Thinking Points

  • C&G Systems (TSE: 6633) designs, develops, and maintains CAD and CAM systems for mold and die manufacturing.
  • The company is one of the leading vendors in its industry, holding approximately 18.5% market share in Japan while being the OEM supplier for the market leader.
  • Despite its strong market share and strong maintenance revenue base, C&G Systems is susceptible to cyclical swings, particularly with swings in the automotive industry.
  • At 250 yen per share, C&G Systems trades at 0.3x EV/EBIT with a market capitalization of 2,375 million yen ($22 million USD).
  • Absent a 2008-2010 automotive crisis level downturn, investors can expect an investment CAGR of between 9.0% and 15.7%, inclusive of dividends, over the next three years.

Introduction

C&G Systems designs and develops Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM) systems for mold/die design and manufacturing. Additionally, it manufactures metal molds/dies. The company operates through two reporting segments: CAD/CAM Systems and Mold Manufacturing.

Source: Kenkyo Investing, based on company data

C&G Systems has the second largest market share in the domestic mold/die specialized CAD/CAM market, with the market leader being Unisys (TSE: 8056). In recent years, C&G Systems has focused on establishing itself as a global niche leader with its existing CAD/CAM business, expanding into related markets like CAM software for parts processing, and making its CAM software compatible as an add-on for other platforms like the NX CAM by Siemens.

The business & environment

C&G Systems came about when CAD-focused Computer Engineering (founded in 1978) and CAM-focused Graphic Products (founded in 1981) set up Alpha Holdings to be the new parent company in 2007, with both parties carrying out a share transfer with the new parent company. The two organizations maintained separate operations until January 2010, when the two companies were merged through an absorption-type merger. After the merger, Alpha Holdings was renamed to C&G Systems.

The automotive industry is one of the biggest customer industries for C&G Systems. Its CAD software is often used to design the molds and die for automotive parts while the CAM software is used to convert CAD designs to numerical inputs for manufacturing equipment such as computer numerical control (CNC) machining tools. In other words, C&G Systems’ offerings are involved in factory automation.

Until FY12/13, C&G Systems included domestic market share information in its earnings presentations. As of 2012, the company held 18.5% market share in Japan for mold/die-specialized CAD/CAM software, down from 21.4% in 2006. At this point, C&G Systems was the #2 player in the domestic market, behind Nihon Unisys (TSE: 8056), which held a 29.1% share.

Interestingly, in the FY12/10 earnings presentation, C&G Systems noted that it had become the OEM supplier for Nihon Unisys in 2009. It’s unclear whether this is still true, but the company has noted its focus on building OEM business essentially since Computer Engineering and Graphic Products merged. 

When assessing historical business performance, C&G Systems does not boast the sort of operating margins normally expected by an established software vendor with a high market share in a specific area (~7.3% OPM in FY12/19). In fact, the company booked operating losses in FY12/07, FY12/08, and FY12/10. 

Source: Kenkyo Investing, based on company data

To be sure, the operating losses in FY12/07 weren’t a function of the global financial crisis. In fact, it had more to do with costs associated with shutting down unprofitable businesses after Computer Engineering and Graphic Products joined forces. On the other hand, the steep decline in revenues in FY12/09 was a direct result of the automotive industry crisis.

Interestingly, aside from select CAD/CAM vendors like Fukui Computer Holdings (TSE: 9790), operating margins around 10% are fairly common among other specialized CAD/CAM players like Applied Technology (TSE: 4356), Andor (TSE: 4640), or Zuken (TSE: 6947).

Since FY12/10, C&G Systems started disclosing revenues by category.

Source: Kenkyo Investing, based on company data

Source: Kenkyo Investing, based on company data

The bulk of C&G Systems’ revenues come from the maintenance contracts associated with its CAD/CAM system sales. According to FY12/19 short form filings, C&G Systems managed to renew 90+% of maintenance contracts in FY12/19, although specific figures aren’t disclosed.

Some investors may be surprised to find out that the company actually has a manufacturing arm. C&G Systems doesn’t actually operate a manufacturing facility, but runs a fabless operation. It’s important to note here that the manufacturing operation is based in N. America and it accounts for the bulk of overseas revenues.

For FY12/20, C&G Systems expects revenues of 4,262 million yen ($39.5 million USD, +1.6% YoY) and operating profits of 320 million yen ($3.0 million USD, +3.5% YoY). 

Shareholders

As of Q4 FY12/19 (ending December 31, 2019), C&G Systems had 9,801,549 shares issued and 300,182 shares in treasury, putting outstanding shares at 9,501,367.

Here are the major shareholders:

Source: Kenkyo Investing, based on company data and Nikkei

The company recently implemented an equity compensation plan for the management team (Japanese). The plan allocates 165 million yen ($1.5 million USD) for share repurchases to use for equity compensation between May 2019 and May 2024. In the event that the plan is extended, the company may allocate 33 million yen ($306K USD) per extended year for equity compensation. 

Other than one sizable share repurchase in FY12/15, C&G Systems does not have a particularly active history in terms of share repurchases. In FY12/15, the company acquired 1,243,700 shares for 700 million yen ($6.5 million USD), or 563 yen per share.

Although C&G Systems stopped dividend payments during the automotive crisis, it started paying dividends again in FY12/12. Over the last several years, the company paid out 10 yen per share and expects to maintain this payout for FY12/20 as well (expected payout ratio of 53.6%). 

Financials & Valuation

  • C&G Systems designs, develops, and maintains CAD and CAM systems for mold and die manufacturing.
  • The company is one of the leading vendors in its industry, holding approximately 18.5% market share in Japan while being the OEM supplier for the market leader.
  • Despite its strong market share and strong maintenance revenue base, C&G Systems is susceptible to cyclical swings, particularly with swings in the automotive industry.
  • At 250 yen per share, C&G Systems trades at 0.3x EV/EBIT with a market capitalization of 2,375 million yen ($22 million USD).
  • Absent a 2008-2010 automotive crisis level downturn, investors can expect an investment CAGR of between 9.0% and 15.7%, inclusive of dividends, over the next three years.

C&G Systems designs, develops, and maintains CAD and CAM systems for mold and die manufacturing. In the domestic mold/die specialized CAD/CAM market, the company holds the #2 position with approximately 18.5% market share with a high probability that it supplies the share leader. 

The company’s strong maintenance revenue base combined with its fabless mold and die manufacturing operation makes the operating business attractive. With that said, the company is susceptible to cyclical swings in the automotive industry as many of its customers are automakers and auto parts suppliers. 

Moreover, C&G Systems hasn’t grown enough to leverage scale benefits often seen in software companies, with operating margins remaining below 10%. CAD/CAM growth in overseas markets will be a key indicator in whether the company can achieve higher operating margins. While it’s important to note that the bulk of the company’s overseas revenues currently come from its N. America based fabless mold/die manufacturing operation, it’s also worth pointing out that the company is releasing an add-on for the Siemens NX CAD system which is commonly used in the automotive industry.

The balance sheet for C&G Systems isn’t a fortress like some of the other profitable Japanese companies trading near EV. However, with an equity to asset ratio of 0.53 and an almost net cash balance sheet, the company is healthy enough to withstand another downturn. 

Summarily, the company runs a medium quality operating business. Depending on its ability to expand overseas, however, its business quality may improve as the main drawback is its inability to take advantage of scale benefits so far. 

At 250 yen per share, C&G Systems trades at 0.6x EV/EBIT with a market capitalization of 2,375 million yen ($22 million USD). Adjusted for long-term investment security holdings, however, the company trades at 0.3x EV/EBIT. 

The company’s shares traded at the 400-yen level as recently as January 2020 and in the 600-yen level as recently as January 2018, however, share prices have depressed quite a bit in the last couple of months amid market-wide concerns over the new coronavirus and its effects on businesses.

Under more normal circumstances, a 2 to 3x EV/EBIT multiple should be fair given the company’s current scale. Absent a 2008-2010 automotive crisis level downturn, investors can expect an investment CAGR of between 9.0% and 15.7%, inclusive of dividends, over the next three years. It is, however, important to note that the company’s business is directly affected by cyclical swings.

The bottom line

C&G Systems is one of the leading vendors for CAD/CAM software specialized for molds and dies in Japan. The company is trying to expand its business by going overseas and offering some of its software as an OEM for reselling. Absent a 2008-2010 automotive crisis level downturn, investors can expect an investment CAGR of between 9.0% and 15.7%, inclusive of dividends, over the next three years.


Kenkyo Investing
Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.