new products resulting in a decline in the number of halls using its system. On April 1, 2021, Nippon Game Card absorbed JOYCO SYSTEMS.

Gamecard-Joyco Holdings, Inc.

On April 1, 2011, Nippon Game Card and JOYCO SYSTEMS merged and established a joint holding company “Gamecard-Joyco Holdings, Inc.” through a share transfer.

Major shareholders

Top shareholders	Shares held	Shareholding ratio
Top shareholders	('000)	Shareholding ratio
SANKYO CO., LTD.	1,944	14.57%
DATA-ART, Inc.	632	4.73%
Heiwa Corporation	612	4.58%
Kyoraku Sangyo Co., Ltd.	611	4.58%
Sammy Inc.	611	4.58%