Alpha-Win Company Research Report

PCA
(9629 TSE First Section) Issued: 8/1/2019

Research Dept., Alpha-Win Capital Inc.

http://www.awincap.com/
● Flash Report on Financial Performance

◆ A major specialized player in enterprise system software; taking a lead in the cloud
business as No. 1 in the industry
・PCA CORPORATION (hereinafter referred to as the "Company") sells proprietary packaged business software
(for accounting, sales management, purchasing and inventory management, payroll, human resources, labor
management, etc.) mainly to small- and medium-sized companies as on-premises or via the cloud. It also provides
related maintenance services. The Company’s mission is to contribute to society as a “management-supporting
company” that supports the smooth management and operation of other companies. It is taking a lead in the cloud-
based business software industry as No. 1 in the industry (PCA Cloud).
・In recent years, thanks to the transition to a subscription-based business model and the event-driven, high market
demand, the Company’s financial performance has been excellent. This fiscal year, it plans to increase sales and
profits for the fifth consecutive year, as well as achieving record-high profit (net profit).

◆ This fiscal year’s Q1 results came as a positive surprise: excellent results with greater-
than-expected, significant rise in sales and profits, both hitting their Q1 record highs
・The Company's financial results for the first quarter (Q1: April-June 2019) of FY 2020 (note that all fiscal years or
FY in this Report are March-ending; e.g. FY 2020 ends in March 2020) were excellent: sales were Y3,073 million
(+31.0% YoY), operating profit was Y587 million (+917.5% YoY), recurring profit was Y598 million (+754.6%
YoY), and net profit was Y364 million (+945.3% YoY) (see Figure 1).
・Sales and each of the profits substantially exceeded their past Q1 record highs. In the previous year’s Q1, the profits
fell by a large amount despite increased sales due to the upfront investment cost for developing next-generation
products. Partly in reaction to this drop, this Q1’s sales growth rate was much greater than before (+11.3% YoY in
the previous Q1 → +31.0% YoY in the current Q1) and the growth in financial results was remarkable with an
operating profit and a net profit that were about 10 times greater than in the previous Q1.
・The significant rise in sales seems to have been mainly caused by the following factors: 1) the Company’s efforts
in strengthening its products and services as well as marketing (shifting to the cloud business, expanding the lineup
of products such as its consolidated subsidiary Xronos Inc.’s labor management system related to the work-style
reform, increasing direct sales, continuing to hold the PCA Festa, strengthening cooperation with sales partners, etc.),
2) solid performance of Japanese companies and recovery of investment activities in the information service industry,
and 3) high market demand related to the replacement of software to deal with the rise in consumption tax and the
PC replacements in response to the termination of Windows 7 support in January 2020.
[Figure 1] First Quarter’s Financial Results and Full-Year Plan
Contribution Share of FY 2020 full-year
Q1 Results FY 2019 Q1 FY 2020 Q1 % Change Difference % Change
to inc. in sales sales company plan
Unit: Y million Apr-Jun 2018 Apr-Jun 2019 YoY: % YoY: Y mil % % Apr 2019 - Mar 2020 YoY: %
Consolidated Sales 2,346 3,073 31.0 727 100.0 100.0 12,783 11.8
Products 394 652 65.3 258 35.5 21.2 2,673 6.2
Goods 107 102 -4.6 -5 -0.7 3.4 1,036 1.6
Sales Category Maintenance Service 788 865 9.8 77 10.6 28.1 3,407 9.0
Cloud Service 544 764 40.3 220 30.3 24.9 2,804 14.4
Other Operating Revenue 511 688 34.7 177 24.4 22.4 2,857 23
Gross Profit 1,287 1,868 45.1 581 - - 7,331 12.4
Gross Margin (%) 54.9 60.8 5.9 - - 57.3
SG&A Exp. 1,229 1,281 4.2 52 - - 5,852 11.0
SG&A Exp. Ratio (%) 52.4 41.7 -10.7 - - 45.8
Operating Profit 57 587 917.5 530 - - 1,478 18.5
O.P. Margin (%) 2.4 19.1 16.7 - - 11.6
Net Profit 34 364 945.3 330 - - 976 7.7
N.P. Margin (%) 1.4 11.8 10.4 - - 7.6

(Ref) Prepared by Alpha-Win Research Dept. based on the financial results summary. (Note) “Products” and “other operating
revenue” were retroactively adjusted in response to the change in the sales accounting standard (also applies to the rest of this Report).

・Of the total increase in sales of Y727 million, Y258 million (about 36% of the total increase in sales) were from the
products, Y220 million (about 30%) were from the cloud service, and Y177 million (24%) were other revenue.
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This Alpha-Win Company Research Report (hereinafter “this "Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in this
Report for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate, or
fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage resulting from the
use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility regarding their investment. Intellectual property
of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without our consent.
Alpha-Win Company Research Report
PCA (9629 TSE First Section) Issued: 8/1/2019

・Actual sales for each sales category (as defined by the Company) were as follows:
1. For the products (conventional packaged software; on-premises), thanks to the high replacement demand from
stand-alone software users, sales increased from Y394 million last Q1 → Y652 million this Q1 (+65.3% YoY;
21.2% of total sales) (the same order applies below). Of all the sales categories, the products had the highest
sales growth rate as well as contributing the most to the sales increase. In response to the consumption tax
revision, sales of the accounting software, the sales management software SHOKON and SHOKAN, and the
labor management software grew. Presumably, the contribution to profit was also significant.
2. Meanwhile, sales of goods (business forms, etc.) decreased from Y107 million → Y102 million (-4.6% YoY;
3.4% of total sales) due to the trend toward paperless operation.
3. Maintenance service, which accounted for the largest percentage of the total sales (28.1%), has been a stable
source of profit. Its sales grew by 9.8% YoY from Y788 million to Y865 million (last Q1, sales grew by 0.5%
YoY), an especially high growth rate relative to recent years owing to the acquisition of maintenance contracts
along with the strong sales of products.
4. Sales of the cloud service grew from Y544 million → Y764 million and its sales growth rate has increased
(+28.3 YoY in the previous Q1 → +40.3% in the current Q1). Its share of total sales was 24.9%; adding the
maintenance service, the share of sales of the subscription-based businesses has reached 53%. As shown on
Figure 2, quarterly sales have been continuing to increase year-on-year as well as compared to the previous
quarter regardless of seasonality. The number of cloud service users had reached 12,000 in March 2019 and new
users have been joining at a pace of about 150 to 160 companies per month, contributing to the sales increase.
Since this business is excellent in continuity and has a high marginal profit ratio, its contribution to profit must
also have been significant.
5. Other operating revenue also increased significantly from Y511 million → Y688 million (+34.7% YoY). In
addition to the implementation services for various systems (provided by the consolidated subsidiary KEC), sales
of other companies’ goods contributed to the steady growth of this category’s sales.

[Figure 2] Quarterly Change in Sales of the Cloud Business

900 45.0
Sales of cloud (left axis: Y mil) Share of sales (right axis: %)
800 40.0
YoY growth rate (right axis: %)
700 35.0

600 30.0

500 25.0

400 20.0

300 15.0

200 10.0

100 5.0

0 0.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
FY 2017 FY 2018 FY 2019 FY
2020

・Meanwhile, regarding profit, since the Company is based on a business model with a high marginal profit ratio, a
large increase in sales is directly linked to an improvement in the profit margin and a large increase in profit. In
addition, the cost of sales decreased due to the completion of most of the software amortization during the previous
fiscal year, leading to an improvement in the gross margin by 5.9% from 54.9% in the previous year’s Q1 to 60.8%
in the current Q1. Also, the SG&A expenses increased by Y52 million or 4.2% YoY, a small increase compared to
the sales growth rate (SG&A expenses ratio improved by 10.7% from 52.4% → 41.7%). This improvement may be
explained by the fact that the R&D and other upfront investment activities, although still in progress, are starting to
relax to normal levels, and the fact that the Company is properly carrying out cost control. As a result, the operating
margin improved significantly from 2.4% to 19.1%. As a reference, the Company's predicted full-year operating
margin for this fiscal year is 11.6%; the actual operating margin in Q1 exceeded this target. There were no major non-
operating or extraordinary gains or losses. The significant increase in operating profit led to record-high Q1 net profit.
・The balance sheet at the end of this Q1 is not largely different from the previous year’s Q1. The increase in profit
caused an increase in the cash and deposits (last Q1 → this Q1: Y7,280 million → Y8,134 million) and the net
assets (last Q1 → this Q1: Y11,995 million → Y12,375 million). As a result, the ratio of cash and deposits over
the forecasted sales for this fiscal year or total assets was 63.6% (equivalent to 7.6 months’ worth of average monthly

Short Report 2/5

This Alpha-Win Company Research Report (hereinafter “this "Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in this
Report for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate, or
fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage resulting from the
use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility regarding their investment. Intellectual property
of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without our consent.
Alpha-Win Company Research Report
PCA (9629 TSE First Section) Issued: 8/1/2019

sales) and 40.9%, respectively; the Company has ample liquidity at hand. In addition, its financial standing is strong
with an equity ratio of 61.9% and a current ratio of 249.0%.

◆ Progress Rate in Terms of the Financial Forecast

・The Company has not disclosed an interim financial forecast for this fiscal year. Q1's progress rate against the
Company’s full-year forecast for this fiscal year was 24.0% for sales (20.5% in last year’s Q1 and 21.5% in the year
before the previous) and 39.1% for operating profit (4.6% in last year’s Q1 and 21.7% in the year before the previous).
This progress is excellent even in comparison to the past 14 years during which the Company’s Q1 results have been
disclosed. Also, both the sales and profits seem to be growing steadily in line with the Company’s plan to increase
full-year sales by 11.8% YoY and operating profit by 18.5% YoY (see Figure 1 shown above).
・The Company has not changed its forecast on full-year sales, profits, and dividend since the Q1 results were mostly
in line with its plan and because the second half, which will be largely influenced by the event-driven, high market
demand, is hard to predict.
・Since the event-driven high demand is causing an extremely high growth especially for the products, the cloud, and
other revenue, making a full-year prediction simply based on the extension of the Q1 results is risky. We must
evaluate how long the event-driven high demand will continue into Q3 and onward. The improvement in Q1 sales
growth rates and margins of the four sales categories excluding the goods, though, was above our forecast. Since
there currently seems to be no slowdown in the orders received and the growth of sales, we believe that the
Company’s sales will also grow steadily in Q2 (June-August 2019), especially for the products and the cloud. In fact,
we have already made a forecast that the results will exceed the Company’s full-year targets. Furthermore, we believe
that the full-year forecast may be revised even higher, since the strong results during the first half will leave room
for adjustments, the demand related to PC replacements will continue in Q3, the subscription-based businesses will
continue to support the overall financial performance in Q3, and cost control is expected to be conducted.
・Regarding next fiscal year, we expect that the profits will temporarily decline in a fallback from the event-driven
high demand. However, we believe that the cloud business will serve as a stable driver of high growth, such that the
EPS will grow annually by 8-10%, based on leveled-out figures, over the medium term after the event-driven high
demand ends. Furthermore, with a strong financial performance over the medium to long term, we believe that the
Company may improve its shareholder return through increased dividend and a flexible buyback of shares, as well
as stock splits and the enhancement of the shareholder benefit program.

◆ Stock Price
・The Company’s stock is seen as a defensive, domestic-demand-related, and small-cap growth stock with strong
financial performance that is positively affected by the rise in consumption tax. After the announcement of Q1 results,
in anticipation of excellent financial performance during this fiscal year, the stock price soared and, in July, reached
the highest price since becoming listed on the TSE First Section. Over the past 12 months, the Company’s stock
price has grown by about 2.5 times, significantly outperforming the TOPIX.
・Regarding valuation, the Company’s valuation is high compared to the average of the First Section of the TSE
(based on the closing price on 7/31/2019: P/E of 13.6, P/B of 1.2, and simple average of the dividend yield of 2.1%).
On the other hand, compared to its competitors Obic Business Consultants and Miroku Jyoho Service, except for
dividend yield and this fiscal year’s forecasted P/E (note: our forecast for this fiscal year is 25.7), all the indicators
(P/B, EV/EBITDA, and P/S) have an undervalued impression (Figure 3).

(Ref) Prepared by Alpha-Win Research Dept. based on

[Figure 3] Comparison of Valuation Indicators with Competitors each company’s securities report and stock data

Obic Business Consultants Miroku Jyoho Service (MJS:

Company Name PCA (consolidated)
(OBC: non-consolidated) consolidated)
[Figure 27] Comparison of Valuation Indicators with Competitors
Code 9629 4733 9928
Stock Price (at 7/31 closing) 4,065 4,705 3,435
Market Cap (Y mil) 31,301 379,712 119,560
P/E (price-to-earnings ratio) 27.7 35.1 26.2
P/B (price-to-book ratio) 2.3 3.1 5.9
Dividend Yield (%) 0.8 1.1 1.1
EV/EBITDA 14.0 20.9 19.1
P/S (price-to-sales ratio) 2.4 12.7 3.5
Market cap = shares outstanding x market stock price [at 7/31 closing] The companies' estimated EPS for FY 2020 used in all P/E calculations
EV/EBITDA = (market cap + interest-bearing debt - cash & deposits) / (O.P. + depreciation + intangible fixed asset amortization, etc.)
P/S = market cap / sales [the companies' estimate for FY 2020]

Short Report 3/5

This Alpha-Win Company Research Report (hereinafter “this "Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in this
Report for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate, or
fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage resulting from the
use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility regarding their investment. Intellectual property
of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without our consent.
Alpha-Win Company Research Report
PCA (9629 TSE First Section) Issued: 8/1/2019

【Performance】
Period Return vs. TOPIX
1 month 13.1% 12.1%
3 months 18.9% 22.9%
6 months 103.3% 103.6%
12 months 153.4% 183.9%

(Note) Reflects stock price and index

values up through 7/31/2019

Short Report 4/5

This Alpha-Win Company Research Report (hereinafter “this "Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in this
Report for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate, or
fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage resulting from the
use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility regarding their investment. Intellectual property
of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without our consent.
Alpha-Win Company Research Report
PCA (9629 TSE First Section) Issued: 8/1/2019

Disclaimers

This Alpha-Win Company Research Report (hereinafter “this Report”) has been prepared by Alpha-Win-
Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in this Report.

This Report is not to be construed as a recommendation or solicitation of investment. Alpha-Win

shall not be liable for any consequences including direct or indirect loss, lost profit, or damage
resulting from the use of or reliance on this Report. Investors who read this report must make their
own decisions on all investment matters and take full responsibility regarding their investment.

This Report has been prepared with a focus on objectivity and neutrality based on the analysis of generally
accessible public information and supplemental information including interview(s) by the analyst. Alpha-
Win, the writer, and/or other persons involved in the publication of this Report may already hold, or buy
and sell in the future, the stock of the company presented in this Report.

Contents of this Report are based on information current as of the issue date and are subject to
change without notice. We do not warrant or represent that the information in this Report is accurate,
reliable, complete, appropriate, or fit for any purpose and do not accept any responsibility or liability.

Copyright of this Report belongs to Alpha-Win and no part of the publication may be copied, photocopied,
cited, or translated without our consent.

For inquiries regarding this Report, please send us an e-mail to [email protected]. However, Alpha-Win
and the writer of this Report do not have any obligation to reply to inquiries. SV20190810-9

Short Report 5/5

This Alpha-Win Company Research Report (hereinafter “this "Report”) has been prepared by Alpha-Win-Capital Inc. (hereinafter “Alpha-Win”) on the request of the company presented in this
Report for the purpose of providing a description of the company. This Report is not to be construed as a recommendation or solicitation of investment. Contents of this Report are based on
information current as of the issue date and are subject to change without notice. We do not warrant or represent that the information in this Report is accurate, reliable, complete, appropriate, or
fit for any purpose and do not accept any responsibility or liability. Alpha-Win shall not be liable for any consequences including direct or indirect loss, lost profit, or damage resulting from the
use of or reliance on this Report. Investors who read this report must make their own decisions on all investment matters and take full responsibility regarding their investment. Intellectual property
of this Report belongs to Alpha-Win and no part of this report may be copied, photocopied, cited, or translated without our consent.