16 June 2014

Summary company financials (m, unless otherwise stated)

Yen USD Year end March FY2012A FY2013A FY2014A FY2015E
Price 1046.00 USD (m)
Market cap 98,080.3 961.2 Revenue 1,281.2 1,249.7 1,441.4 1,568.3
Enterprise value 54,769.9 536.7 4.2% -2.5% 15.3% 8.8%
JPY (m)
Free float 82% Revenue 105,061.0 117,468.0 147,054.0 160,000.0
2.9% 11.8% 25.2% 8.8%
EBITDA 7,568.0 11,257.0 14,959.3 15,981.5
7.2% 9.6% 10.2% 10.0%
Net income 2,607.0 5,507.0 7,664.0 10,074.8
Net debt (cash) -27,998.0 -36,234.0 -43,310.3 -45,467.3
Shares outstanding 93.6 93.6 93.8 93.8
EV/Sales 0.29 0.78 0.37 0.35
EV/EBITDA 4.0 8.1 3.7 3.5
PE 22.3 23.2 12.8 9.7
PE, ex cash 5.4
Fujitec Co. Ltd.
Revenue growth
Revenue growth
EBITDA margin
Fujitec Co Ltd manufactures, installs and maintains people-moving systems including elevators, escalators and moving walks. The company
primarily serves hotels, office and residential buildings, transit systems, and commercial buildings. Clients include, for example, Four Seasons
Hotels, W Hotels, HSBC Headquarters Canary Wharf, John F Kennedy International Airport, Vancouver International Airport, and Kyoto
Railway Station Japan. Fujitec has operations in the Americas (10% of revenue), China (40% of revenue), Europe (1% revenue), South Asia (9%
of revenue), and Japan (42% of revenue). The company was founded in 1948 and is headquartered in Tokyo, Japan.

Elevator companies such as Fujitec have generally attractive business models due to the recurring nature of the service element of their
revenue streams, typically around 2/3rds of their total revenues. Fujitec's estimated forward revenue growth, at high percentage single digit
in USD, sits at a slight premium to its comp set. Its EBITDA margins however, at 10%, whilst they have been improving may still offer upside
relative to the average comp EBITDA margin at 12-13%. Fujitec's valuation, at 3.5x EBITDA for the year to March 2015, is at 72% discount to
the average comp set (Schindler, Otis Zardoya, Kone and Hitachi Elevator) EV/EBITDA of 12.9x. Fujitec's equity is 82% free float, with the
remaining 18% of shares owned by Otis Elevator (the world's largest elevator company by revenue, a subsidiary of United Technologies
Corporation) since 2007.

The opportunity to invest in Fujitec at a low valuation relative to its EBITDA may have come about as Fujitec's own EBITDA improvement has
been either ignored by the market or assumed not to be durable. Fujitec's current CEO, Takakazu Uchiyama, was appointed in 2002 and at
that stage Fujitec was achieving EBITDA margins of c.6% relative to the EBITDA margins of comps at 12-13%. Between 2002 and 2007, there
was little change in Fujitec's EBITDA margins under Uchiyama. However, in 2007, US investment fund Dalton Investments acquired a 15%
stake in the company and proposed a buyout offer at 900/share (12x EBITDA 2007). Following the offer not gaining sufficient support, Dalton
then sold 11% of the company to Otis Elevator (who already owned 7%), and Dalton itself retained a 4% stake. In a statement at the time,
James B. Rosenwald, founder of Dalton Investments, said, "While we are extremely disappointed that Fujitec's management never embraced
Dalton's Management and Employee Buyout proposal, we are thrilled with the prospect of helping Fujitec's management enhance value for all
shareholders. Fujitec is now well positioned to improve its margins." Both Dalton and Otis Elevator remain shareholders of Fujitec today.

True to the Dalton statement, since 2007, Fujitec has improved its EBITDA margins from 5.9% to 10.2%, and, the company has communicated
a management plan to increase EBITDA further from the 14,959m reported in the year to March 2014 to 17,500m for the year to March
2016 (we've backed out the EBITDA target for 2016 based on the guided EBIT target of 15,000m). The higher margins since 2007 have also
been accompanied by improved revenue growth, presumably, as a sales-led culture has been implemented. In the pre-Dalton period, 2002-
2007, revenue growth at Fujitec averaged 1.8% per annum in a benign economic environment. Post-Dalton, 2007-2014, revenue growth has
averaged 5.0% per annum in a period which included the financial crisis of 200708. Fujitec's revenue for the 12 months to March 2014
increased 25.2% in Yen (15.3% measured in USD). The company has recently increased its revenue target to 175,000m for the year to March
2016, representing 2 year forward growth rate of 9.1% per annum.

As noted, the business model of elevator companies has attractive characteristics due to the recurring nature of their revenue streams. Whilst
Fujitec itself does not disclose the proportion of its revenues it derives from service activities, the proportion averages c. 2/3rds of revenue in
Fujitec's comp set. After elevator installation, service revenues may be "locked in" for twenty to fifty years as maintenance is normally done
by the elevator company that installed the equipment in the first place. Despite this, elevator companies book service revenue based on the
maintenance that has been carried out during the year, not up front at the time of elevator installation. The argument that applies to
software-as-a-service companies justifying higher valuation multiples due to the recurring nature of their revenue streams, in other words,
also applies to elevator companies.

Fujitec's competitors are primarily the big three global elevator companies - Otis (revenue $12.4bn), Schindler (revenue $12.3bn) and Kone
(revenue $10.0bn). Whilst Fujitec's own revenue at $1.4bn is low relative to these competitors, it can be speculated that Fujitec may be seen
as a potential bolt on acquisition for their Asian businesses at some stage. Fujitec derives 88% of its revenue from Asia including China and
Japan, and its scale in this region is c. 1/3rd of the scale of the Asian business divisions of Otis, Schindler and Kone. All three of Fujitec's larger
peers operate acquisition-led business strategies - making bolt on deals to supplement their business growth. Otis Elevator has made 38
acquisitions over the last 10 years of small elevator companies, although given that Otis is part of United Technologies Corp it is not possible
to isolate the total acquisition spend. Nevertheless, Schindler has made 30 acquisitions over the last 10 years, spending $465m. And Kone has
made 66 acquisitions, spending $1.1bn. Fujitec's EV, at $537m, would seem within the spend context of its larger peers. Furthermore, Fujitec
trades at a 74% EV/Sales discount to the average acquisition valuation paid by Otis, Schindler and Kone, according to an analysis of the
selected acquisitions where it has been possible to source the transactional data, suggesting a transaction could be accretive even if a
reasonable premium were offered.

reasonable premium were offered.

In summary, Fujitec offers a lowly valued way to invest in the elevator sector, as well as an investment in a company with above sector-
average revenue growth and a management plan with further revenue growth and margin improvement targeted. Whilst Fujitec's Japanese
listing might deter some investors, the company has improved its operational KPIs to levels consistent with its Western peers, and its two key
shareholders are US-listed United Technologies Corp (owner of Otis) and US activist fund Dalton Investments, overseeing a combined 22% of
the company's equity. Fujitec's low valuation, currently at a 72% EV/EBITDA discount to its comp set, may increase further in attractiveness if
Fujitec's EBITDA improves to management's 17,500m target for the year to March 2016. The business model of elevator companies has
attractive characteristics due to their recurring service revenue streams, and the larger three of the global elevator companies have pursued
acquisition-led strategies. Fujitec trades at a 74% discount to the level at which its competitor set have typically carried out acquisitions,
according to the data identified. Whilst there is not necessarily any reason to assume specific corporate activity at Fujitec, it might be
speculated that the company is seen as an attractive target at some stage. For now, the investment case can be summarised as a theoretically
safe, cheap way to invest in either the elevator sector, Asian growth, or potential Japanese equity market multiple expansion.