Marumae 6264
マルマエ
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Summary
Marumae provides contracted processing (cutting) and manufacturing of precision parts with a focus on high-mix/low-volume production. In its Precision Parts business, it produces vacuum parts that are used in semiconductor production equipment (SPE) and flat panel display (FPD) production equipment. In the SPE field, the company manufactures vacuum parts employed in front-end wafer processing such as chemical vapor deposition (CVD*1), etching*2, coating*3, and cleaning. These parts mainly include vacuum chambers (vacuum-resistant vessels) and electrodes (machined aluminum parts placed inside vacuum chambers). In the FPD field, it manufactures vacuum parts used in FPD production processes such as CVD, sputtering*4, etching, ashing*5, coating, and bonding. While Marumae still operates on a small scale (roughly JPY5bn in sales), it supplies world-class SPE manufacturers in Japan and the US, including Tokyo Electron (TSE1: 8035), providing key parts of the equipment of these industry leaders. In many cases, the company is the sole supplier of the parts it produces.
Semiconductors & Semiconductor Equipment
Key dates
2020-12-01
Coverage initiation
Executive summary
Business overview
Marumae provides contract machining (cutting) and manufacturing of precision parts used in semiconductor production equipment (SPE) and flat panel display (FPD) production equipment with a focus on high-mix/low-volume production. In the SPE field, the company manufactures vacuum parts employed in front-end wafer processing such as chemical vapor deposition (CVD*1), etching*2, coating*3, and cleaning. These parts mainly include vacuum chambers (vacuum-resistant vessels) and electrodes (machined aluminum parts placed inside vacuum chambers). In the FPD production equipment field, it manufactures vacuum parts used in FPD production processes such as CVD, sputtering*4, etching, ashing*5, coating, and bonding. Marumae supplies world-class SPE manufacturers in Japan and the US, including Tokyo Electron (TSE1: 8035), providing key parts of the equipment of these industry leaders. In many cases, the company is the sole supplier of the parts it produces.
In FY08/21, the company reported sales of JPY5.4bn, breaking down by sales category into JPY4.2bn for the semiconductor field (SPE parts; 78.6% of total sales), JPY838mn for the FPD field (FPD production equipment parts; 15.6%), and JPY310mn for other field (7.3%). In the same year, consumables accounted for 71% of its SPE parts (just over 35% after excluding consumables pre-installed in and accompanying new equipment), and 23% of its FPD production equipment parts. These products need to be replaced every several months (the surface of the vacuum parts used inside vacuum chambers degrades due to plasma*6 exposure), contributing to steady income. In FY08/21, the company’s cost of sales ratio was 66.2%, its SG&A ratio 11.4%, and its OPM 22.5%. Marumae has consolidated its high-mix/low-volume production in Kagoshima Prefecture (where it generates 77% of its production value). Although the company's share of the market remains at 6.3% as of 2020 (company estimate based on reference group of 30 peer companies, market value of JPY70.0bn), it leads the industry in OPM (22.5% in FY08/21) by virtue of its superior productivity (see Marumae Manufacturing System section). The company aims to establish itself as the industry leader by capturing new customers and expanding its market share.
To enable high-mix/low-volume production, the company uses mixed-flow production lines that can simultaneously process prototypes (10% or less of sales) and finished products. It has accumulated the expertise to generate profit from high-mix/low-volume production through its Marumae Manufacturing System, a proprietary production system that integrates factory automation for repetitive manufacturing tasks, other forms of automation, and labor reduction technologies. Marumae uses an internal core system to ascertain the material costs, processing costs, and work/time necessary to manufacture each part and calculate gross profit. In this way, it quantifies the profitability of each product it manufactures. Its core system can also analyze production costs incurred by each employee, revealing individual contributions to gross profit. Marumae internally develops the automation systems that power its automated transport and other equipment. In terms of employee compensation, the company structures its salaries to reward performance rather than seniority.
In FY08/20, Marumae generated JPY2.4bn in sales (54.1% of total sales) from major customer Tokyo Electron, which holds the top global market share in SPE such as coater/developers*7 and etch systems. Sales to Tokyo Electron were up 3.2x from FY08/16. Marumae’s relationship with Tokyo Electron goes back many years, and the continued uptrend in its business with Tokyo Electron amid growth in the semiconductor market has been a major factor behind its sales expansion. In the SPE field, once the specifications of vacuum parts are determined, the production method remains generally unchanged unless special circumstances apply. In addition, many of the parts it supplies for the FPD field cannot be replaced by other manufacturers. According to its medium-term management plan, the company is making progress with the acquisition of new customers, and it has recently added two new customers each in the semiconductor and FPD fields.
Trends and outlook
In FY08/21, Marumae reported sales of JPY5.4bn (+22.4% YoY), operating profit of JPY1.2bn (+34.7% YoY), recurring profit of JPY1.2bn (+43.9% YoY), and net income attributable to owners of the parent of JPY902mn (+30.7% YoY). The company's main source of demand is the semiconductor field, where the market is currently at a record high level. In the FPD sector, too, OLED investment for the Chinese market is recovering rapidly, and LCD panel investment also is showing signs of recovery. Operating profit increased 34.7% YoY as although the company spent more on outsourcing in order to ramp up production, it was able to rein in labor and depreciation expenses.
On April 15, 2022, the company revised its full-year FY08/22 forecast. The revised forecast calls for sales of JPY8.3bn (+54.6% YoY), operating profit of JPY2.3bn (+90.5% YoY), recurring profit of JPY2.3bn (+90.5% YoY), and net income of JPY1.7bn (+84.7% YoY). The company adopted the new Accounting Standard for Revenue Recognition from Q1 FY08/22. In the mainstay semiconductor field, the company expects the market environment to remain at a high level, especially for logic applications. Orders from new customers are also gaining momentum. The company expects demand to remain upbeat in FY08/22. It sees the trend toward recovery in FPD investment continuing for some time, and plans to pursue orders for products manufactured with large-scale electron beam welding (EBW) machines. In the other field, too, the company aims to secure orders enabling it to utilize surplus production capacity. Capex is expected to total just over JPY1.4bn. The company looks for labor costs and depreciation to rise as it continues to expand production capacity not just to achieve its FY08/22 sales target but also those for FY08/23 and beyond, but expects these increases to be offset by higher capacity utilization rates driven by sales growth.
Under its Innovation 2022 medium-term plan, Marumae aims to achieve the following targets by FY08/22, the final year of the plan: sales of JPY7.0bn, operating profit of JPY2.0bn, OPM of 28.6%, asset-based ROIC of 18%, liability-based ROIC of 14%, and a payout ratio of 30% or above. The company plans to ramp up capital expenditures (cash flow basis) for production capacity expansion from JPY340mn in FY08/20 to JPY907mn in FY08/21 and further to JPY1.0bn in FY08/22, while expanding its market share by winning new customers. Its ROIC declined from FY08/17 through FY08/19 due to upfront spending, but these investments led to the company adding new customers in FY08/20.
Strengths and weaknesses
Shared Research believes the company’s strengths are 1) its comprehensive technological capabilities stemming from a combination of applied technologies honed in a broad range of industries and fields, 2) its proprietary Marumae Manufacturing System and one-stop production structure for multi-stage machining, and 3) performance-based compensation linked to marginal profit and the ability to ramp up programmer capacity.
We believe its weakness are 1) the inability to handle consumables surface treatment (such as thermal spraying and thin film deposition) in-house, 2) the internal training of executives and managers failing to keep pace with rapid growth, and 3) the focus on contracted machining of high-mix/low-volume products holding back development-driven sales proposals and high-mix/medium or high-volume production.
Glossary
Key financial data
Note: Per-share data adjusted for stock splits.
Note: Figures may differ from company materials due to differences in rounding methods.
Recent updates
Company raises full-year sales and earnings estimates, reports order backlog for March 2022
On April 15, 2022, Marumae Co., Ltd. announced monthly order backlog data for the month of March 2022.
Monthly order backlog
Company comments
As of the end of March 2022, the company reported a total order backlog of JPY3.1bn (+8.7% MoM, +139.5% YoY). By sector, at the end of March the semiconductor sector showed an order backlog of JPY1.9bn (+0.3% MoM; +155.3% YoY) as orders and deliveries/acceptance inspections continued to run at elevated levels. At the FPD sector, steady progress on the acceptance inspection front left an order backlog of JPY712mn (-6.4% MoM; +42.7% YoY). For other sectors, the company reported an order backlog of JPY430mn (+203.6% MoM; 1,452.8% YoY), reflecting mainly an influx of orders for components used in solar cell manufacturing equipment.
Looking ahead, the company sees orders from the semiconductor sector remaining at elevated levels for at least the near future, supported by ongoing strength in demand and reductions in parts and materials shortages among client companies previously experiencing difficulties. At the FPD sector, the company sees little-to-no growth in overall orders through the end of FY08/22 as further declines in demand for LCD-related applications effectively offset the solid growth in demand on the small/medium-sized OLED side. In other sectors, the company sees orders continuing to come in for components used in photovoltaic cell production equipment, though somewhat sporadically rather than a steady stream.
On the same day, the company also updated its full-year forecast for FY08/22.
Revised full-year forecast for FY08/22 (as of April 15, 2022)
Company explanation of revisions
In the semiconductor sector, the company expects continued strong shipments, attributing the improved outlook to a combination of its high order backlog and better visibility now that most of the drag on production stemming from shortages of parts and materials at client companies had eased. In addition, sales in the FPD sector are expected to raise due to mainly an increase in orders received as a result of market share expansion. In other sector, sales for photovoltaic cell applications are also expected to increase. The company raised its estimate for sales in the semiconductor sector to JPY6.1bn (versus JPY5.9bn previously), its sales estimate for the FPD sector to JPY1.5bn (from JPY1.1bn), and its sales estimate for the other sector to JPY740mn (from JPY222mn).
On the earnings front, the upward revisions reflect a combination of higher sales and margin improvement. At the gross profit level, the company said higher factory operating rates had led to lower production costs as a percent of sales despite having to use outside contractors when orders exceeded its internal capacity. With this expected to push up the operating profit margin 2.7pp more than it had previously projected, the company raised its full-year estimates for earnings at the operating profit level and below.
Order backlog for February 2022
Marumae Co., Ltd. announced monthly order backlog data for February 2022.
Monthly order backlog
Summary of comments by the company
Order backlog as of end-February 2022 is as follows. Order backlog in the semiconductor field was a record JPY1.9bn (+7.9% MoM; +174.8% YoY) as orders and acceptance inspections reached record highs. In the FPD field, order backlog was JPY760mn (-8.3% MoM; +134.6% YoY) on favorable progress in acceptance shipment inspections. There were no significant MoM changes in the other field. As a result, order backlog was JPY2.8bn (+2.7% MoM; +161.8% YoY)
Marumae expects orders to remain high for the time being in the semiconductor field despite signs of assembly delays at customer manufacturers stemming from component shortages and ongoing uncertainty about the impact of the Russian invasion of Ukraine on the market, because its orders have not been affected so far. Marumae also expects the current order environment to remain favorable in the FPD field despite signs of some customers curtailing investment. In the other field, the company is continuing to receive inquiries for photovoltaic cell production equipment parts. The company plans to work toward securing these orders by maintaining capex to increase production capacity.
Order backlog for January 2022
Marumae Co., Ltd. announced monthly order backlog data for January 2022.
Monthly order backlog
Summary of comments by the company
Order backlog as of end-January 2022 is as follows. Order backlog in the semiconductor field was up JPY1.8bn (+2.6% MoM; +155.0% YoY) as acceptance inspections remaining high. In the FPD field, order backlog turned JPY829mn (+12.0% MoM; +267.9% YoY) from strong orders, favorable progress in acceptance inspections, and G8 OLED-related prototype orders. In the other field, the company had new orders for photovoltaic cell production equipment parts and order backlog rose to JPY139mn (+16.6% MoM; +57.6% YoY)
Marumae expects orders to remain high for the time being in the semiconductor field despite signs of assembly delays at customer manufacturers stemming from component shortages, because the parts Marumae supplies have been in short supply too. It also expects the current order environment to remain favorable in the FPD field for our customers. In the other field, the company is continuing to receive inquiries for photovoltaic cell production equipment parts and plans to work toward securing these orders.
Revisions of 1H FY08/22 earnings and dividend forecast
Marumae Co., Ltd. announced revisions to its 1H FY08/22 earnings and dividend forecast.
Company revised forecasts for 1H FY08/22 (announced February 9, 2022)
Reasons for revisions
The company revised up its sales forecast to reflect brisk performance of the semiconductor field and stronger-than-expected performance of the FPD field, as well as orders for solar cell manufacturing equipment components surpassing expectations. It also raised its profit forecasts due to the sales growth effect, greater-than-expected savings on materials and outsourcing costs on an increase in orders with relatively low variable expenses, and inventory trending up as a result of increasing production capacity. The left its full-year forecast unchanged despite favorable market conditions because of ongoing uncertainties such as assembly delays at customer manufacturers due to difficulty in sourcing parts. The company raised its interim and year-end dividend forecast to JPY22 per share (from JPY18 per share), respectively, to reflect 1H results, for a total of JPY44 annual dividend per share.
Earnings trends
Quarterly results and monthly data
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: From FY08/21, “SPE parts” was renamed to “semiconductor field,” and “FPD production equipment parts” to “FPD field.”
1H FY08/22 results (out March 30, 2022)
Earnings overview
In the mainstay semiconductor field, the market remained at a record high level, thanks in large part to a surge in logic chip-related products demand amid a global semiconductor shortage. In the FPD field, orders were below historical peaks but nonetheless recovered from the prior-year slump, amid generally robust investment in China in small and medium-sized OLED and Generation 10.5 LCD panel production. Supported by these favorable market conditions, the company secured orders from new customers and expanded orders from existing customers in the semiconductor field. In the FPD field, orders for large electron beam welders (EBW) increased, as well as orders from new customers for new product types. In the other field, orders for photovoltaic cell applications grew.
Sales rose 72.3% YoY driven by strong performance in the semiconductor field. On the profit front, gross profit was JPY1.5bn (+118.0% YoY), and GPM was 39.1% (+8.2pp YoY). However, Q2 (December 2021–February 2022) GPM was 37.6%, down 3.1pp versus Q1 (September–November 2021). The main reasons for the decline included increases in provisions for loss on orders received (in relation to some unprofitable products included in orders filled but not yet inspected for acceptance) and inventory valuation losses. These increases were due to a rise in hourly unit wage amid sharp growth in workforce, as the company made capital investments to address the rising order backlog.
The total of provisions for loss on orders received and inventory valuation losses were JPY89mn in Q1 (-JPY28mn QoQ) and JPY128mn (+JPY39mn QoQ) in Q2. In other words, as FY08/22 proceeds, the company has had a negative factor of JPY67mn in valuation in Q2. Shared Research estimates that excluding this factor, GPM in Q1 and Q2 were roughly at the same level (at around 39%).
SG&A expenses were up 30.5% QoQ to JPY374mn on higher R&D and personnel expenses. However, the increase here was easily offset by sales growth, and operating profit rose 177.1% QoQ.
Performance by sales category
The company discloses business results for a single segment—Precision Parts. It also discloses orders and sales by sales field. 1H FY08/22 (September 2021–February 2022) results are given below. Consumables sales accounted for about 70% of total sales.
Semiconductor field
Market conditions in the semiconductor field trended at record levels, and the company saw a steady stream of orders centered on vacuum parts as it did in Q1. As a result, as in Q1 (September–November 2021), sales reached a quarterly record high in Q2 (December 2021–February 2022). Demand for logic-chip related products was robust, and demand for memory-related products has also begun to grow. Orders from both existing customers and new customers grew, with overall orders continuing to trend above the company's production capacity. Considering these factors, the company upwardly revised its capex plan to reflect its goal of increasing monthly production capacity for the semiconductor field to JPY720mn by around end-December 2022. The company noted that orders included those for materials supplied at cost.
FPD field
In the FPD field, orders and sales for Generation 6 OLED panel production and Generation 10.5 LCD panel production parts were strong. The company also received prototype orders related to Generation 8 OLED panel production, and expects them to contribute to sales going forward. For large FPD production equipment parts in particular, manufacturing processes utilizing electron beam welding (EBW) become necessary to meet processing size and accuracy requirements. However, competitors withdrew from handling EBW processes, and this has led to strong inquiries at the company, which owns a large EBW machine. According to the company, more than 60% of orders involve some kind of EBW-related processing. Such competitive advantage attributed to the originality of the company's services, in addition to favorable market conditions, has led to the acquisition of new customers and growth in market share.
In the FPD field as well, production capacity is running tight, and the company said it may need to outsource some manufacturing processes to outside companies. The company announced its plans to increase monthly production capacity from JPY150mn to JPY180mn by around end-2022.
Other field
Photovoltaic cell production equipment parts contributed to order growth.
FY08/22 company forecast
Note: Figures may differ from company materials due to differences in rounding methods.
Consolidated earnings forecast for FY08/22 (revised April 15, 2022)
For full-year FY08/22, Marumae forecasts sales of JPY8.3bn (+54.6% YoY), operating profit of JPY2.3bn (90.5% YoY), recurring profit of JPY2.3bn (+90.5% YoY), and net income of JPY1.7bn (+84.7% YoY). From Q1 FY08/22, the company adopted the new Accounting Standard for Revenue Recognition, but the adoption of the new standard is expected to have only a minor impact. On February 9, 2022, the company revised upward its 1H earnings forecast while making no change to the full-year forecast. The company maintained its full-year forecast at the time of 1H results announcement (March 30, 2022) as well, but upgraded the forecast on April 15, 2022. This was because some uncertainties the company had been concerned about, such as parts procurement delays at customers and geopolitical risk, were resolved to some extent. The annual dividend forecast was revised up from JPY36 per share to JPY44 per share on February 9, 2022.
In the semiconductor field, the company forecasts sales of JPY6.1bn (+43.6% YoY) expecting the market environment to remain at a high level for the foreseeable future, especially for logic applications. Orders from new customers are gaining momentum, so the company expects sales to continue to increase in FY08/22. In the FPD field, it forecasts sales of JPY1.5bn (+79.0% YoY). Marumae believes that recovery in investment will continue in the FPD field, and plans to use its large EBW equipment to land orders. As for other fields, the company plans to continue to capture orders by utilizing its varied production capacities.
In terms of profit, the company estimates that operating profit will increase by 90.6% YoY amid persistently high levels of capacity utilization, despite increases in labor costs and manufacturing depreciation costs. Labor costs and depreciation constitute the main manufacturing cost items, and they are expected to rise in line with sales growth.
Marumae had planned annual capex outlays of JPY1.4bn (+75.2% YoY) at the beginning of the fiscal year. On January 15, 2022, however, the company announced that it would increase annual capex by approximately JPY500mn to JPY1.9bn. The increase is to enable the company to address its growing order backlog amid persistently strong demand in the semiconductor field. Later the company announced it would further increase its annual capex to sharply increase monthly production capacity in the semiconductor field from JPY550mn as of January 15, 2022 to JPY720mn by end-2022 (as of January 15, 2022, the company had planned to increase the production capacity to JPY600mn by end-August 2022). In the FPD field as well, the company expects to increase monthly production capacity from JPY150mn as of January 15, 2022 to JPY180mn by end-2022 (as of January 15, the company had planned to maintain production capacity of JPY150mn at end-August 2022). Note that in the January 15, 2022 announcement, these production capacity targets were set as targets for end-FY08/23.
Note: Figures may differ from company materials due to differences in rounding methods.
Company forecasts versus results
Note: Figures may differ from company materials due to differences in rounding methods.
After profit fell sharply below initial forecasts in FY08/11 and FY08/12, Marumae consistently issued conservative forecasts from FY08/13 to FY08/18, and results surpassed forecasts during this period. However, earnings fell significantly short of target in FY08/19 due to a sharper-than-expected downturn in market conditions. In FY08/20, sales finished below the initial forecast, while profits topped the forecast due in part to improved product mix. Sales and profits can easily diverge from the company's initial forecasts due to influence from macroeconomic factors, such as trends in the semiconductor industry, and differences in profitability for each project. In FY08/21, the company made significant progress in the semiconductor field due to strong SPE demand amidst a shortage of semiconductors. This, coupled with a recovery in demand in the FPD field, resulted in a significant increase over the initial plan.
Medium-term Management Plan
Revised medium-term management plan: Innovation 2022
Numerical targets
On August 21, 2020, Marumae unveiled the medium-term management plan Innovation 2022, which constituted a revision of the previous Innovation 2021 plan and extended the period covered by the latter by one year. The company decided to revise the previous plan to account for SPE market trends that diverged from its initial expectations. It updated its numerical targets for the final year in line with its current market outlook, lowering its forecast from JPY8.0bn to JPY7.0bn for sales, from JPY2.4bn to JPY2.0bn for operating profit, from 30.0% to 28.6% for OPM, from 20% to 18% for asset-based ROIC*, and from 15% to 14% for liability-based ROIC*. It left its payout ratio target unchanged at 30% or above (minimum annual dividend per share of JPY10, subject to review in fiscal years during which the company posts net losses). In FY08/22, Marumae forecasts shareholders’ equity of JPY7.2bn and interest-bearing debt of JPY2.5bn, which are both metrics that underpin its ROIC targets. ROIC fell from FY08/17 to FY08/19 due to upfront spending, but these investments led to the company adding new customers in FY08/20.
Capital investment plan
Contrary to the expectations of the Semiconductor Equipment Association of Japan (SEAJ), the market for Japanese-made SPE and FPD production equipment shrank in FY2019, and SEAJ subsequently scaled back its growth outlook through FY2021. As a result, Marumae thinks it will not be able to achieve its initial targets even after extending its medium-term plan by one year to FY08/22. Because it now anticipates a greater degree of stagnation in the market in the final year of its Innovation 2022 plan than initially expected, the company believes it will need to gain further market share to achieve its targets. Accordingly, it plans to step up capital expenditures (cash flow basis) for production capacity expansion from JPY340mn in FY08/20 to JPY907mn in FY08/21 and JPY1.0bn in FY08/22, while increasing its share by winning new customers.
In FY08/21, demand for the company's products surged—especially in the semiconductor field—prompting the company to increase its production capacity. As such, the company raised its FY08/22 capital investment plan to JPY1.4bn.
Estimated capacity utilization rate (based on machinery and equipment)
The company plans to ramp up its monthly production capacity* (based on machinery and equipment) from JPY600mn at end-August 2020 (JPY450mn for SPE parts and JPY150mn for FPD production equipment parts) to JPY700mn by end-August 2022 (JPY550mn and JPY150mn). This will translate into an increase in annual output from JPY7.2bn at end-August 2020 to JPY8.4bn at end-August 2022.
Based on a simple calculation, Shared Research estimates the company plans to increase its capacity utilization rate (based on machinery and equipment) from 61% in FY08/20 (sales of JPY4.4bn / production capacity value of JPY7.2bn) to 83% (JPY7.0bn / JPY8.4bn) in FY08/22, the last year of its medium-term plan. By sales category, this translates into a projected improvement from 59% to 76% for SPE parts, and from 59% to 89% for FPD production equipment parts.
FPD field
The company has cut back capital investment in the FPD field following the global financial crisis in late 2000s, but it has acquired electronic beam welders (EBW) at the insistence of its customers. SEAJ sees the FPD production equipment market shrinking 6.4% YoY in FY2021 and expanding 4.3% YoY in FY2022, but Marumae looks for a JPY400mn increase in EBW-related orders secured from two new customers and a JPY120mn increase from market share gains as competitors exit the EBW field. As a result, it expects sales to rise from JPY1.1bn in FY08/20 to JPY1.6bn in FY08/22.
Semiconductor field (new customers)
SEAJ projects the front-end SPE market will expand 5% YoY in both FY2021 and FY2022. Marumae expects to capture additional orders from two new customers. It already commenced bulk production for one company, and started supplying prototypes to the other in FY08/20. It aims to raise sales to these customers from JPY120mn in FY08/20 to JPY1.2bn in FY08/22 (JPY800mn and JPY400mn, respectively).
One of the two recently added customers is a domestic equipment manufacturer that needed a new supplier to resolve supply constraints at existing contractors when the market expanded. Marumae was ideally positioned to meet the unfulfilled demand, having made substantial capital expenditures through 2019 and accordingly built up excess production capacity. The other new customer is an overseas equipment manufacturer that sought a new supplier in Japan as part of business continuity planning efforts after the city it operates in entered a lockdown due to the COVID-19 pandemic. It reached out to Marumae, having been aware that the company has accumulated the required production technology over many years. Marumae plans to grow its overseas customer base, but it is proceeding cautiously because every new customer it brings in requires a huge time and labor commitment.
Semiconductor field (existing customers)
The company aims to increase its sales to existing customers in the semiconductor field by roughly 26% from FY08/20 (based on preliminary estimates) to FY08/22. It expects the growth to be fueled by market expansion (10.3%), a greater variety of products ordered by existing customers (10.7%), and growth in consumables attributable to improved capacity utilization rates at device manufacturers (5%). It anticipates increases in prototype and EBW-related orders.
Pursue organic growth while on the lookout for acquisition candidates
The semiconductor field is subject to market fluctuations and likely to remain stagnant over the near term, but Marumae thinks the field, as a manufacturing industry, is poised for relatively strong growth over the longer term. Among SPE parts, the company manufactures core parts and consumables that influence SPE performance. This recurring revenue business underpins its earnings foundations and powers its growth. Alongside organic growth, Marumae is keen to explore potential acquisitions that could bring in new customers or elemental technologies missing from its current portfolio. It is particularly interested in companies that have developed recurring revenue businesses related to consumables. Marumae is also making progress with overseas expansion, having recently added a new overseas customer, but it had not considered overseas production at the time it released its medium-term plan.
ESG investment
Marumae invests in environmental, social, and corporate governance (ESG) related areas. Its medium-term plan calls for a total investment of JPY424mn in photovoltaic panels to generate power for in-house consumption through FY08/30, and it plans to install such panels and NAS batteries rated to 1,872kW and 600kW, respectively. It intends to consume the entire annual power output of 2,640MWh internally, deriving over half of its annual energy needs from self-generated photovoltaic power.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: The capital expenditure plan for FY08/21 remains unchanged from the initial plan; for FY08/22, the plan was raised to JPY1.4bn.
Reverted to growth trajectory after overcoming challenges
To assess the feasibility of its medium-term targets, we need to understand how Marumae overcame past hurdles to move back to a growth trajectory. In FY08/06, the fiscal year immediately before it listed on the Mothers market (December 2006), the company posted sales of JPY931mn and recurring profit of JPY141mn. It subsequently diversified its business portfolio—hitherto tilted toward the FPD field—by expanding into photovoltaic cell applications. Thereafter, the company successfully won processing and assembly orders for parts such as vacuum chambers used in photovoltaic cell production equipment from a major global SPE manufacturer. As the orders from this manufacturer were worth over JPY10.0bn per year, the company set in motion a capital expenditure plan of over JPY5.0bn to build the necessary production infrastructure. However, before it was able to complete the plan, the global financial crisis occurred, and the orders from the customer dried up. Although Marumae immediately suspended the outstanding investment, the turn of events left it saddled with borrowings in excess of JPY3.0bn at one point. Consequently, it reported sales of JPY2.0bn, a recurring loss of JPY501mn, and a net loss of JPY701mn in FY08/09.
Thereafter, Marumae shifted its attention from the photovoltaic cell and FPD fields, which were plagued by low demand, to the semiconductor field, which it believed offered stronger growth prospects despite being subject to fluctuations. In this way, the company sought to revitalize its business without the sponsorship of a major customer. After having more or less returned to the breakeven level at the operating line in 2011, Marumae filed for a business turnaround alternative dispute resolution (ADR) procedure with the help of the Kagoshima bank, Ltd. (a subsidiary of the Kyushu Financial Group [TSE1: 7180])—its main bank at the time—to rebalance its financial health. As a result, it was able to 1) execute debt-equity swaps (DES) with Kagoshima bank and the Shoko Chukin Bank, Ltd. (unlisted, public-private government-owned financial institution) by converting debt into preferred shares, 2) execute a debt-debt swap (DDS) accompanied by a certain degree of debt forgiveness with the Japan Finance Corporation (unlisted, special company under the jurisdiction of the Ministry of Finance), 3) and request deferred repayment of debt and change in repayment terms to other banks.
These arrangements allowed Marumae to continue restructuring its operations with a focus on the semiconductor field while protecting its financial health. After achieving record-high sales and operating profit in 2015, the company declared its business restructuring plan complete, and repurchased the preferred shares issued to Kagoshima Bank and Shoko Chukin Bank, bringing an end to several years of business reforms. It consistently posted sales and profit record highs through 2018 (FY08/18 sales of JPY4.6bn and recurring profit of JPY1.2bn). in FY08/19, sales and recurring profit fell to JPY4.0bn and JPY477mn, respectively, as a result of a temporary slump in the semiconductor market, but bounced back to JPY4.4bn and JPY834mn in FY08/20. In FY08/21, both sales and recurring profit reached record highs, due in part to higher capital investment in the semiconductor field.
Note: Figures may differ from company materials due to differences in rounding methods.
Business
Overview
Excels in production of precision parts for SPE and FPD production equipment
The company undertakes contracted machining (cutting) and manufacturing of precision parts with a focus on high-mix/low-volume production. It produces vacuum parts that are used in semiconductor production equipment (SPE) and flat panel display (FPD) production equipment, including vacuum chambers (vacuum-resistant vessels) and electrodes (machined aluminum parts placed inside vacuum chambers). In the SPE field, it manufactures vacuum parts used in front-end wafer processing such as chemical vapor deposition (CVD), etching, coating, and cleaning in the process of manufacturing semiconductor chips. In the FPD field, the company mainly manufactures parts used in FPD production processes such as CVD, sputtering, etching, ashing, coating, and bonding.
Overview of business model
Background and history
Existing business grew out of R&D for motorcycle racing parts
Former president Tsutomu Maeda established the company individually as an iron works in 1965, and later reorganized it into a limited liability company in 1988 and a joint-stock company in 2001. The name “Marumae” comprises the Japanese characters for “being amicable” (maru) and “moving forward” (mae), and was inspired by the advice received by former President Maeda from a senior manager to “advance your business with an amicable disposition while avoiding confrontation.” The company’s existing operations trace their roots back to T’sM’s R&D, a company founded by current president (and former professional motorcycle racer) Toshikazu Maeda in 1992 to develop and manufacture motorcycle racing parts ranging from frames to mufflers. Marumae later applied the machining expertise gained in this field to various industrial machinery to produce SPE and other parts, expanding its business sphere.
Expansion to industrial precision parts
Marumae has accumulated the expertise to efficiently machine complex parts by manufacturing products for a broad range of industries, including motorcycle racing parts, industrial turbine blades, and robotics parts. Motorcycle racing parts require robust materials and structures, have complex shapes, and need to withstand extreme operating conditions such as speeds of 300km/h. Current President Maeda independently studied the relevant materials and welding technologies and tested the performance of motorcycle parts under harsh racing conditions. Alongside motorcycle racing parts, he started manufacturing blades for steam turbines manufactured by a leading manufacturer of heavy industrial products. Because the power generation efficiency of steam turbines is greatly affected by the manufacturing precision of their blades, the latter require processing technologies that achieve highly difficult machining of complex, 3D shapes. Guided by the experts of the customer’s thermal power turbines section, president Maeda acquired the necessary knowledge to deliver the steam turbine blades.
Positioning
Corporate value and social responsibility
As a parts manufacturer, Marumae does not interact directly with consumers (B2C), but rather supports SPE and FPD production equipment manufacturers (B2B). The customers are world-class production equipment manufacturers in Japan and the US, and Marumae supplies key components for these industry leaders. In many cases, the company is the sole supplier of the parts it produces. Many of the core components that power essential infrastructure in our global society (including rockets, satellites, power plants, robots, and medical equipment) are custom made by craftsmen working in small factories across Japan. Inheriting the spirit of craftsmanship of these factories, Marumae has expanded into the production of core parts for SPE and FPD production equipment. It stands out from its rivals by virtue of its progress with digital transformation and automation. Rather than operating its main factory in a metropolitan area such as Tokyo, it has opted to consolidate its production in its home prefecture of Kagoshima. In this way, it also contributes to regional employment and revitalization of the local economy.
Business sphere and sales activities
Marumae manufactures vacuum parts for SPE and FPD production equipment as its core business. Because this field requires advanced production expertise, the company has few rivals and can provide high added value and secure high profit margins. The company's sales activities mainly consist of tasks such as providing estimates to customers and customer relationship management. For existing customers, the company aims to expand the amount of orders received. When developing new customers, however, it is necessary to build a company-wide system for prototype manufacturing and quality assurance. If the product is approved by the customer, the project transitions to mass production, so the aim after that is to increase orders. Marumae does not employ aggressive sales tactics, but rather attracts new customers via referrals from other companies that have recognized its technical prowess.
Growth strategy
Expanding market share by adopting to the semiconductor industry trends
Marumae does not aspire to become a manufacturer of final equipment, but rather supports a wide range of equipment manufacturers as a supplier. As a result, it looks to further strengthen its elemental technologies and supply capacity, which are essential capabilities if the company is to continue delivering cutting-edge parts. Marumae operates in an industry subject to cyclical fluctuations in demand, but it believes such changes represent opportunities for growth. While many of its peers are hesitant to boost production capacity in tandem with market growth, Marumae leverages its comparatively strong financial position to flexibly invest in its production infrastructure, and has increased its market share by responding to the needs of its customers. For example, Marumae brought in several new customers during the semiconductor market downturn spanning from 2019 to 2020, paving the way for future growth.
As its core business, the company manufactures vacuum parts used in SPE and FPD production equipment. Vacuum parts supplied by Marumae are vital components of front-end SPE and FPD production equipment, requiring advanced production expertise. Because no reference materials that comprehensively aggregate data for its target market exist, Marumae has compiled data for a group of 30 peer companies since 2014 based on information sourced from Teikoku Databank, Ltd. (unlisted; Japan's largest credit reporting company) to get a sense of its relative position in the industry. These data show the company has continued to increase its sales share from 3.8% in 2014 to 6.3% in 2020, and imply a market size of nearly JPY71.0bn in 2020 (based on aggregated sales of 30 companies). After including competitors that do not feature in the reference group, Marumae assumes the number of companies operating in its industry is about 100, and it estimates the domestic market alone is worth over JPY200.0bn based on sales share data. Shared Research also believes that the company's products are used by SPE manufacturers outside of Japan, meaning that the target market is even larger than the above estimate when potential overseas customers are factored in.
M&A activity
Alongside organic growth, Marumae is interested in acquisitions that could bring in new customers or elemental technologies it is lacking today. The company has not engaged in M&A to date, but its Kanto Factory has acquired a bankrupt company with all of its employees from a bankruptcy trustee (operations started in April 2008). Marumae is particularly keen to acquire companies that have built recurring revenue businesses involving consumables. In terms of overseas expansion, it is actively exploring the acquisition of overseas customers, but it is not considering overseas production at present.
Originality
Pioneer in digital transformation
Marumae adopted computer-aided design (CAD) and computer-aided manufacturing (CAM) software after it launched its present business (2D software in 1995, 3D software in 1997), pursuing digital transformation at a time when many of its rivals were still relying on craftsman intuition and calculators. The company also created a proprietary post-processor that functions as an interface between CAM and the programming language of machine tools to streamline the process from programming to the start of machine operation. This has given it productivity advantages over rivals in high-mix/low-volume manufacturing (in terms of work efficiency, the ability to accommodate complex processing, and simulation-based discovery of data problems), and contributed to the highest OPM in the industry (the company ranked first in OPM based on its own estimates). Marumae’s machining technologies are supported by a team of 50 technicians who program its machinery. In addition to operating machinery on factory floors, these employees can also produce CAD drawings and write CAM programs. The company explains that many of the technicians are graduates from local technical high schools and rapidly absorb complex knowledge ranging from CAD/CAM programming to machinery operation.
Marumae Manufacturing System
Marumae’s corporate philosophy calls for “the pursuit of growth by consistently enhancing productivity,” and this is the primary focus of the current president as the head of the management team. Because its vacuum parts need to undergo various process evaluations in a vacuum state before receiving approval for bulk production, the company needs to produce a large number of prototypes in a short period of time. As a result of these requirements and in part also due to its pursuit of digital transformation ahead of peers, Shared Research's view is that Marumae has developed strong programming capabilities (in terms of number and quality of programmers) and robust prototype handling capabilities. It says roughly 10% of its prototypes lead to orders for bulk production. To enable high-mix/low-volume production, the company uses production lines that can simultaneously process prototypes and finished products. It has gained the expertise to generate profit from high-mix/low-volume production via its Marumae Manufacturing System, a proprietary production system that integrates factory automation for repetitive production tasks, other forms of automation, and labor reduction technologies. Semiconductor device manufacturers rigorously manage changes in their production processes through factory strategy models such as Copy Exactly (C/E*) and Change Control (C/C*). As a result, once Marumae commences bulk production, it is rare for customers to switch suppliers, so orders typically continue until a part needs to be upgraded or its specifications change due to innovations in technology. In semiconductor production, once a company enters mass production, it is rare for it to outsource parts procurement to other companies. This means that orders typically continue until technological innovation requires a model or specification change. Shared Research believes that the Marumae Manufacturing System is suited to this type of ordering system for semiconductor/FPD production equipment, where mass production and specification changes occur repeatedly.
Differentiation through enhanced production capacity
Comparative advantages in capital investment
Many of the company’s rivals are unlisted, small and medium-sized businesses with sales of JPY500mn to JPY6.0bn that depend heavily on one specific equipment manufacturer, and struggle to handle urgent prototyping work or process several orders at once. In addition, competitors have less capital investment capability than Marumae due to relatively low profit margins and other factors, and struggle to flexibly invest. Marumae, on the other hand, is a listed company and has more equity capital and cash reserves than its competitors. To strengthen its production capacity, the company is now promoting automated manufacturing, which has rarely been undertaken in the industry due to the small volume and variety of products. The company has developed its own automated systems, such as automated transport equipment. By strengthening its production system, the company says that when the market fluctuates and final demand increases, it is able to receive orders that have been rerouted from other manufacturers that were unable to meet them (examples are customers requesting prototypes or pursuing a multiple sourcing strategy).
Ability to process multiple orders in parallel
Whereas its competitors tend to supply specialized semiconductor-related parts to a specific equipment manufacturer in the capacity of a near-exclusive subcontractor, Marumae has developed general-purpose technologies by manufacturing parts for a broad range of industries. It has also cultivated more programmers than its peers to build a structure capable of concurrently delivering a large number of prototypes to several manufacturers. In addition, the company has brought several elemental technologies—that are outsourced by its rivals—in-house, thus creating a one-stop production structure that can handle multiple processes. These technologies have mainly centered on metal cutting processes, including various welding technologies such as electronic beam welding (EBW), surface treatment technologies, and gun drilling technologies. In the spirit of open innovation, Marumae uses its Izumi Factory as a hub for collaboration with partner companies (consolidating subcontractor equipment and employees at its own plant), and is taking steps to centralize production of SPE parts. At present, Marumae cooperates with a company specializing in surface treatment, friction stir welding (FSW*), and thermal processing, but it looks to team up with other companies that possess assembly and other parts-related technologies. Currently, Marumae is conducting surface treatment, friction stir welding (FSW*), and thermal processing on its own, but it is also considering cooperative production with partner companies that possess assembly and other parts-related technologies.
Business overview by sales field
Description of businesses by sales field
Semiconductor field (SPE parts; 78.6% of FY08/21 sales)
Applications: Vacuum parts used in SPE and testing equipment
Characteristics: Vacuum parts need to be airtight as they are chiefly used in vacuum environments, and this means they require a high degree of manufacturing precision. In addition, they must be resistant to high voltages as they are routinely exposed to high-temperature and high-voltage plasma. Semiconductor production involves highly intricate processes, so the stability of SPE parts is paramount. Although it takes a long time to evaluate prototypes and processes, the adoption of a part in a piece of equipment typically results in continued orders without adjustments for a long period of time. Vacuum parts also degrade significantly due to their exposure to plasma, producing replacement demand for consumables* every few months. This means that even in the absence of demand for new equipment, Marumae can count on stable, recurring demand.
FPD field (FPD production equipment parts; 15.6% of FY08/21 sales)
Applications: Vacuum parts used in LCD, OLED and other panel production and testing equipment, and related assembly.
Characteristics: Marumae manufactures vacuum chambers (vacuum-resistant vessels) and electrodes (machined parts placed inside vacuum chambers). Despite having large dimensions (3m and above) and complex shapes that are prone to deformation, these parts are made of metals such as aluminum and require a high degree of manufacturing precision in terms of flatness and positioning accuracy. Although they differ from the company’s semiconductor-related parts in size, they are key products that are similarly exposed to plasma and therefore need to withstand voltages and deliver stability.
Other field (5.8% of FY08/21 sales)
The main products are aluminum or other metal parts used in surface treatment equipment for smartphone casings, photovoltaic (PV) cell production equipment parts, motorcycle racing parts, optical parts (cameras and microscopes), medical equipment, steam turbines for power plants, industrial robots, and products for the Ministry of Defense. In addition to this, the aluminum scrap generated during the manufacturing of parts is sold to recyclers (about JPY60mn per year).
The products in this field (aluminum and various metal parts) are generally highly difficult to process. This includes products that have little tolerance for deformation (parts with complex shapes or parts that need a high level of flatness), and parts that need to go through several machining stages such as welding and surface treatment.
When orders for SPE and FPD production equipment parts were scarce in the past, Marumae accepted low-margin orders for steam turbine blades and nuclear power plant-related parts to sustain its capacity utilization rates. At present, however, it abstains from orders if their projected profit margins are below a certain level, and essentially looks for profitability on par with orders in the semiconductor field. On the R&D front, the company looks to acquire pre- and post-process technologies to supplement its elemental technologies. It also conducts research in the field of medical devices, including rehabilitation devices, but it does not expect such efforts to lead to a business that can support earnings over the near term. However, the company is committed to undertaking meticulous and long-term initiatives in this field in an effort to contribute to society.
Lead times
According to the company, lead times from order to delivery average 2.5 months (maximum is two months for semiconductor field, but six months for FPD field). Production volume, order volume, and sales have historically moved more or less in step with each other (excluding in FY08/09). Market expansion and growth in market share have resulted in the company's total sales of SPE parts and FPD production equipment parts increasing approximately fivefold over the past decade. The proportion accounted for by overseas sales is currently around 3%, as the ratio of direct transactions with overseas customers is small.
Since losing photovoltaic (PV) cell production equipment orders (mainly equipment assembly) from an overseas customer in August 2009, Marumae has hardly encountered any major cancellations. In the aforementioned PV-related assembly business, the company received orders denominated in dollars, but had to purchase the parts that made up the bulk of the order amount in yen. This resulted in high risk from currency fluctuations, and led to Marumae ultimately exiting the business. However, it remains keen to engage in assembly business if it can purchase parts while ensuring low risk.
Note: Figures may differ from company materials due to differences in rounding methods.
Relationship with customers
Marumae generally manufactures new products based on drawing supplied by its customers. However, when adopting new processing methods, the company cooperates from the development phase by exchanging opinions with the design departments of its customers. That said, Marumae does not engage in development-driven sales at present as its primary objective is to secure orders for bulk production. In the SPE and FPD production equipment markets, equipment manufacturers are constantly locked into a fierce battle for market share, and Marumae’s rivals tend to supply semiconductor-related products nearly exclusively to one specific equipment manufacturer, creating a strong dependence on a single customer. Marumae, on the other hand, has accumulated general-purpose technologies by building experience in a broad range of fields, and it manufactures a large number of parts that cannot be replaced by competitors. Its customers therefore do not object to it supplying other manufacturers as long as the latter do not constitute direct competition. Marumae employs a large number of programmers to handle orders from multiple customers in parallel. These programmers are tasked with the development and operation of mixed-flow production for prototypes and finished products and production line systems (61 people out of a total of 272 employees were programmers as of end-August 2021).
Major customers
Note: Figures may differ from company materials due to differences in rounding methods.
Note: If the sales composition ratio is less than 10% of the total, the field is left blank.
Tokyo Electron (Tokyo Electron Miyagi accounted for 29.7% of total sales in FY08/21)
Marumae’s relationship with Tokyo Electron goes back many years (Tokyo Electron was added as a major customer in FY08/04). At that time, the company's main products were for a subsidiary (now Tokyo Electron Technology Solutions Ltd.) that handled etch systems for FPDs. Subsequently, in its 2011 business revitalization plan, the company sought to expand into the semiconductor field, making vacuum parts for etch systems—which are difficult to produce and have high barriers to entry—the centerpiece of its business revitalization. Tokyo Electron Miyagi Ltd. (a subsidiary of Tokyo Electron) manufactures etch systems, and Marumae has continuously increased its market share by expanding business with Tokyo Electron Miyagi. The company believes that it has room to increase its semiconductor-related sales to the Tokyo Electron Group to about JPY10bn per year by increasing the number of primary vendor certifications. In the FPD field, Marumae believes it can expand annual sales to Tokyo Electron to above JPY2bn once the market rebounds, as competitors are exiting the field.
Tokyo Electron generated 85.9% of its sales overseas in FY03/21. Tokyo Electron's major customers are Intel (20.4% of total sales), TSMC (16.7%), and Samsung Electronics (10.7%), which from Marumae's perspective are end-product users.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
NHK Spring (43.1% of total sales in FY08/20)
Although NHK Spring is primarily known as a manufacturer of automotive springs, Marumae receives orders for SPE parts from NHK Spring. Specifically, orders include vacuum parts for etch systems and CVD systems manufactured in Japan and abroad. Whether it receives such orders from NHK Spring or directly from equipment manufacturers depends on the need for brazing*, a soldering technology NHK Spring excels in. The main SPE parts ordered by NHK Spring are titanium-brazed cooling plates, aluminum-brazed cooling plates, aluminum-brazed heaters, multilayer shower heads, ceramic springs, cold spray technologies, and metal base printed wiring boards.
Past monthly order backlog
Production sites
Centralized production in Kagoshima Prefecture
Marumae has set up its headquarters and consolidated its production in its home prefecture of Kagoshima, which accounts for roughly 75% of its production value (the remaining 25% is accounted for by production accomplished in Saitama Prefecture). The company has reaped major benefits from this location, such as the acquisition of a large plot of land to house its manufacturing operations at an affordable price, and the relative ease with which it can recruit human resources due to the lack of competitors in neighboring areas. Its Izumi Factory (headquarters) still has ample room for expansion, so Marumae is currently planning to increase capacity. It is not considering decentralizing production beyond its current structure. As for work distribution, the Takaono Factory manufactures large parts for FPD production equipment and small prototype parts for SPE, while also handling small and large-scale electron beam and other welding operations for both fields. The Izumi Factory engages in bulk production of small SPE parts, while the Kanto Factory exclusively handles bulk production of small SPE parts for NHK Spring.