Thinking points
- Jedat Inc. (TSE: 3841) is a small software vendor specializing in development and sales of electronic CAD software (EDA) for LSI and LCD panel design.
- Key challenges for the company include clients switching away from Jedat’s EDA tools to more versatile and up-to-date products offered by global vendors.
- Key opportunities include the upward trend in global semiconductor demand, semiconductor manufacturing equipment, and EDA tools for semiconductor and FPD design.
- At JPY768 per share, Jedat trades at an adjusted P/NCAV of 97.4% with a market capitalization of JPY3.0bn.
- Assuming a fair value P/NCAV of 80%-120%, investors can expect an investment CAGR of -0.7% to +8.3% including shareholder returns, over the next 5-8 years.
Introduction
Jedat is an electronic CAD (= Electronic Design Automation, EDA) specializing in semiconductor and FPD design. The company operates only one segment (“EDA software”), which is divided into EDA development of semiconductors and FPDs. The company’s major customers are electronic component manufacturers that develop analog LSIs, sensor devices, memory, power devices, high-definition LCD panels, OLED panels, and touch panels. These companies look to use Jedat’s software to improve design efficiency and ensure design quality.
Business & operating environment
Company History
Jedat was established in 2003 as a wholly owned subsidiary of Seiko Instruments Inc., from which it took over the EDA system business in 2004. At the same time, Seiko Instruments transferred 58% of its stake in Jedat to Argo Graphics Inc., making Jedat a subsidiary of Argo Graphics. The company then established subsidiaries in Beijing in 2005 and Shanghai in 2013, but eventually withdrew in 2014 and 2015, respectively. It also expanded its business to consulting by launching A-Solution Ltd. in 2007, but the company was liquidated in 2012. Jedat is listed on the Standard market of the Tokyo Stock Exchange.
Industry and Business Model
EDA is an acronym for Electronic Design Automation, which refers to the software or hardware to support the automation of design work for integrated circuits, electronic devices, and other electrical systems. Jedat specializes in EDA software for designing LSIs and FPDs, and its core customers are LSI and FPD manufacturers..
LSI (Large Scale Integration) : An electronic circuit component that integrates transistors, diodes, passive elements, etc. to realize complex functions. Generally composed of silicon and other semiconductors.
FPD (Flat Panel Display) : A generic term for thin video display devices such as flat screens, including liquid crystal displays, plasma displays, organic electroluminescent (EL) displays, and electronic paper.
The semiconductor production equipment market was at USD58bn in 2020, and is expected to grow steadily on a global basis at a CAGR of +9.5% going into 2030 driven by the increase in the number of electronic devices and the computerization of automobiles. Meanwhile, the FPD production equipment market is forecasted to reach JPY500bn in 2023 with a CAGR of +3.1% from 2021, supported by increased investments.
Currently, Intel (USA), Samsung (South Korea), TSMC (Taiwan), and SK Hynix (South Korea) are the top four semiconductor manufacturers in the world, but when it comes to manufacturing equipment, Japanese manufacturers hold a leading global share in some areas of front-end processing such as coater development or washing apparatus. Similarly, in FPD production equipment, five of the top 10 companies are Japanese manufacturers.
It is important to keep in mind that demand for EDA tools will not rise unless equipment manufacturers design new LSIs or FPDs, and that simply increasing production of existing semiconductors will not contribute to Jedat’s performance. The EDA market, which amounted to USD10.8bn in 2020, is expected to expand to USD21.5bn in 2028 at a CAGR of +9.0%, but this growth will be mostly led by three giants: Synopsys (NASDAQ: SNPS), Cadence Design Systems (NASDAQ: CNDS) and Mentor Graphics (a subsidiary of SIEMENS), which hold over 60% of the global EDA tool market combined.
Japanese manufacturers continue to use both proprietary EDA tools (e.g. Jedat) in addition to products offered by global players. This is because EDA tools are difficult to change once adopted due to the switching costs, such as the cost of training dedicated engineers to change the design process. However, some say that Japanese semiconductor manufacturers have fallen behind the rapid global progress of EDA technology because they stuck with the proprietary EDA tools. The IP designed with these tools not only lost its versatility and compatibility, but prevented companies from incorporating superior IP from the outside.
Turning to Jedat’s performance, sales fell sharply after the global financial crisis and further declined to nearly half the pre-crisis level in FY03/13. Sales performance has steadily recovered since, but stagnated in FY03/21 amid the COVID-19 pandemic. The company expects sales to improve in FY03/22.
As for operating profit, the company was in the red between FY03/10 and FY03/13, but has since maintained an operating margin of 6~10%. It projects full-year FY03/22 operating margins to come in on the high end of this at 10%.
Shareholders
As of the end of December 2021, the company had 10,903,240 shares issued, with 1,623,889 shares in treasury, putting outstanding shares at 9,279,351. Foreign shareholders accounted for approximately 6.9% of total. Major shareholders are as follows.
Argo Graphics (TSE: 7595) is a mid-sized PLM (Product Lifecycle Management) servicer specializing in supporting business processes from the design to the tooling/processing fields mainly in the automotive industry. Argo has been Jedat’s parent company since the transfer of Jedat’s shares from Seiko Instruments in 2004. Argo Graphics was established by Seiko Instruments, Sony, and Canon-subsidiary Argo21, and thus has had a close relationship with Seiko since its inception.
Seiko Instruments is one of the core business units of the Seiko Holdings Group, specializing in manufacturing precision instruments and electronic devices such as quartz crystal.
SK-Electronics (TSE: 6677) is a manufacturer of photomasks, which are used in the production of LCDs, and holds the 3rd largest global market share. Dai Nippon Printing (TSE: 7912) is the largest printing company in Japan, which also manufactures photomasks and color filters for LCDs.
SBI securities and Rakuten securities are two of the largest online securities companies in Japan. The details of the other individuals are unknown.
The company has maintained a dividend payout ratio of approximately 40% in recent years, Income as dividends, but announced plans to double its dividend for FY03/22 to commemorate its 15th anniversary. In addition, it executed a stock split in March 2022. The unexercised stock acquisition rights are negligible at JPY 0.2mn.
Financials & valuation
- Jedat Inc. (TSE: 3841) is a small software vendor specializing in development and sales of electronic CAD software (EDA) for LSI and LCD panel design.
- Key challenges for the company include clients switching away from Jedat’s EDA tools to more versatile and up-to-date products offered by global vendors.
- Key opportunities include the upward trend in global semiconductor demand, semiconductor manufacturing equipment, and EDA tools for semiconductor and FPD design.
- At JPY768 per share, Jedat trades at an adjusted P/NCAV of 97.4% with a market capitalization of JPY3.0bn.
- Assuming a fair value P/NCAV of 80%-120%, investors can expect an investment CAGR of -0.7% to +8.3% including shareholder returns, over the next 5-8 years.
Jedat has been operating completely debt-free for over a decade with cash and equivalents of JPY3.5bn out of total assets of 4.3bn as of Dec 2021. As a result, it maintains a strong balance sheet with an equity ratio of 71.8% and a current ratio of 3.37x.
Some of the challenges the company faces include clients switching away from Jedat’s EDA tools to those offered by global players like Synopsys or Cadence to keep up with global development competition of chips. Jedat’s shares may also be sold off by the parent company, Argo Graphics, considering that there is currently little synergy between the businesses, which may prompt Argo Graphics to focus its resources on PLM to avoid a conglomerate-discount.
In terms of opportunities, growing demand for semiconductors and their manufacturing equipment is highly likely to attract new semiconductor development and may boost demand for EDA tools.
At JPY768 per share, Jedat trades at a market capitalization of JPY3.0bn with an NCAV of JPY2.9bn as of end-FY03/21. Assuming a fair value P/NCAV of 80%-120% and stable profits, the company trades roughly at fair value. Investors can expect an investment CAGR of between -0.7% and +8.3% including shareholder returns, over the next 5 to 8 years.
The bottom line
Jedat Inc. (TSE: 3841) is a small software developer specializing in EDA (electronic CAD software). Although the company faces some challenges such as clients switching away from Jedat’s EDA tools to more versatile and up-to-date products offered by global vendors, it also has tailwinds such as the upward trend in the global semiconductor/FPD manufacturing equipment market. Buying in at JPY768 per share, investors can expect an investment CAGR of between -0.7% and +8.3%, including shareholder returns, over the next 5 to 8 years.
