（4634） | Publish:Tue, Jul 18, 2017 IR「BRIDGE REPORT」

BRIDGE REPORT
（4634）

プライム

Toyo Ink SC Holdings, Co., Ltd. (4634)

President
Katsumi Kitagawa

Company	Toyo Ink SC Holdings, Co., Ltd.
Code No.	4634
Exchange	TSE 1st Section
Industry	Chemical (Manufacturing)
President and CEO	Katsumi Kitagawa
Address	2-2-1 Kyobashi, Chuo-ku, Tokyo
Year-end	End of March
HP	http://schd.toyoinkgroup.com/en/index.html

Share Price	Number of shares issued (excluding treasury shares)		Total market cap	ROE (Actual)	Trading Unit
¥590	291,945,083shares		¥172,247million	6.0%	1,000shares
DPS (Est.)	Dividend Yield (Est.)	EPS (Est.)	PER (Est.)	BPS (Actual)	PBR (Actual)
¥16.00	3.1%	¥40.53	12.7times	¥697.57	0.7times

* Share price as of closing on the end of June 29. Number of shares outstanding is as of end of the previous term.
ROE and BPS are based on actual results of the previous term end.
As the account settlement month changed from March to December, the EPS of 34.25 yen is the value for 9 months.

Fiscal Year	Net Sales	Operating Income	Ordinary Income	Net Income	EPS	DPS
March 2010 (Actual)	226,074	13,339	13,604	6,556	21.77	10.00
March 2011 (Actual)	245,958	19,145	19,002	11,517	38.60	12.00
March 2012 (Actual)	245,337	13,648	13,445	7,238	24.26	12.00
March 2013 (Actual)	248,689	17,547	18,468	8,714	29.20	12.00
March 2014 (Actual)	279,557	19,728	20,553	12,260	41.09	13.00
March 2015 (Actual)	286,684	18,210	19,411	13,304	44.60	14.50
March 2016 (Actual)	283,208	18,470	18,697	12,190	40.87	15.00
March 2017 (Actual)	268,484	19,222	19,257	12,687	42.95	16.00
December 2017 (Est.)	235,000	16,300	16,600	10,000	34.25	16.00

* Estimates are those of the Company. Net income is net income attributable to owners of parent.
The values of December 2017 are for 9 months.

This Bridge Report provides overview of the fiscal year March 2017 earnings results, etc.

Key Points

Company Profile

Toyo Ink SC Holdings is Japan's top manufacturer of printing inks. Using the processing technologies of pigments and resins that are the raw materials of inks, the Company manufactures various products such as LCD color filters and electromagnetic shielding films, etc. The Toyo Ink Group is comprised of Toyo Ink SC Holdings, 67 consolidated subsidiaries in and outside Japan, and 10 equity method affiliate companies. They are operating business in 24 countries around the world. In the "Midterm Business Plan SCC-III", the Company is aiming to "transform from a specialty chemical manufacturer to a science company". It aims to grow through development of new products and acceleration of overseas expansion.

History

The origin of Toyo Ink dates back to 1896, when founder Kamataro Kobayashi opened Kobayashi's Ink Shop as sole proprietorship at Nihonbashi, Tokyo. In 1907, it was reorganized and renamed as Toyo Ink Manufacturing Co., Ltd. During the Meiji period, many newspapers and magazines, including the Yomiuri Shimbun (founded in 1874) and the Asahi Shimbun (founded in 1879), were launched. The government also printed increasing number of materials including textbooks to enhance educational levels under the policy of increasing wealth and military power. Under these circumstances, the demand for printing inks expanded rapidly.

Initially, inks in the Japanese market were mostly imported products; however, as the national policy favored high quality domestically produced inks, the Company, with its advanced technological skills, successfully expanded its business with clients such as the Printing Bureau of the Ministry of Finance and other government bodies, in addition to private printing companies. Exports also grew during the same time. The Company's rapid growth was also due in part to the early introduction of integrated manufacturing system from raw materials (pigments, resins) to finished products (printing inks). Another contributing factor may be that the Company, since its inception, had strong ties with Toppan Printing Co., Ltd., which, by then, was among Japan's largest printing companies. The Company survived the difficult times of the Great Kanto Earthquake and the World War II and experienced rapid growth again during the period of high economic growth after the war. The Company was listed in the Second Section of the Tokyo Stock Exchange in 1961 and moved to the First Section of the Tokyo Stock Exchange in 1967.
The Company is expanding its businesses from manufacturing of printing inks to other fields such as LCD film materials, using its wide range of technologies and know-how cultivated through manufacturing and processing of raw materials such as pigments and resins. In 2011, the Company adopted a holding company system for further expansion and growth of the Group, and changed its name to Toyo Ink SC Holdings, Co., Ltd.

Corporate Philosophy

The Toyo Ink Group's Corporate Philosophy was established in April 1993. It consists of 3 parts, namely, corporate philosophy, corporate policies, and guiding principles. The Philosophy embodies the original roots of the brand of the corporate group and serves as guidelines that each employee of the Group should always keep in mind and act on as a business professional.
In April 2014, "improving shareholder satisfaction" was added to its guiding principles. With this revision, the Company is aiming to improve satisfaction of all stakeholders.

All employees must always carry this philosophy system printed on a credo card, read it out in the 5-minute meeting every week at each division, and repeatedly confirm its meaning through discussion. This way, the employees are expected to have deeper understanding and implement the philosophy.
Furthermore, the "Toyo Ink Group Corporate Philosophy" is printed on the first page of every single issue of the Company's in-house magazine, which is published for the Group's unity and circulated to the entire Group including the overseas locations. Also, the above-mentioned credo has "Japanese/English" version as well as "Chinese/English" version to share and spread the corporate philosophy globally.

Market Environment

◎ Overview
(Market trend)

The production value of the Japanese printing industry is declining especially in the realm of publication printing of newspapers and magazines as a result of increasing digitization and aliteracy.
In the realm of commercial printing, on the other hand, of posters, catalogues, fliers, POP, etc. demand is fairly steady. Furthermore, printing on food and pharmaceutical packages and plastic containers is steadily increasing at the compound annual growth rate (CAGR) of 2.4% from 2004 to 2016.

Meanwhile, overseas, especially in newly emerging countries, both printing on papers (offset printing) and printing on film of food packages (gravure printing, flexographic printing) is expected to grow, and the Company is focusing on responding to the demand.
As innovation of printing machine is progressing, quality of printing is enhancing. Overseas local inks, in many cases, cannot respond to such demand for high quality, which may lead to more demand of excellent Japanese ink.

(Printing houses and printing ink manufacturers)

According to the "Census of Manufactures 2014: Report by Industry" by METI, there were 25,843 business entities in the printing and related industries in 2014. 25,446 (98.5%) of them are small and medium-sized enterprises with fewer than 100 employees.

The Company's customers i.e. printing companies purchase printing inks and carry out printing. However, printing cannot be done simply by setting printing inks and papers and starting the machine. Printing companies are faced with needs such as "selection of the ink for the new types of paper", "producing special color" and "producing premium look" and challenges such as improving printing efficiency and taking environmental measures. The Company provides its customers

with information on new products and various advices concerning these needs and challenges. Most of the 26,000 printing companies in Japan can hardly conduct business without such solutions. Therefore, printing ink manufacturers play a crucial role in the printing industry.
Thus, the Company's customers seek direct dealings with the Company. As a result, nearly 80% of the Company's domestic sales come from direct sales to its customers. These strong relationships with the customers are among the Company's major characteristics.

◎ Other companies in the industry

There are 6 major listed companies including Toyo Ink in the ink industry in Japan.
Whereas (4631) DIC is the number one company in the world, Toyo Ink is the top runner in Japanese printing ink industry, and ranks first or second by most product categories. Globally, the Company is ranked third (The second is a European firm).
(4633) SAKATA INX is the second largest shareholder of the Company. The Company and SAKATA INX complement each other mainly in logistical aspects. The two companies concluded a capital and business alliance agreement in 2000.

Business Contents

◎ Concerning "printing inks"

Followings are the summary of printing inks, one of the major product categories of the Company, categorized by "raw materials" and "types and purposes of use".

High-level diffusion technologies are required when various inks are produced by combining the above 3 raw materials.
Since its foundation, the Company also has been expanding its business categories by exploring application of these raw materials in the process of manufacturing them.

◎ Business segments

The business activities of the Company are classified into 4 segments: the "Colorants & Functional Materials Related Business", "Polymers & Coatings Related Business", "Printing & Information Related Business", and "Packaging Materials Related Business".
The "Printing & Information Related Business" mainly deals with planographic inks that are used for printing on papers (offset inks, etc.). The "Packaging Materials Related Business" deals with gravure inks and flexographic inks that are used for printing on films of food packages. The "Colorants & Functional Materials Related Business" deals with products related to pigments that are also the raw materials of printing inks as core materials. The "Polymers & Coatings Related Business" began with resins that are the main raw materials of inks and their design technologies.

Based on the organic pigments that are the main raw materials for printing inks, and by integrating their color material technologies, organic chemical synthetic technologies and high-level dispersion technologies, the Company offers materials that are used in various fields. Especially, it created higher functional LCD color filter materials using their nano-level dispersion technologies through integration of technologies that have been accumulated from their ink and painting materials production experiences.
Furthermore, the Company's dispersion processing technologies are used not only for organic pigments but also inorganic materials such as carbon nanotube (CNT), which lead to expansion of their business in the new energy field such as secondary battery materials. They constitute about 40% of the Company's operating income.

For this segment, the Company develops functional resins as the core materials with different functional features. Using unique technologies that have been developed for many years, the Company creates new functions to cultivate new demand and open new markets in electronics, energy, health care and other fields.

For this segment, the Company deals with printing inks and equipment used in packages such as gravure printing, flexographic graphic printing and screen-printing. In the field of food packaging, etc., the Company is dedicated to developing environmentally friendly products using water-based ink to assure their safety to the consumers.

This segment is the core segment of the Company since its establishment. For this segment, the Company deals mainly with printing inks used for printing on paper.
The Company offers not only printing inks but also sales of machinery/equipment, support for streamlining customers' printing process, and support and tools for color management and color universal design.

◎ Overseas expansion

While the Company is improving profitability by offering high-value-added products in the Japanese market, where a rapid growth is not expected, it is aggressively expanding its business from both production and sales perspectives in the overseas market where future growth is expected.
Development of its overseas manufacturing structures was almost completed during the previous Midterm Business Plan, and the Company is carrying out both raw material procurement and production at the local sites.
As of the end of March 2017, the Company has about 50 overseas consolidated subsidiaries and 51 plants in 23 countries around the world.

ROE was nearly unchanged from the previous term, as margin improved somewhat, but total asset turnover decreased.
In general, it is desirable to boost profitability and efficiency to achieve an ROE of 8%, which is said to be the value that should be pursued by Japanese companies.

Characteristics and Strengths

(1) Strong technological edge

As described above, the Company has been manufacturing in-house pigments and resins, which are the raw materials of printing inks. Its technological capacities form the basis of high quality printing ink production and lead to expansion of business areas and product range such as, LCD color filter materials, adhesive bonds and adhesive compounds.

(2) Excellent problem solving skills

One of the reasons for the Company to be at the top of the Japanese printing inks industry is its excellent problem solving capability in all aspects of printing.
The Company not only produces and supplies printing inks but also studies elements related to "printing" as a whole including plate making and images. Such efforts enable the Company to make technological proposals, demonstrate advanced service skills, and obtain high customer satisfaction.

(3) Environmental concerns

The Company is a forerunner in CO2 emission reduction as well as production of eco-friendly inks such as non-VOC inks, water-base inks, and UV inks. In the newly developed countries, too, the environmental regulations are becoming tighter, and the needs for environmentally friendly products are increasing. The Company is also working on assuring safety such as chemical substances control and manufacturing a line of products that meet the Swiss Ordinance, ahead of other companies.

(4) Uniqueness of management strategies

The Company considers M&A as one of the options for exploring new markets with its technological edge, if M&A is expected to bring synergy effects to the Company. It is also taking an initiative in the printing ink industry to establish "local production for local consumption" policy in the overseas market for enhancing efficiency (e.g. reduction in transport mileage) and social contribution (e.g. utilization of local products) purposes.

Fiscal Year March 2017 Earnings Results

Sales dropped, but operating income grew thanks to the improvement in profit rate, etc.

Sales were 268.4 billion yen, down 5.2% year on year. Sales dropped, as sales promotion was conducted in India, Turkey, Brazil, etc. (+ 7.9 billion yen) and its business in the medical market grew (+ 700 million yen), but the yen appreciation decreased sales by 15.5 billion yen, the performance of resale products including offset printing materials and devices and gravure solvents was sluggish (- 3 billion yen), unprofitable products were disposed of, and selling prices were revised.
Operating income was 19.2 billion yen, up 4.1% year on year. Exchange rate fluctuations (- 1.1 billion yen), the decline of selling prices (- 900 million yen), and the decrease of highly functional products (- 200 million yen) were covered by the effects of the growth of quantities sold thanks to the drop in material prices (+ 3.1 billion yen) and the increase in quantity sold in overseas markets (+300 million yen). Profit rate, too, improved.

☆Colorants and Functional Materials Related Business

Sales and profit declined from the previous term. Neither sales nor profit reached the estimate.

Sales and profit dropped.
As for pigments, the performance of products used in the printing field was sluggish, but profit grew thanks to the improvement of the production process and the integration of models.
The profit from CF paste decreased, due to the downturn of demand.

Sales and profit dropped.
As larger panels became popular and domestic performance was favorable, the sales of display materials recovered in the second half, but profit decreased.
The partial adoption of new green resist started, and the performance is expected to improve from the next term.

Sales dropped, but profit grew.
Functional products, such as CNT compounds and design polymer alloy, sold well.

☆Polymers & Coatings Related Business

Sales declined and profit grew from the previous term. Sales did not reach the estimate, but profit exceeded the estimate.

Sales and profit declined. The release of new functional films was delayed.
Tapes for industrial materials sold well in South Korea and Taiwan.

Sales decreased, but profit increased.
The products for displays were adopted by some new clients, and so their performance was favorable.
The products for industrial use sold well in North America.
- Hot melt adhesives have a significant share in the use for packages.

Sales dropped, but profit grew.
The sales of coating agents for cans were healthy inside and outside Japan.
High value-added resins sold well.

In July 2016, the company started operating the business of patch-type medicines.

☆Packaging Materials Related Business

Sales dropped and profit grew from the previous term. Neither sales nor profit reached the estimate.

<Japan>

Sales and profit decreased.
The package market was healthy, but the publication market was sluggish. Enterprises from other business fields are making inroads into the field of flexography.

Sales declined, but profit rose.
The technological centers in Asia and China got into gear, and the sales promotion of middle-grade ink progressed.
In Turkey, M&A-based business expanded. In Taiwan and China, water-based gravure and flexographic inks started to sell well.

☆Printing & Information Related Business

Sales dropped, but profit grew from the previous term. Neither sales nor profit reached the estimate.

<Japan>

Sales declined, but profit grew.
In the markets of offset rotary presses, sheet-fed presses, and newspaper, quantity sold and sales decreased due to the shrinkage of demand, but profit grew thanks to the reform of the production system, cost reduction measures for material, etc.
As for UV, the shift from sheet-fed presses to UV progressed, increasing demand, and the company increased sales by meeting the needs for electric power saving.

Sales and profit dropped.
The sales promotion of sheet-fed presses is progressing in India and Brazil, but the market is shrinking in Europe and the U.S.
The performance of UV-LED was healthy as it expanded globally.

Current assets decreased 2.1 billion yen from the end of the previous term, mainly due to the decline in trade receivables and inventories. Noncurrent assets grew 6.7 billion yen, due to the increase in property, plant and equipment, investments, others. Total assets grew 4.6 billion yen to 365.2 billion yen.
Total liabilities shrank 300 million yen to 145.5 billion yen, as short-term debts augmented, but long-term debts decreased.
Net assets rose 5 billion yen to 219.6 billion yen, due to the increase in retained earnings.
Consequently, equity ratio rose 0.7 points from 57.7% at the end of the previous term to 58.4%.

The surplus of operating CF shrank due to the decline in net income before taxes and other adjustments, etc.
The deficit of investing CF decreased, as the expenditure for acquiring securities and investment securities decreased and there was no longer expenditure for acquiring the shares of subsidiaries, which was posted in the previous term. Accordingly, the surplus of free CF expanded.
The deficit of financing CF expanded due to the augmentation of treasury shares. The cash position improved.

(4) Topics
◎ Resolved to propel business alliance and continue capital alliance with Sakata Inx

On February 20, 2017, the Company resolved to propel a business alliance and continue a capital alliance with Sakata Inx Corporation.

(Reasons for and details of the alliances)
Since the formation of a business alliance in 1999, the Company and Sakata Inx have discussed and propelled collaboration in various fields, including production, logistics, digital related business, and international business. The environment, however, which surrounds the industry has considerably changed in the past 18 years since the establishment of the alliance.
Under these circumstances, taking into account possible changes in the market environment, both companies agreed to propel an alliance in the following business fields, attaching weight to cost reduction with the aim of strengthening the business foundation:

① Further improvement of efficiency in the logistics field
② Development of a complementary relationship in the production field

③ Provision of complementary support in the production process at bases inside and outside Japan in case of emergency based on the BCP measures

In addition to boosting efficiency in the business alliance, both companies agreed to continuously hold 80% of the currently held common shares in the other company that are held by each other to forge long-term partnership.

*The number of shares in each company held by the other company as of December 31, 2016
Number of common shares of Sakata Inx held by Toyo Ink SC Holdings: 10,536 thousand (16.83% of the total number of issued shares)
Number of common shares of Toyo Ink SC Holdings held by Sakata Inx: 14,595 thousand (4.82% of the total number of issued shares)

◎ Updated anti-takeover measures

The Company resolved at the meeting of the Board of Directors held on May 12, 2017 to submit, at the 179th shareholders' meeting scheduled to be held on June 29, 2017, a bill (including some revisions) that approves update to the measures against large-scale takeover (anti-takeover measures) whose validity will expire on the day of the 179th meeting.

At the 170th shareholders' meeting held on June 27, 2008, the Company introduced countermeasures against the takeover of the Company's shares in a scale larger than a prescribed scale by a shareholder or a group of shareholders. Afterwards, the countermeasures were approved by shareholders at the 173rd shareholders' meeting on June 29, 2011 and the 176th shareholders' meeting on June 27, 2014 and continue to be valid today.
The Company presented the resolution based on the discussion it had held about details, and advantages and disadvantages in continuing the anti-takeover measures which aim to maintain and increase value of the Corporate Group of the Company and the common benefit of shareholders, considering the changing social and economic conditions and the progress in discussion about the anti-takeover measures.

Fiscal Year December 2017 Earnings Estimate

Sales and profit are estimated to grow.

From this term, account settlement will be conducted in December, and so the period of this term is 9 months. Therefore, the year-on-year growth rates are just for reference, but performance is expected to be healthy. Sales are estimated to be 235 billion yen, up 2.7% year on year. Sales are forecasted to grow in all segments.
Operating income is projected to rise 5.0% year on year to 16.6 billion yen. Profit, too, is estimated to increase in all segments.
The dividend amount is to be 16.00 yen/share, equal to the amount in the previous term. Payout ratio is forecasted to be 46.7%.
Assumed exchange rates are 1 US dollar = 100 yen, 1 euro = 115 yen, and 1 yuan = 16 yen.

This fiscal year is recognized as the year in which the company will complete the mid-term management plan "SCC-III" and prepare for the next mid-term management plan.

☆Polymers & Coatings Related Business

With three key points of the growth strategy: "new products and new market: electronics optical, new energy market, and eco-friendliness," "global expansion," and "new business: launching the medical science business," the Company has set the following priority goals:

(3) Long-term scheme SIC27

For achieving the goal of "SCC (Science Company Change) 2017," the Company carried out 3 Midterm Business Plans starting in the term ended March 2009 and completed the final plan, "SCC-III," in the term ended March 2017.

In addition to development and sales increase of new products which are environmentally friendly and satisfy needs of each part of the world, the Company endeavored to enter new business fields such as the energy related field and healthcare field; however, the sluggish demand in the Japanese printing market and the intensified competition in the market for liquid crystal related materials hindered the Company from establishing business that could be a core of the next source of earnings, whereas the Company expanded its business to overseas, including India, Turkey, Brazil, and inland areas in China, to break into promising markets and enrich products for such markets, successfully augmenting the number of business areas and strengthening networks.

Accordingly, considering the term ending December 2017 as the final term of SCC2017, the Company has set a goal for the next 10 years as a new long-term plan with the term ending December 2018 as the first fiscal year, and will engage in activities to realize the plan.

With five key points: "technology and products," "business model," "network," "manufacturing," and "management foundation," the Company aims to change its corporate structure to one that sustainably thrives through innovative ideas, scientific implementation of such ideas, and a chain of such activities.
In addition, the Company will strategically expand the framework for the traditional domains (3 business fields including life science, communication science, and sustainability science) and focus on not only growing markets but also fields that may lead to solutions to social issues and sustainable growth of life and global environment.

Sales under the Midterm Business Plan for the next term, "SIC-I," are forecasted to be 350 billion yen. The Company plans to make an announcement after details are confirmed.

Conclusions

Sales dropped from the previous term, failing to reach the estimate, but profit grew as estimated. The progress of business was slow during the term, and so it can be said that the performance in the previous term was not bad. Its share price did not get weakened, but exceeded TOPIX healthily, but the company is lagging behind competitors.
Partially due to the significant changes in the business environment, the results were well below the goals set in "SCC-III", but we would like to expect that the company will perform well and grow in the next long-term scheme "SIC27." In the existing business, the points of interest are overseas business expansion, for which their investment is bearing fruit, and how many new earning pillars the company will be able to build in its 3 business domains.

◎Corporate Governance Report

The latest update: Jul. 5, 2016.

Disclaimer

This report is intended solely for information purposes, and is not intended as a solicitation to invest in the shares of this company. The information and opinions contained within this report are based on data made publicly available by the Company, and comes from sources that we judge to be reliable. However we cannot guarantee the accuracy or completeness of the data. This report is not a guarantee of the accuracy, completeness or validity of said information and or opinions, nor do we bear any responsibility for the same. All rights pertaining to this report belong to Investment Bridge Co., Ltd., which may change the contents thereof at any time without prior notice. All investment decisions are the responsibility of the individual and should be made only after proper consideration.
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