Striving for Made in Japan manufacturing through ...lin.trias.co.jp/en/report/doc/22/6157_nst_fy316_linmemo...Geographic operating regions for the Company outside of Japan include:

MONOZUKURI - Builders -

This Memo is for reference purposes only and is not intended as a solicitation for investment. The contents contained herein are prepared based on reliable information that already exists in the public domain. The Company, however, does not guarantee complete accuracy. Any opinion or information contained in the Memo is relevant as of the day of the Information Meeting and/or Company Visit, although the views and/or facts may be altered without prior notification. Final investment decisions shall be made by investors themselves based solely on their own judgment and responsibility. Copyright © 2016 Trias Corporation All rights reserved.

| 1

An investment research platform to support a Japanese Economic Renaissance October 24, 2016

http://lin.trias.co.jp/en/

Dating back to before the Lehman financial crisis in May 2004, the Ministry of Economy, Trade and

Industry (METI) formulated and announced its “New Industry Promotion Strategy” (hereinafter

“NIPS”), beginning to take steps toward addressing improved turnover in the micro-economy

through progress in structural adjustments of companies, and in order to ensure signs of demand

recovery stimulated by innovation based on that become a firmly established trend. Then, in order to

realize NIPS, METI determined that revival of strong manufacturing industries, and creation of a

variety of service industries that will generate jobs, are essential, and that through these measures,

a virtuous cycle at the micro-economy level will lead to realization of a virtuous cycle at the

semi-macro and macro-economy levels.

Among these, the following 3 prongs were put forward as groups of strategically targeted industries.

Specifically, these were 1) the group of advanced industries (leading new industries) that can

leverage competitive strengths and emerge successful globally, 2) the group of industries that can

respond to market needs that adapt to changes in society (needs-responsive new industries), and 3)

the group of industries that are responsible for revitalizing local regions (regional revitalization

industries).

With respect to Japanese manufacturing in particular, METI’s analysis concluded that the globally

unique concentration of high-grade parts and materials industries is one of Japan’s strengths as an

industrial base for supporting the group of leading new industries in point 1). East Asian

manufacturing industries which have become the world’s factories function with the concentration of

high-grade Japanese parts and materials industries at the core, and the integrated network that has

been nurtured by the concentration of industries from downstream (final products), mid-stream

(materials, parts and equipment) and upstream (basic and raw materials) is viewed to stimulate

next-generation innovation.

At the same time, challenges for the group of leading new industries include long-term

employment/HR systems, intellectual property (IP) strategy, securing profit margins/establishing

brands, lack of speed, mutual dependence based on long-term relationships, strengthening

cooperation between industry and academia, and turning out a large number of venture firms.

6157

JASDAQ

NS TOOL CO., LTD.

～For Crafting Tomorrow～ Striving for “Made in Japan” manufacturing through specialization in micro-precision machining



| 2



NIPS theory emphasizes the need to incorporate ongoing innovation within business strategy, taking

a medium- to long-term on changes in society, and there are companies in Japanese manufacturing

that are making serious efforts through practical application of this. One such company is NS TOOL

CO., LTD. (hereinafter “NS TOOL” or the “Company”), which was founded in 1954 for the purpose of

manufacturing cutting tools. Here we consider how the Company’s business strategy, which is

in-line with national industrial policy, and developed business foundation, has led to competitiveness

and growth.

NS TOOL Corporate History and Business Overview

Currently, within end mills which are a type of cutting tool, the main business of NS TOOL is the

manufacture and sale of carbide (super hard) end mills made using carbide alloys from high

temperature sintering of powdered raw materials tungsten and cobalt, business which was started in

1980.

After the collapse of the bubble economy in 1993, the Company completed construction of the

Sendai Plant in Miyagi Prefecture, and after consolidating scattered production centers in Tokyo’s

Shinagawa City and Kanagawa Prefecture’s Fujisawa City, the manufacturing division and

development division were consolidated in the same plant in 1998, and while remaining thoroughly

committed to manufacturing in Japan, has led to present day.

As can be seen in [Figure 1] on P.3, end mills are used in machining dies and components, and

users include auto-related, digital AV and electronic components makers, across a wide range.

According to the aforementioned METI’s NIPS, Japan has strength in concentration of high-grade

parts and materials industries, and East Asian and Chinese manufacturers actually depend on

Japan’s superior basic materials industries and functional component industries excelling in

micro-precision machining.

Under NIPS, since high-grade parts and materials industries are concentrated in Japan, METI’s

analysis concludes that indispensable elemental technologies for manufacturing including

micro-precision machining and special materials synthesis have been networked, and at the on-site

level can be tapped both promptly and in high-grade. For example, as can be seen from strengths

attributed to Japanese die makers of high precision and short delivery times, this networking is

functioning properly.

Based on the medium-term outlook for mainly domestic demand to rise, NS TOOL has strengthened

small-diameter end mills (cutting edge diameter 6mm and under) which are essential for ultra



| 3



micro-precision machining and high value-added processing, and this strategy has supported

upstream (basic and raw materials) industries and midstream (parts and materials industries in

Japan’s concentration of high-grade parts and materials industries).

The proportion of carbide small-diameter end mills in total volume handled by NS TOOL was 70.8%

in FY3/16. As can be seen in [Figure 2] on P.4, there are over 5,000 user makers of die machining

and components processing. Further, demand sectors cover a wide range from transport equipment

to electrical and miscellaneous precision equipment etc., and each sector requires functional

components made from micro-precision machining.

[Figure 1] End Mill Summary and Applications

Source: Compiled by Trias Corporation from the Company IR materials

Geographic operating regions for the Company outside of Japan include: China/HK/Taiwan, Other

Asia, Europe and America/Other. Overseas sales in FY3/16 accounted for 23.2%, of which

China/HK/Taiwan accounted for the largest share at 39.5%, and together with Other Asia accounted

for 68.5%. This is believed to be the result of the dependence of Asian manufacturers on Japanese

manufacturing base industries.



| 4



[Figure 2] Overview of Main Demand Sectors

Source: Compiled by Trias Corporation from information on the Company’s website

The Company changed its strategy to focus on small-diameter end mills, which is attributed to the

current Chairman of the Board Isamu Goto. Appointed President and Representative Director in

1991, Mr. Goto made a major turn in strategy to focus on specializing in business areas that can

leverage Japan’s strength in manufacturing industries base. Through strengthening high

value-added products and raising production efficiencies, he worked on improving profitability as

well as drastic reform of the Company’s weak financial position. Then, through these series of

measures, he built a brand as the top maker of small-diameter end mills.

[Graph 1] on P.5 shows the trend of earnings and amount of loans for NS TOOL. From FY3/91 when

the balance of loans had swollen to ¥1,945 million (versus shareholders’ equity of ¥410 million and

shareholders’ equity ratio of 15.2%), the Company reduced the balance of loans to zero by FY3/04,

raising shareholders’ equity to ¥2,258 million and the shareholders’ equity ratio to 80.5%, posting a

massive improvement. During that period, the ordinary income margin was 12.2% in FY3/91,

dipping into loss in FY3/93, and reaching a record 23.1% in FY3/04.

Under the aforementioned NIPS, the challenge for Japan’s concentration of high-grade parts and

materials industries was accumulating elemental technologies that had been further honed,

emphasizing the need for maintaining and expanding the concentration created through a chain of

tapping into constant innovation. The corporate history of NS TOOL until now is believed to have

provided hints from the micro level regarding the direction of manufacturing in Japan.



| 5



[Graph 1] NS TOOL Trend of Earnings and Amount of Loans

-15.0%

0.0%

15.0%

30.0%

45.0%

0

2,000

4,000

6,000

8,000

（¥ million） Net sales Loans Ordinary income rate

※2002 includes 7 months due to changing of fiscal year.Source: Compiled by Trias Corporation from the Company IR materials

1980:

1991:

Stock listing (Cleared off a debt)

Compledted Sendai plants

Collapse of bubble economy

Lehman Bros. collapse

The Great East Japan Earthquake

Launched manufacturing carbide end mills

Isamu Goto wasassigned to the president

2004:

1993:

2011:

NS TOOL Group Development

Before considering the source of the Company’s competitiveness and growth potential, first we look

at an overview of the NS TOOL Group (hereinafter ”NS TOOL Group” or the “Group”). [Figure 3] on

P.7 shows a business diagram for the Group, and [Figure 4] on P.7 shows the Group’s supply chain.

Currently, the NS TOOL Group is comprised of the parent, NS TOOL CO., LTD., along with 4

consolidated subsidiaries, for a total of 5 companies.

The Group development began in 1990 with the establishment of a domestic sales subsidiary

GTECH Co., Ltd. (hereinafter “GTECH”). Under the leadership of mainly Chairman Isamu Goto, the

parent company proceeded to develop the market for carbide small-diameter end mills which had

not yet emerged, and GTECH was established to meet the needs of clients who wanted to

consolidate suppliers, separate from the domestic distributors, dealers and sales agents. Currently,

roughly 20% of transaction volume is through GTECH, and the remainder through distributors,

dealers and sales agents.

NS Engineering Co., Ltd. was established in 2009 for coating, inspection/packaging and regrinding

service for mainly small-diameter end mills. As part of this, in addition to in-house manufacturing of

small-diameter tool cases, the Niigata Plant also handles end mill processing for diameters over

6mm.



| 6



Then in 2011, the Company acquired Makino Kogyo Co., Ltd. (hereinafter "Makino Kogyo"), making

it a wholly-owned subsidiary, which is involved in plastic molding focused mainly on tool cases.

Makino Kogyo which has strengths in planning/design sells roughly 90% of volume transacted to

external clients. NS TOOL is planning to expand the scope of business outside of end mills through

Makino Kogyo.

For sales distribution overseas, in order to develop the China market, the Company established NS

TOOL HONG KONG LIMITED (hereinafter “NS TOOL HK”) in 2013, commencing measures to

further strengthen sales and respond promptly to customer needs.

Based on this group structure, the NS TOOL Group currently handles roughly 5,000 items, of which

roughly 2,000 comprise the mainstream of sales. In the market for end mills, since clients don’t hold

much inventory, stable supply is a major competitive strength. Therefore, inventory centers at the

head office in Tokyo and NS TOOL HK always hold 3.5 months of strategic inventory reserves.

According to the Company, the Sendai Plant also keeps some inventory for risk management

purposes.

For reference, as of the end of FY3/16, there are 75 sales staff members in the NS TOOL Group, of

which 58 are assigned to NS TOOL. The Company has the largest carbide end mill dedicated sales

force domestically, and the special feature is strength in technical proposal sales through using

client prototypes and samples to realize high precision machining through actual tool operation in

response to client precision machining challenges, new techniques etc. Actual results of technical

interfacing with accumulated clients through this type of technical sales activity are believed to be

one of the Company’s strengths.



| 7



[Figure 3] NS TOOL Group Business Diagram


[Figure 4] NS TOOL Group Supply Chain

Source: Compiled by Trias Corporation from the Company interviews



| 8



Japan-Concentrated Production Structure is the Foundation

for High Profitability and Highly Efficient Management

[Graph 2] shows the trend of NS TOOL’s consolidated net sales with the sales amount for machine

tools and carbide tools from METI’s Current Survey of Production. In general, NS TOOL sales move

in correlation with macro statistics for machine tools and carbide tools, however, since a large

portion of sales distribution for the Company depends on an external network of distributors, dealers

and sales agents, the Company’s sales tend to lag macro statistics by 1-2 quarters.

Looking at data for just 2015, the amount of domestic machine tool sales increased 4.9% YoY to

¥472.5 billion, of which the sales amount for carbide tools which include carbide end mills increased

6.7% YoY to ¥279.1 billion. The sales amount of carbide end mills within carbide tools increased

11.5% YoY to ¥39.0 billion, sharply exceeding growth for overall machine tools and carbide tools.

FY3/15 net sales for NS TOOL, which specializes in carbide small-diameter end mills, increased

15.3% YoY, sharply exceeding growth in the overall market.

Also, looking at the compound average growth rate (CAGR) over the period of this graph, over the

30-year span from 1985–2015, relative to NS TOOL sales of 6.4% CAGR, machine tools and

carbide tools were 0.9% and 1.6%, respectively. Even just looking at the 5-year period from 2010–

2015, relative to NS TOOL sales of 14.6% CAGR, machine tools and carbide tools were 4.5% and

5.4%, respectively. In addition, carbide end mill data which has been published since 1997 is 8.1%

CAGR, and NS TOOL sales are clearly exceeding market growth by a wide margin.

[Graph 2] Trend of NS TOOL Consolidated Net Sales and Machine Tool Sales

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

（¥ million）（¥ million） NS TOOL (RHS) Machine tool (LHS) Carbide tool (LHS)

Source: Compiled by Trias Corporation from the Company IR materials and Current Survey of Production by METI



| 9



As can be seen from these statistics, while the market for carbide end mills is by no means large,

among machine tool makers, profitability and efficiency for NS TOOL are extremely high. According

to financial analysis of FY3/16 results for factory automation (FA) makers published in the July 2016

issue of GEKKAN SEISANZAI MARKETING (Monthly Production Goods Marketing) by News Digest

Publishing, based on ordinary income margin and CoGS ratio, the Company’s high level of

profitability stands out. On ordinary income margin, NS TOOL ranked No.2 with 23.3% after No.1

FANUC with 23.8%, and on CoGS ratio ranked No.1 with the lowest 47.6%, sharply ahead of No.2

FANUC at 52.4%. Also, on management efficiency benchmarks, NS TOOL ranked top in both ROE

and ROA, with 14.0% and 11.8%, respectively. For reference, No.2 in ROE was Yamazen at 13.7%,

and No.2 in ROA was FANUC at 10.6%.

Factors supporting the Company’s high profitability and high management efficiency include

specialization in carbide small-diameter end mills and Japan-concentrated production structure

using the Company’s in-house developed automatic production equipment (tool grinding

machines).

As mentioned earlier, in 1991 the Company consolidated its 4 domestic plants into the Sendai Plant,

achieving specialization in small-diameter end mills. The amount of capital expenditures in FY3/16

including automatic grinding equipment was ¥1.3 billion, completing a new factory building within the

grounds of the Sendai Plant. This new building is expected to contribute a 20% increase in

production capacity.

Full swing measures for production automation of carbide small-diameter end mills were

commenced in 2010. For tool grinding machines required for processing end mills, the Company

had mainly used machines manufactured by Swiss company Rollomatic SA, however, competitors

use the same machines, making it difficult to differentiate its products.

NS TOOL aimed for product production that can’t be imitated by competitors, thoroughly

investigating functions that were impossible on existing machines, including automation, and

designed and developed in-house its own automatic grinding machines. Currently, out of grinding

machine units in operation, roughly 60% are automatic machines, which the Company uses for high

production volume items.

For quality control as well, on existing lines, the Company performs sampling inspections using

stereographic microscopes during processing, inputting correction values, but on automated lines,

the Company introduced individual automatic inspections using lasers, making automatic

corrections.



| 10



By automating sampling inspections during processing, the only required manual tasks in the

automated line process are initial steps such as settings for the grindstone. As a result, the number

of lines that can be handled by production staff increases, contributing to increased production

efficiency.

[Graph 3] shows the trend of the Company’s financial results post-Lehman Bros. collapse, and

success of measures toward automating production can be seen in the rise of the ordinary income

margin over the last several years.

[Graph 3] Trend of NS TOOL Consolidated Financial Results

5,892 5,251

3,857

4,977

5,781 5,997 6,418

7,402

8,382

1,271 1,052 361 834 1,032 951 1,107 1,534

1,954

21.6% 20.0%

9.4%

16.8%17.9%

15.9%17.2%

20.7%

23.3%

0

2,000

4,000

6,000

8,000

10,000

FY3/08 FY3/09 FY3/10 FY3/11 FY3/12 FY3/13 FY3/14 FY3/15 FY3/16

（¥ million） Net Sales Ordinary income Ordinary income rate


Influence ofLehman Bro. collapse

Through NS TOOL’s achievement of raising production efficiency through the introduction of

in-house developed automatic grinding machines, it may be thought that it is possible for

competitors to similarly raise production efficiency by introduction of in-house developed machines.

However, the 2015 market scale of ¥17.0 billion (company estimate) is an extremely small niche

market for carbide small-diameter end mills, making it difficult for large makers to realize scale

merits.

According to the Company, it is possible for competitors to develop machines in-house, however,

since competitors are not specialist makers of small-diameter end mills only, there is an advantage

from accumulated know-how as a specialist maker, and the Company believes it will be difficult to

shrink the gap in efficiency with NS TOOL.

In the front-end process of end mill production, and important factor is how to achieve “centerless”

(turning out a true circle), in other words how to achieve high precision roundness. The Company is

currently also working on automation of the centerless process. As a result, even made in Japan



| 11



products will be able to secure sufficient cost competitiveness.

Going forward, there are expectations for innovation in automation of uniformity of the coating for

the coating process and image processing etc. for the inspection/packaging process, which require

technologies not within the Company’s technology areas until now.

Potential to Expand Applications for Carbide Small-Diameter End Mills

Precision processing requires processing technology that becomes the core of manufacturing, and

carbide end mills are used toward realization of that core. Since ultra-precision processing is

essential for improving product quality stability/safety, and making things more compact and light,

carbide small-diameter end mills are used across a wide range of fields. In the future, demand is

expected to increase further for making products even more compact, improving product

quality/safety and raising efficiency, and since even higher precision processing technology will be

required, expanded applications for carbide small-diameter end mills can be expected.

Currently, main applications for carbide end mills include auto parts-related, on-vehicle

device-related, smart phone-related etc., and in particular, for automotive use, the increasing trend

of the number of sensor units installed has become pronounced. Already in autos, thermopile

infrared sensors for AC temperature control in each seat, electrical current sensors that can detect

battery charging/discharging, reverse and corner sensors, security sensors and ultrasonic sensors

that can detect a parking space for automated parking systems, make up a wide variety of types of

installed sensors.

Going forward, in addition to diffusion of electric vehicles (EV), commercialization of advanced driver

assistance systems (ADAS), autonomous driving vehicles, and connected cars that are equipped

with internet access etc. is estimated to drive further expansion of the automotive sensor market.

Since these advanced systems acquire various data through sensors such as the state of the

vehicle or surrounding road conditions etc., the number and types of sensor units installed per

vehicle is forecast to grow.

According to a report by the Yano Research Institute in September 2015, the global market for

automotive sensors in 2014 saw growth in power train and ADAS sensors, and on a manufacturer

shipment value basis, reached ¥2,254.3 billion. With increased diffusion of ADAS contributing, the

global market for automotive sensors in 2020 is estimated to reach ¥3,148.7 billion.

In addition to advanced systems, automobile fuel economy standards and exhaust emission

regulations are being tightened in every country around the world, and automakers are being



| 12



increasingly required to pursue environmentally friendly technologies and cost reduction. Also,

including EV and fuel cell vehicle (FCV) which uses fuel other than gasoline and the trend of

headlights shifting to LED, weight reduction of car bodies, and automotive electronic parts having

higher functionality and higher efficiency etc. have become important issues. According to NS TOOL,

deliveries to LED headlight makers increased from 2 years ago, and this is due to the curved

molding process for LED headlight light guide plates requiring high precision end mills.

For new demand other than autos, progress in the Internet of Things (IoT) connecting a variety of

things to the internet, and dyes for sensors used in wearable devices, require further micro-precision

machining. For wearable devices, the market for bio-sensors including pulse and blood pressure

sensors etc. is expected to grow. While demand is still low, there is likely high potential for use of

carbide small-diameter end mills for dye cutting for medical and aerospace-related components.

NS TOOL R&D Structure Driving Innovation

NS TOOL carbide small-diameter end mill products from the standpoint of short processing times

and long useful lives have contributed to raising production efficiency of metal machining. Elemental

technologies for this include basic materials processing technology, coating technology, software

technology including CAD/CAM, and data accumulation related to processing, a wide range.

For example, NS MicroCAM which was completed in 2014, is a dedicated CAD/CAM for

micro-precision machining consolidating the tool database an accumulated know-how from

responding to various client issues related to machining, a support tool for even higher precision

machining of miniature dyes and components. Through this tool, offering value-added not only from

hardware end mills, but also from ease of use software, the Company aims at raising efficiency and

micro-machining technology in customer manufacturing.

In addition to its strength in technical sales, by strengthening this type of software approach,

opportunities for technological tapping at client manufacturing sites increase and continuing to

support the honing of client machining technology will likely lead to new applications and market

development.

Daily product development including improvements is handled by the R&D Department which is

home to 20 engineers, however, for advanced elemental technologies and NS TOOL non-core

technology areas, the Company is actively pursuing external joint research projects with other

companies and college research labs. For example, NS TOOL’s original coating

“MUGEN-COATING Premium” was developed through joint research with a coating specialist firm.



| 13



In addition, for diamond coating, development of the furnace was carried out in collaboration with a

college research lab.

In recent years, in order to fulfill new demand, materials of end mills themselves have seen major

changes. Carbide end mills use carbide alloys from tungsten and cobalt sintered metals, however, in

response to changing demand, NS TOOL developed end mills using polycrystalline diamonds

(PCD) and cubic boron nitride (CBN).

Among substances, PCD has the highest hardness and thermal conductivity properties, exerting a

significant impact on ultra-precision machining of non-ferrous metals and non-metals. While there

are still few fields that make dyes from carbide alloys, fields that require specularity (qualities of a

mirror) such as lens molds are beginning to use them.

At the same time, CBN hardness and thermal conductivity rank next after diamonds, with small

reaction to iron-based materials, and compared with diamonds, has superior thermal and chemical

stability, making possible machining of heated metal groups that is difficult using diamonds since it

doesn’t contain the carbon in diamonds. Leveraging this property, CBN end mills are starting to be

used for precision die machining, and are apparently also suited for the aforementioned LED die

machining.

In addition, in the future, precision machining technology using lasers and image processing

technology for automation of the inspection process are also being pursued through collaboration

with industry and academia.

In the area of production technology, in FY3/16, rising need for program development for moving to

mass production and improving production technology prompted the Company to transfer 10

engineers from manufacturing to development. By unifying the organizational function of product

development and production technology, product development completion can be simultaneously

moved to mass production, aiming at smoothing out the transfer to mass production.

Mid- to Long-Term Analysis of Consolidated Financial Condition

Consolidated Earnings and Profitability

NS TOOL's consolidated performance, as is shown in [Graph 4] on P.14, has largely grown nicely

after being hit in FY3/09 and FY3/10 by the negative impacts from the Lehman Bros. collapse, with

an only exception in FY3/13 when the "Apple Shock" undermined overall relevant markets.

YoY performance change ratios and key PL items ratios to net sales are displayed in [Graph 5] and



| 14



[Graph 6], respectively on P.15. As [Graph 6] illustrates, the Company's operating income margin

rose from 16.0% in FY3/11 to 22.8% in FY3/16, topping levels prior to the Lehman Bros. collapse.

Since FY3/13, higher operating income margins have been driven by both growing gross profit

margins (GPMs) and declining SG&A expenses ratio to net sales. GPM widened from 47.4% to

52.4% while SG&A expenses to sales ratio improved from 32.0% to 29.5% in the 4-year period.

Improvements in both should be attributable to economies of scale delivered by higher net sales.

For example, small-diameter end mills, which are highly profitable in our view, increased steadily

from 69.9% of total net sales in FY3/13 to 70.8% in FY3/16 although the latter declined by a 0.8%

point on a year-on-year basis due to sharp increases in other products such as plastic cases and

special-use end mills.

The SG&A expenses ratio to net sales decreased by 2.5% points from FY3/13 to FY3/16, chiefly due

to diluted labor expenses against net sales from 13.9% to 12.3% in the same period. Looking at

per-head Group productivities, net sales jumped by 40.3% from ¥21,345 thousand in FY3/13 to

¥29,936 thousand in FY3/16 while operating income soared by 108.4% from ¥3,281 thousand to

¥6,837 thousand in the period. This indicates the Company achieved the strong growths in sales

and incomes/profits without adding much head counts.

[Graph 4] Mid- to Long-Term Consolidated Performance Trend

(Net Sales/Operating Income)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


（¥ mi l lion） Net sales Operating income

Source: Compiled by Trias Corporation f rom the Company IR materials



| 15



[Graph 5] Trend of YoY Performance Change Ratios

5.6%‐10.9%

‐26.5%

29.0% 16.1% 3.7% 7.0% 15.3% 13.2%

10.8%‐18.6%

‐74.2%

203.4%

21.1%‐4.3%

16.0%38.5% 29.3%

‐100%

‐50%

0%

50%

100%

150%

200%

250%


Net sales Operating income Gross profit


[Graph 6] Trend of Key PL Items Ratios to Net Sales

49.7% 49.6%

43.1%47.3% 47.4% 47.4% 47.9%

50.1%52.4%

21.1% 19.3%

6.8%

16.0% 16.7% 15.4% 16.7%20.0%

22.8%

28.5% 30.3%36.3%

31.3% 30.7% 32.0% 31.3% 30.1% 29.5%

0%

10%

20%

30%

40%

50%

60%


Gross profit margin Operating income margin SG&A expenses rate


Compositions of Net Sales

Compositions of products to overall net sales are shown in [Graph 7] on P.16 (small-diameter end

mills include cubic boron nitride [CBN]). The weight of small-diameter end mills, accounting for

about 70% of total net sales, is trending up steadily since FY3/12. This should be due to increased

demand from micro fabricated components used in the growing smartphone industry as well as

sales increases in new products made with blade materials such as diamonds and CBNs.

Net sales by region are shown in [Graph 8] on P.16. Domestic net sales, having been at more or less

80% of total until FY3/14, in fact weighed less at 76.8% in FY3/16. The sharp increase to

China/HK/Taiwan region in FY3/15 should have reflected the Company's aggressive marketing

efforts in these areas. Finally, sales to America/Other region appear to be growing gradually as local

firms increasingly employ the Company's products whereas the sales composition used to be as



| 16



small as about 2% due to the barrier caused by different metric standards.

[Graph 7] Net Sales Composition Ratio Trend by Product

68.2% 71.8% 74.0% 70.3% 69.4% 69.9% 71.2% 71.6% 70.8%

17.3% 14.3% 12.7% 14.3% 13.0% 12.3% 12.9% 12.5% 11.6%

0%

20%

40%

60%

80%

100%


End mill (6mm & under) End mill (Over 6mm) End mill (Others) Other products


[Graph 8] Net Sales Composition Ratio Trend by Region

84.7% 83.2% 79.0% 79.3% 80.8% 79.2% 80.2% 77.0% 76.8%

7.1% 7.0% 6.7% 8.1% 6.2% 8.9% 9.2%6.7% 6.8% 5.8% 6.1% 6.3% 6.5% 6.7%

0%

20%

40%

60%

80%

100%


Japan Overseas China/HK/Taiwan Other Asia Europe America/Other


Changes in Balance Sheet

Major items of balance sheet as percentage of total are shown in [Graph 9] on P.17. FY3/16-end

current assets (blue line) stood at in excess of 60% after sustained growths in total assets in recent

years. The most significant factor behind is found in the increases in cash and its equivalents thanks

to growing profits.

Meanwhile, property, plant and equipment declined to 31% of the total at the end of FY3/15 as

capital expenditures remained at about par with depreciation expenses in FY3/14 and FY3/15 after

increasing by about ¥1.0 billion in each of FY3/12 and FY3/13 when the Company invested

aggressively. It should be noted, however, that the percentage rose to 34% in FY3/16 as the



| 17



Company doubled its capex in order for a construction of a new factory and associated machine

purchases.

[Graph 10] shows compositions of the liabilities/equity side and proves it has kept shareholder's

equity largely 80% of total balance, yet relying on no debts. The equity ratio in fact declined to 84%

at FY3/16-end compared to 91% in FY3/10, a corresponding move to the increase in current

liabilities. The rise in current liabilities is mainly attributed to increased income tax payable and

others. Current liabilities tend to increase percentage-wise against shareholders' equity as an

approximately 40% effective tax burden is booked into the account every year.

[Graph 9] Consolidated BS Major Items Trend

0%

20%

40%

60%

80%

100%


Cash and deposit Accounts receivable InventoriesOther current assets Property, plant and equipment Other assetsCurrent assets


[Graph 10] Consolidated BS Liabilities/Equity Ratio Trend

81%90% 91% 86% 84% 86% 85% 82% 84%

15%5% 5% 10% 12% 11% 11% 14% 12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Shareholder's equity rate Non‐current liabilities Current liabilities


Trend in Operational Efficiencies

[Graph 11] on P.18 tracks ROA and ROE, representative measures for operational efficiencies. Both

measures have been trending upward after having plunged right after the Lehman Bros. collapse,

finally returning to pre-Leman levels in FY3/16. ROA and ROE, both at double-digit levels, indicate



| 18



relatively high operational efficiencies compared to not only the machinery tool sector but overall

firms in Japan.

[Graph 12] illustrates the DuPont analysis* which breaks ROE down to each factor. It clearly tells

higher ROEs in recent years are caused by improved net income margins. Financial leverage (total

assets/shareholders' equity) has also been modestly helping while total asset turnover has

remained largely neutral.

In order for ROE to rise further, it would require higher asset turnover through broader production

automation and/or better profit margins brought by that. As for financial leverage, the ratio should be

improving once new applications/markets for carbide small-diameter end mills expand more visibly

and this triggers the Company to increase capex.

* The DuPont analysis is a method used by US chemical firm DuPont for its managerial analysis which breaks down ROE to 3

factors: net income margin, total asset turnover and financial leverage.

[Graph 11] ROA and ROE Trend

0%

2%

4%

6%

8%

10%

12%

14%

16%


ROA ROE


[Graph 12] Operational Efficiency Trend by ROE DuPont Analysis

0.0

0.5

1.0

1.5

2%

7%

12%

17%


Net income rate ROA ROE Assets turnover (right) Total assets/Equity (right)




| 19



Summary of FY3/16 Consolidated Performance

Consolidated results for the fiscal year ended March 2016 delivered the record highs in both net

sales and incomes/profits, supported by solid demand for small-diameter end mills. As [Table 1]

shows, both net sales and incomes/profits achieved double-digit growth.

[Table 1] FY3/16 Consolidated Financial Results Summary

(￥ million)

AmountComposition

RatioAmount

CompositionRatio

Amount Ratio

Net sales 7,402 100.0% 8,382 100.0% 979 13.2%

Cost of sales 3,695 49.9% 3,992 47.6% 296 8.0%

Gross profit 3,707 50.1% 4,389 52.4% 682 18.4%

SG&A expenses 2,226 30.1% 2,475 29.5% 249 11.2%

Operating income 1,481 20.0% 1,914 22.8% 433 29.3%

Ordinary income 1,534 20.7% 1,954 23.3% 420 27.4%

973 13.1% 1,342 16.0% 369 37.9%Source: Compiled by Trias Corporation from the Company IR materials

FY3/15 Actual YoY ChangesFY3/16 Actual

Profit attributable to owners of parent

Compared to the Company's initial forecasts: net sales at ¥8,200 million, operating income at

¥1,630 million and ordinary income at ¥1,660 million, actual results topped at net sales by ¥180

million, operating income by ¥280 million and ordinary income by ¥290 million.

In fact, the forecast for net sales had been lowered in October 2015 by ¥190 million to ¥8,010 million

as the Company anticipated weaker demand for its tools in the second half of the fiscal year due to

concerns over a slowdown in Chinese economy as well as potential impacts from the exhaust gas

fraud practiced by a European automaker. In retrospect, however, impacts from these were

insignificant and actual net sales, at ¥8,380 million, even exceeded the initial forecast to record a

historical high thanks to solid demand for small-diameter end mills from auto and smartphone

industries in particular.

Gross profit margin rose to 52.4% from 50.1% in the previous fiscal year. This was thanks mainly to

controlled cost of sales which include economies of scale in production, restrained manufacturing

expenses namely depreciation burdens, a decline in labor expenses due to shifts of technical staffs

to both production and development divisions.

SG&A expenses increased by 11.2% YoY. Personnel expenses rose 13.2% YoY as a result of

above-mentioned shifts of staffs to the development division as well as an increase in profit-linked

bonuses. While depreciation expenses increased by 37.5% YoY, the SG&A expenses to net sales



| 20



ratio in fact improved by 0.6% point to 29.5% over higher net sales.

Operating income jumped by 29.3% to the second consecutive yearly record, exceeding the

Company's forecast which had been revised upward twice in the period, thanks mainly to

economies of scale delivered by increased net sales. As a result, operating margin also widened

nicely by 2.8% points YoY to 22.8%.

Financial positions at the end of the fiscal year stood with total assets of ¥11,370 million, a 10.0%

increase from a year ago, as are shown in [Table 2]. On the asset side, tangible assets rose by ¥720

million to ¥3,890 million as the Company front loaded the construction and implementation of its new

factory and facilities.

On the liabilities/equity side, while current liabilities decreased due to smaller accounts

payable-others and income taxes payable, net assets increased by ¥1,090 million.

[Table 2] FY3/16-End Consolidated BS Summary

(￥ million) YoY Cahnges

ActualConposition

RatioActual

ConpositionRatio

Amount Major Factors

Current assets 6,711 64.9% 6,978 61.4% 266

Cash and deposits 3,716 35.9% 3,898 34.3% 181 <- Increase in income before income tax, etc.

Notes and accounts receivable - trade 1,264 12.2% 1,332 11.7% 68<- Accounts receivable increased due to net sales increase

Inventories 1,509 14.6% 1,467 12.9% (41)

Non-current assets 3,628 35.1% 4,393 38.6% 765

Property, plant and equipment 3,172 30.7% 3,893 34.2% 720<- Building new plant and enhancing of introducing machinaries

Intangible assets 143 1.4% 147 1.3% 4

Investments and other assets 312 3.0% 353 3.1% 40

Total assets 10,339 100.0% 11,371 100.0% 1,032

Current liabilities 1,439 13.9% 1,355 11.9% (83)<- Decrease in income tax payable etc, consumption tax payable other than accounts receivable

Accounts payable - trade 277 2.7% 272 2.4% (4)

Non-current liabilities 419 4.1% 446 3.9% 27

Total liabilities 1,858 18.0% 1,802 15.8% (56) <- No interest-bearing debt

Total net assets 8,480 82.0% 9,569 84.2% 1,089

Total assets and liabilities 10,339 100.0% 11,371 100.0% 1,032


<- Although product stock slightly increased, decrease in raw material and work in progress surpassed

FY3/15-End FY3/16-End

Historical net sales trends for each product and domestic and overseas net sales are shown in

[Graph 1] and [Graph 2], respectively on P.21.

The Company's mainstay end mill products (6mm and under) increased by 11.9% YoY in net sales

as demand was solid namely from sectors relating to autos, smartphones as well as electronic



| 21



components benefitting from electronically enhanced auto components. Net sales of other products

grew by 30.9% YoY in aggregate, led by plastic cases manufactured by Makino Kogyo, a Group

subsidiary.

Domestic sales rose by 12.9% YoY, driven by stronger demand from auto- and electronic

component-related sectors. Overseas sales jumped by 14.2% to ¥1,940 million and accounted for

23.2% of overall consolidated sales, up 0.2% point YoY.

[Graph 1] FY3/16 Net Sales and Growth Rate Trend by Product

4,011 4,193 4,570 5,301

5,931

750 738 825

925 971

579 646 586

661

805

440 419 435

514

673

5,781 5,997 6,418

7,402

8,382

14.7%

4.5%

9.0%

16.0%

11.9%

0

2,000

4,000

6,000

8,000

10,000

FY3/12 FY3/13 FY3/14 FY3/15 FY3/16

（¥ million）End mill（6mm & under） End mill（Over 6mm）End mill（Others） Other productsEnd mill（6mm & under）growth rate


[Graph 2] FY3/16 Net Sales Trend of Domestic and Overseas

4,680 4,750 5,150 5,699 6,437

1,101 1,247

1,268 1,703

1,944

5,781 5,997 6,418

7,402

8,382

81.0% 79.2% 80.2% 77.0% 76.8%

19.0% 20.8% 19.8% 23.0%23.2%

0

2,000

4,000

6,000

8,000

10,000

FY3/12 FY3/13 FY3/14 FY3/15 FY3/16

（¥ million） Domestic sales Overseas salesDomestic sales composition ratio Overseas sales composition ratio




| 22



Regional overseas sales are displayed in [Graph 3]. China/HK/Taiwan saw net sales increase by

15.9% YoY in aggregate driven by demand from smartphone (connector- and earphone-related) and

LED component clients. Other Asian regions, mainly in Thailand, recorded an 18.0% YoY sales

increase after recovering from political turmoil taken place in the previous fiscal year. Major

applications in the regions are for autos, OA equipment and home appliances. Europe registered a

10.2% YoY sales growth although its recovery yet remained somewhat slow. The region saw

stronger demand from the watch industry in Switzerland and autos (mainly for interior uses) in Italy.

Sales in the US, though small yet, are mainly for medical uses.

[Graph 3] FY3/16 Net Sales Trend by Overseas Region

381 483 396 662 767

333 363

402

478 564

334 309 357

410

452

51 90 112

152

160

1,1011,247 1,268

1,703

1,944

0

500

1,000

1,500

2,000

FY3/12 FY3/13 FY3/14 FY3/15 FY3/16

（¥ million） China/Hong Kong/Taiwan Other Asian regions Europe America/Other


Overview of FY3/17 Consolidated Financial Forecasts

As in [Table 3] on P.23, for this fiscal year of FY3/17, the Company expects consolidated net sales at

¥8,480 million (up 1.2% YoY), operating income ¥1,940 million (up 1.3%), ordinary income ¥1,980

million (up 1.3%) and net income ¥1,350 million (up 0.5%).

It says the growth could largely be limited given its prospects for uncertain global economies and/or

possible appreciation of the yen although it is expecting some sales growth driven by clients

involved in autos and electronic components benefitting from electronically enhanced auto

components. In terms of expenses, it looks for an increase of ¥130 million in depreciation expenses

as its new factory starts operations. Although the Company's performance in Q1 ended in June

2017 was mostly in line with what it had expected, it now expects that demand from



| 23



smartphone-related sectors should have peaked in Q1 and will be slowing in the following quarters.

[Table 3] FY3/17 Consolidated Financial Forecasts Summary

(￥ million)

AmountComposition

RatioAmount

CompositionRatio

Amount Ratio

Net sales 8,382 100.0% 8,480 100.0% 97 1.2%

Operating income 1,914 22.8% 1,940 22.9% 25 1.3%

Ordinary income 1,954 23.3% 1,980 23.3% 25 1.3%

1,342 16.0% 1,350 15.9% 7 0.5%Source: Compiled by Trias Corporation from the Company IR materials

FY3/16 Actual FY3/17 Forecasts YoY Changes

Profit attributable to owners of parent



| 24



References

Consolidated Key Financial Data

No. of Shares Issued Mar-16 6,252,000 Total Assets (￥mn) Mar-16 11,371

No. of Treasury Shares Mar-16 117 Shareholders' Equity (￥mn) Mar-16 9,569

Market Value (￥mn) 21-Oct-16 15,504 Interest-Bearing Debt (￥mn) Mar-16 0

BPS (￥) Mar-16 1,530.66 Equity Ratio (%) Mar-16 84.2

ROE (%) Mar-16 14.9 Ratio of Interest-Bearing Debt (%) Mar-16 0.0

ROA (%) Mar-16 12.4 Free Cash Flows (￥mn) Mar-16 434

PER (times) FY3/17 fcst. 21-Oct-16 11.5 ROE = Net Income ÷ Averaged Shareholders' Equity

PCFR (times) FY3/16 actual 21-Oct-16 8.4 ROA = Net Income ÷ Averaged Total Assets

PBR (times) FY3/16 actual 21-Oct-16 1.6 PCFR = Market Value ÷ (Net Income + Depreciation)

Share Price (￥) 21-Oct-16 2,480 Ave. Daily Vol. = Ave. Daily Vol. (from 21-Oct-15 to 21-Oct-16)

Unit Share (shares) 21-Oct-16 100 Interest-Bearing Debts* Ratio = I.B.D. ÷ Shareholders' Equity

Average Daily Volume (shs) 21-Oct-16 3,103 Free Cash Flows = Operating CF + Investment CF

Consolidated Financial Results

Consolidated(￥million) Net Sales

OperatingIncome

OrdinaryIncome Net Income EPS (￥) DPS (￥)

FY3/13 5,997 921 951 527 168.75 39.00

FY3/14 6,418 1,069 1,107 694 111.12 60.00

FY3/15 7,402 1,481 1,534 973 155.69 40.00

FY3/16 8,382 1,914 1,954 1,342 214.76 50.00

FY3/17 1H fcst. 4,320 1,050 1,070 730 116.76 0.00

FY3/17 full year fcst. 8,480 1,940 1,980 1,350 215.93 60.00

Note1: FY3/17 forecasts announced on May 13, 2016.

Note2: DPS of FY03/14 includes ¥20 of the 60th anniversary commemorative dividend.

Stock Price Charts and RSI （October 21, 2015 – October 21, 2016）

0

500

1,000

1,500

2,000

2,500

3,000 Share Price (Close)

1 Month Moving Average

3 Months Moving Average

RSI 14 Days Moving Average (RHS)

（¥）

Source: Prepared by Trias Corp. with Bloomberg data.Note: RSI, Relative Strength Index, is the index representing the ratio of overbought or oversold share prices. In general, over 70 in RSI

shows overbought share price range, while below 30 shows oversold share price range.RSI = averaged share price appreciation for N days ÷ (averaged share price appreciation for N days

+ averaged share price decline for N days) x 100

RSI

70

30

Documents

Striving for Made in Japan manufacturing through ...lin.trias.co.jp/en/report/doc/22/6157_nst_fy316_linmemo...Geographic operating regions for the Company outside of Japan include: