Summary: RIZAP Group<2928>The comprehensive enterprise, which is committed to proving that "people can change" as its unique management philosophy, develops a variety of businesses in the three areas of health creation, health care / beauty, lifestyle, and investment. Under the vision of "Global No.1 in the self-investment industry", it has achieved remarkable growth by actively utilizing M&A under the holding company structure and has grown to include 68 group companies, including 5 listed subsidiaries, and 4,606 consolidated employees. Listed on the Sapporo Stock Exchange's Ambitious Market in 2006, it formulated a medium-term management plan in September 2022, but revised it in February 2024 to achieve an operating profit of ¥400 million (fiscal year ending March 2027) by aggressively expanding the new business "chocoZAP". The fiscal 2024 performance was sales revenue of ¥16,629.8 million (+7.6% YoY), operating loss of ¥594 million (compared to a loss of ¥4948 million in the same period of the previous year), pre-tax loss of ¥4524 million (compared to a loss of ¥7,031 million in the same period of the previous year), and net loss attributable to the owners of the parent of ¥4,300 million (compared to a loss of ¥12,673 million in the same period of the previous year). Due to the black ink conversion of the chocoZAP business, it achieved a black ink of ¥417.5 million on an operating profit basis in the fourth quarter alone. As for sales revenue, the RIZAP-related business (including the chocoZAP business) significantly increased its revenue (+¥201 million) by focusing on expanding the convenience gym "chocoZAP". In existing businesses, there was an increase in revenue, including Antiroza Co., Ltd. (+¥419.8 million), while there was a decrease in revenue due to store structure reform in REXT Co., Ltd., etc. (-¥599.8 million) and the impact of selling the Sikata business under the subsidiary BRUNO<3140>at the end of the previous year (-¥511.1 million). As for operating loss, the group as a whole improved due to the transition of the chocoZAP business to the investment recovery period and the success of business portfolio reform such as REXT.

G-DEP Advance <5885> is a company that engages in the System Incubation business mainly targeted towards AI, with the mission of 'Advance with you, let's move forward in the world.' The System Incubation business involves providing server machines using cutting-edge technology, the company's original solutions, etc., to address the system environment challenges of researchers and developers handling mainly AI, visualization, and big data. This service supports the acceleration of research and development in a different approach by offering solutions. President and CEO, Tadami Iino, knew about NVIDIA Corporation 's products at the Supercomputing Conference held in Nevada, USA in 2007, where a small card drastically changed the concept of parallel computing and became the driver for the subsequent successful growth. The company has a small but elite workforce of 21 employees (as of the end of May 2024) and was listed on the Tokyo Stock Exchange (TSE) Standard Market in June 2023.

1. Business content The main business of Sakai Heavy Industries <6358> is the manufacturing and sale of road rollers used for road paving, and road roller related products account for about 95% of its revenue. In addition, the company's corporate philosophy is to contribute to the world's land development through its road construction machinery business. 2. Characteristics and strengths As previously mentioned, the company is a specialist manufacturer of road construction machinery such as road rollers, but has the following characteristics and strengths. (1) Long history as a specialist manufacturer The company's biggest feature (strength) is its long history as a specialist manufacturer of road construction machinery, including road rollers. In other words, by focusing on and specializing in its global niche strategy, it has accumulated its own unique technologies. This long history and experience have enabled it to enhance its technical and credit strengths. (2) Technical strengths Simply saying "compacting or paving roads" requires different pressures, rotation forces, etc. (compaction technology) depending on the location, soil conditions, etc. According to the company, the construction function of the roller itself determines the final quality (density, flatness, lifespan) of the road or embankment, and it is generally said that if the compaction density is increased by 1%, the road lifespan is extended by 10%. Therefore, for construction clients and contractors, product quality (performance) is also a very important factor, in addition to the price of road rollers. Since the company has been a specialist manufacturer of road construction machinery, including road rollers, for a long time, it boasts high technical strengths in compaction technology that are not easily matched by other companies in the same industry. In summary, the technical strength of the company can be described as "knowledge about entities and concepts." In other words, it is their engineering ability to oversee the entire construction project and their ability to adapt to a variety of materials. Specifically, it is the combination of various technologies, such as mixing with tires, vertical vibration to increase the compaction force, horizontal vibration to scrape the ground, vertical vibration to form a thick layer of compaction, further high-density compaction by tire vibration, and solution to difficult compaction problems through high-frequency vibration. An example of the company's high technical strength is the ability to control the relationship between "mechanical vibration technology" and its "vibration suppression technology." Various mechanical vibrations are an important means of improving construction performance in road rollers, but this vibration itself can cause machine malfunctions and have a significant impact on operator comfort. Therefore, the power (technology) to control the conflicting relationship between vibration compaction strength and machine quality is important, and this cannot be accumulated in a short period of time.

The company's business consists of a single segment, 'System Incubation Business,' but it offers two services: 'DX Services' and 'Service & Support.' In the main 'DX Services,' AI solution services are provided to customers developing and operating AI using deep learning. They develop, assemble, and sell turnkey systems (systems that can be used immediately when powered on) with hardware, software, and tools suitable for AI development and operation. In Visualize Solution services, they target customers processing images and videos and engage in assembling and selling graphic workstations used for CAD, CAE, computer graphics production, and digital signage. This service accounts for 91.9% of the revenue composition. 'Service & Support' offers optional operational support services to ensure the continuous use of up-to-date and stable systems through hardware maintenance, environmental updates for the solutions provided by the company (hardware, software, build know-how). The revenue composition of this service is 8.1%.

The company has established a strong competitive advantage through high technical capabilities certified by global processor manufacturers, including NVIDIA, and planning abilities and product procurement powers born from collaboration with global IT vendors. Its strengths and features include: 1) proposing optimal solutions by combining the latest technology with unique gimmicks, 2) diversity in solution delivery formats, 3) customer continuity through Service & Support, 4) project support focusing on small-mass deployments, and 5) a unique positioning that achieves differentiation from other companies.

2. Performance trends

For the full fiscal year 2024 ending in May, the company achieved a significant increase in revenue of 17.0% compared to the previous period, reaching 4,421 million yen, and operating profit increased by 19.0% to 662 million yen, recording substantial growth. The increase in revenue was mainly due to robust demand for AI-related equipment investments. The demand from major customers such as universities and research institutions remained strong, with expanded transactions with startups and the medical industry. Despite increased expenses such as external standard tax and the relocation of the Tokyo office, many of which were fixed costs, the expense rate decreased due to the revenue increase. As a result, operating profit increased by 19.0% compared to the previous period, marking the 9th consecutive increase.

3. Outlook for the Future

For the performance of the fiscal year ending in May 2025, it is expected to increase by 30.5% to ¥5,770 million in revenue compared to the previous year, and increase by 1.9% to ¥675 million in operating profit. The proactive strategy of making aggressive upfront investments in growth markets during the progress phase is planned to suppress each profit, despite the high growth potential of revenue. Anticipating high demand continuing from the previous period and the ongoing increase in project sizes, a significant growth rate of 30.5% compared to the previous period is expected for revenue. To further growth, the strategy involves expanding the portfolio of solutions, preparing a solution lineup for higher layers, and focusing on strengthening the partner ecosystem. Due to factors such as the impact of the increasing project sizes, it is expected that the gross profit margin will decrease. Therefore, the operating profit is planned to be slightly increased or stay the same compared to the previous period (+1.9%). With increased demand for AI-related products and the tailwind of market conditions such as subsidies, the company has an unusually high level of outstanding orders (¥2,106 million at the beginning of the period), and we believe that the high growth of the top line is highly certain. Considering that issues such as the semiconductor supply shortage have been resolved in the past, the risks in the supply chain have also been reduced. It is important to pay attention to whether the company can invest properly in the internal structure (such as personnel and facilities) for the future.

4. Growth Strategy - Topics

As a growth strategy, three key initiatives will be promoted.

1) Transition to higher-layer solutions and environmental enhancement

Expanding the product and service portfolio to higher layers from desk-side AI workstations to large-scale GPU (Graphics Processing Unit) clouds, to timely address the user needs of large-scale AI and promote reliable upselling.

2) Strengthening the ecosystem to align with the era of large-scale AI

By collaborating with domestic SIers and partnering with cloud vendors, data centers, OEM vendors with strong relationships with NVIDIA, storage vendors, and software vendors, it is possible to build large-scale systems with product sourcing capabilities and originality.

3) Promoting hybridization as a comprehensive AI resource vendor

Aiming to be a comprehensive vendor of AI resources that supports the acceleration of AI development by seamlessly migrating all environments from on-premises to private clouds, public large-scale systems, etc.

5. Shareholder Return Strategy

The company regards stable profit return to shareholders according to growth as one of the most important management issues, and plans to increase the dividend payout ratio each period after taking into comprehensive consideration the performance outlook and necessary equipment investments. Over the past three years, it has increased dividends annually while maintaining a dividend payout ratio of around 20%. The dividend at the end of May 2024 was 67.00 yen per share (after adjustment for stock splits, equivalent to 16.75 yen), with a dividend payout ratio of 20.4%. For the end of May 2025, a dividend of 17.50 yen per share and a dividend payout ratio of 21.1% are expected. We believe that with continuous profit growth, there can be high expectations for an increase in the dividend payout ratio, resulting in a high dividend growth pace in the future. Furthermore, the company plans to carry out a stock split on November 30, 2024, in a ratio of 4 shares for every 1 common stock share to improve stock liquidity and expand the investor base.

■Key Points

- NVIDIA's No.1 partner in Japan. Providing solutions that combine cutting-edge technology for AI development.

- The domestic AI market is expected to grow by 30% annually. The strength lies in the technological capabilities recognized by global processor manufacturers like NVIDIA, as well as the planning and product procurement capabilities through collaboration with global IT vendors.

- Recent performance: Significant revenue growth due to increased demand for AI-related equipment investments and larger projects, achieving profitability growth for 9 consecutive periods.

- Aiming for an operating profit of 1 billion yen in the final year of the medium-term management plan (end of May 2027). Developing a growth strategy to adapt to the era of large-scale AI and cloudification.

Due to the growth in profits and dividend payout ratio, a high dividend growth rate can be expected. The dividend for the fiscal year ending May 2025 is expected to be ¥17.50, with a dividend payout ratio of 21.1%. In addition, a stock split is planned.

(Written by FISCO Guest Analyst, Hideo Kakuta)