Bridge Report:（8061）Seika Corporation Fiscal Year March 2019

President Akihiko Sakurai	Seika Corporation (8061)

Company Information

Stock Information

*The share price is the closing price on June 14. The number of shares outstanding, ROE, DPS, EPS and BPS were taken from the brief financial report for the term ended March 2019.

Earnings Trend

*Unit: million yen or yen. Oct. The company implemented a reverse stock split at 1:5 on October 1, 2017. EPS and DPS adjusted retroactively. Net income is profit attributable to owners of the parent. Hereinafter the same shall apply.

This report outlines the overview of Seika Corporation for the fiscal year March 2019 earnings results.

Table of Contents

Key Points
1. Company Overview
2. Fiscal Year March 2019 Earnings Results
3. Fiscal Year March 2020 Earnings Forecasts
4. Conclusions
<Reference1: The Long-term Management Vision and Mid-term Management Plan>
<Reference2: Regarding Corporate Governance>

Key Points

• The sales for the term ended March 2019 were 157.1 billion yen, down 5.1% year on year. Although the chemicals and energy plant business saw significant growth, sales of all the other segments decreased. Operating income was 2.11 billion yen, down 18.5% year on year. Profits of the power plant and industrial machinery businesses decreased, and the global business saw an operating loss. Sales and profits were lower than the initial forecasts as the delivery of lithium-ion battery-related equipment for China was postponed due to the customers. As for dividends, the initial forecast was revised from 55 yen/share to 45 yen/share.

   

• The sales for the term ending March 2020 are expected to be 135 billion yen, down 14.1% year on year, and operating income is projected to rise 13.3% year on year to 2.4 billion yen. The dividend amount is to be 45 yen/share, and the estimated payout ratio is 34.5%.

   

• This term is the final fiscal year of the “Mid-term Management Plan CS2020,” which is to be the first step in the long-term management vision. Currently, the goal has not been achieved due to extraordinary loss from overseas subsidiaries in the first year, and poor business performance from some of the company’s subsidiaries and the postponed delivery of equipment related to export negotiations with China in the second year. As for the subsidiaries with poor performance, the company has conducted reviews on business strategies and additional employment of human resources, and it is expected that the company will recover its performance after this term.

   

• Although profit for this term, which is the final fiscal year of the “Mid-term Management Plan CS2020,” is expected to grow to be positive for the first time in three terms, unfortunately the company will not achieve the goal: “a net income of 2.7 billion yen.” However, recovery of subsidiaries with unfavorable performance has been experiencing steady progress, and we should pay attention to how much the company will approach the goal, “net income of 2.7 billion yen,” for the final fiscal year in order to take the second step in the long-term management vision. In addition, we would like to expect the company to recover its overseas sales ratio, which declined considerably in the previous term.

   

1. Company Overview

Under the corporate philosophy “To Contribute to Society Through the Expansion of Business,” Seika Corporation sells equipment, devices, etc. and offers services in the fields of electric power, chemistry, energy, industrial machinery, material, and measurement as a general machinery trading company.
Its three characteristics and strengths are sales capability thoroughly versed in fields, extensive expertise in each business, and a wide network including 76 business bases both inside and outside Japan.

1-1 Corporate History

In July 1947, after the Pacific War, Mr. Douglas MacArthur, Supreme Commander for the Allied Powers, ordered the dissolution of the old Mitsubishi Corporation with a memorandum. In October 1947, the first president Koji Nakabayashi and staff of the machinery division of Moji Branch played a central role in founding Seika Corporation in Moji-ku, Kitakyushu-shi.

The corporate name is derived from “Essence of commerce: To pursue the quintessence of commerce, and offer benefits to others while earning money,” “Star company of the west: To aim to become a star company in western Japan,” and “Chin It may become helpful if the trade with China increases.”
The company expanded business actively, establishing branches throughout Japan, including Tokyo and Osaka, and an overseas office in Dusseldorf, Germany (old West Germany), where only a few Japanese people resided around that time, in November 1954. The company was listed in the first section of Tokyo Stock Exchange in October 1961.
Then, it has grown as a general machinery trading company, by fortifying the sales base mainly in western Japan and establishing footholds in the U.S., Europe, and Asia.
In 2017, which was the 70th anniversary of the establishment of Seika Corporation, the company set a long-term management vision for the year 2027 “Envisioned Seika Group 10 years from now” and a new three-year plan “Mid-term Management Plan CS2020,” which began in April 2017, and these are ongoing.

1-2 Corporate Philosophy

Seika Corporation set up the following corporate philosophy and code of conduct.

1-3 Business Description

(1) Business segments
As a general machinery trading company, Seika Corporation sells machinery, equipment, devices, and ancillary products and offers services in the fields of electric power, chemistry, energy, industrial machinery, material, and measurement.
The segments to be reported are “Power Plant,” “Chemicals and Energy Plant,” “Industrial Machinery,” “Advanced Materials and Measuring Instruments,” and “Global Business.”

① Power Plant
The clients of Seika Corporation are electric power companies in western Japan, including The Kansai Electric Power, Kyushu Electric Power, The Chugoku Electric Power, Shikoku Electric Power, Electric Power Development Co.,Ltd. (J-POWER), and joint electric power companies, such as Wakayama Kyodo Power. The company sells industrial power generation equipment, such as boilers and gas turbines, environmental conservation equipment for treating discharged water and exhaust gas, anti-crime and anti-disaster equipment, such as security equipment and fire extinguishing equipment for nuclear power plants, etc.
The suppliers include Mitsubishi Hitachi Power Systems (MHPS), which is a joint venture of Mitsubishi Heavy Industries, Ltd. and Hitachi, Ltd. Seika Corporation possesses the distributorship for thermal power generation equipment of MHPS.

② Chemicals and Energy Plant
Seika Corporation procures in-house power generation equipment, such as boilers and turbines, environmental conservation equipment for treating discharged water and exhaust gas, and so on from MHPS, etc., and sells them to chemical companies, oil companies, paper-manufacturing companies, steelmakers, and railway companies.
In addition, the company procures equipment for manufacturing chemical products, etc. from Japanese manufacturers and sells them.

③ Industrial Machinery
Seika Corporation provides clients in a broad range of industries with textile equipment, food processing equipment, brewing equipment, plant machinery, liquid crystal-related equipment, environment-related apparatus, uninterruptible power systems (UPS), etc. produced by Japanese manufacturers, and offers maintenance services.
Recently, the company deals with lithium ion battery-related equipment for electric vehicles (EV) in China.

④ Advanced Materials and Measuring Instruments
Seika Corporation sells equipment for manufacturing printed circuit boards for electronic equipment, etc. to mainly domestic consumer electronics manufacturers, and delivers advanced technology-based measurement equipment, such as laser measurement instruments and pore size measurement instruments, to government offices and research institutes. The company also handles a wide array of products, including measurement equipment of industrial machinery for environmental conservation and equipment for water treatment.
Products are procured mainly from overseas manufacturers.

⑤ Global Business
(Europe)
While selling industrial robots to automotive customers, Seika Corporation sells and leases submersible pumps used in construction, etc.
These products are procured mainly from Japanese manufacturers.

(North America)
The company sells Japanese-made industrial machinery used in the PCB surface mount production line to clients affiliated with Japanese automotive manufacturers.

(Asia)
The company sells Japanese-made machinery and equipment to companies within the textile, chemical, and other general industries, and also procures raw materials outside Japan and sells them to textile manufacturers.

(2) Sales in each region
Domestic sales account for over 80%, but the acceleration of global business expansion is included in the mid-term management plan CS2020 as a company-wide strategy, and the company aims to raise the ratio of overseas sales.

(Taken from the website of the company)

1-4 Characteristics and strengths

(1) Hands-on sales capability
The capability of hands-on sales nurtured in their 70 years history is the company's greatest strength.
By building relationships of trust through meticulous customer services and forming personal connections, Seika Corporation is able to obtain a steady stream of orders.

(2) High level of expertise in each business
Although trading companies are sometimes thought of as middlemen, Seika Corporation has garnered excellent reputation as an essential business partner with a high level of expertise, including profound information gathering capabilities and the ability to develop proposals that stay one step ahead of clients.

(3) Extensive network comprised of 76 bases in Japan and overseas
Ten years ago, the company had around 30 bases, but in anticipation of globalization, they have been rapidly expanding the number of bases, mainly in Europe and Southeast Asia.
The speed and comprehensiveness of information have increased further, and by utilizing this, the company hopes to further improve its corporate value.

(4) Measures to strengthen employee education and sales capabilities
Seika Corporation primarily uses on-the-job training to develop its employees. Senior staff and those with more experience teach newer employees the essentials, and the company also focuses on overseas training programs and seminars for each skill level.
Nowadays, the company requests the former staff of manufacturers and client companies to provide its employees with consultation services and hands-on support for sales.
The advice the company receives allows them to further improve their expertise and sales capabilities.

1-5 ROE analysis

Seika Corporation is still unable to keep its ROE over 8%, which is required for Japanese companies. Since leverage is relatively high, profit rate is expected to improve.

1-6 Efforts for ESG

<E: Environment>
The environmental policy of the company is to “make efforts to protect the earth environment and contribute to the realization of a sustainable society.”
Under this policy, the company obtained the ISO14001 certificate in 2005, and is promoting environmentally-friendly products.
The environmentally friendly products handled by the company are diverse, including equipment for treating exhaust gas from boilers and incinerators and organic solvent recovery equipments for chemical and semiconductor factories. The amount of orders in the term ended March 2019 was about 103 billion yen, as mentioned below.
The company will continue to contribute to the conservation of the earth environment through business activities, and not merely from the perspective of social contribution.

(Taken from the reference material of the company)

<S: Social responsibility>
To fulfill its “social responsibility,” Seika Corporation engages in work-style reforms as follows.

“Promotion of women’s active participation in the workplace”
●To recruit more women in the main career track
●To support female employees in developing their careers
●To appoint female managers

“Enhancement of health of employees”
●To adopt Premium Friday
●To promote the use of paid holidays
●The company bears the expense for cancer screening (tumor marker option) in a health checkup
●The company bears the cost of influenza vaccinations

“Personnel development”
●Training at each level
●Overseas training system

<G: Governance>
The website of the company discloses the activities for each item of the Corporate Governance Code.
“The effectiveness of the board of directors” was evaluated, and in order to deal with the revised corporate governance, the board of directors established the “review committee for appointment,” and “review committee for compensation,” which are composed of outside directors and outside auditors as an arbitrary system.
The company translated some convocation notices into English, and produced financial results briefing materials and a fact book in English.
In order to grow sustainably and improve its corporate value in the medium/long term, the company will strive to strengthen corporate governance, and pursue a sound, transparent management system.

1-7 Shareholder return

The primary managerial mission of the company is to return profit to shareholders, and its basic policy is stable dividend payment.
Through the efficient business operation from the marketing and financial aspects, the company aims to fortify the management base. While dealing with the demand for funds for developing new businesses, etc., the company plans to achieve a consolidated payout ratio of 35%.
For the term ending March 2020, the company plans to pay an interim dividend of 20 yen/share and a term-end dividend of 25 yen/share, that is, a total of 45 yen/share, and the estimated payout ratio is 34.5%.
The company will actively return profit to shareholders while comprehensively considering the dividend policy, full-year results, etc.

2. Fiscal Year March 2019 Earnings Results

(1) Consolidated Business Results

*Unit: million yen. Net income is profit attributable to owners of parent.

Sales and profit decreased
Sales were 157.1 billion yen, down 5.1% year on year. Although the chemicals and energy plant business saw significant growth, sales of all the other segments decreased.
Operating income was 2.11 billion yen, down 18.5% year on year. Profits of the power plant and industrial machinery businesses decreased, and the advanced materials and measuring instruments business saw an operating loss.
Sales and profits were lower than the initial forecasts as the delivery of lithium-ion battery-related equipment for China was postponed due to circumstances of the delivery destination.
As for dividends, the initial forecast was revised from 55 yen/share to 45 yen/share.

(2)Overview of business performance in each segment

*Unit: million yen. Sales to external clients. The composition ratio of profit means the rate of profit to sales.

①Power Plant
Sales and profits decreased.
The number of transactions with high profitability, such as specially ordered construction, decreased.

②Chemicals and Energy Plant
Sales and profit increased
Sales of new power generation equipment for oil companies contributed.

③Industrial Machinery
Sales and profit declined.
The postponed delivery of lithium-ion battery-related equipment impacted.

④Advanced Materials and Measuring Instruments
Sales decreased, and loss occurred.
In addition to unsuccessful negotiations regarding printed circuit boards, the performance of the subsidiary Seika Digital Image was also unfavorable.

⑤Global Business
Sales decreased, but moved into the black.
While performance of European subsidiaries, Tsurumi (Europe) GmbH and Seika Sangyo GmbH remains steady, sales of Chinese subsidiary, Seika Shanghai Co., Ltd., and Thai subsidiary, Seika Sangyo (Thailand) Co., Ltd. dropped below the previous term.

(3)Financial standing and cash flows

◎Main BS

*Unit: million yen. Interest-bearing debt does not include lease obligations.

Total assets decreased 12,553 million yen from the end of the previous term to 85,742 million yen due to decreases in receivables and advance payments. Total liabilities declined 12,630 million yen from the end of the previous term to 56,675 million yen, as a result of decreases in payables and advances received.
Net assets are almost unchanged, amounting to 29,066 million yen.
Equity ratio rose 4.3 points to 33.2% from 28.9% at the end of the previous term.

◎Cash Flow

*Unit: million yen

Operating CF and free CF turned negative due to decreases in net income before taxes, etc. Investing CF also turned negative, as gain on sale of investment securities decreased. Deficits in financing CF shrank as a result of decreases in the amount paid as dividends and in purchase of treasury shares, etc. The cash position worsened.

(4) Topics

① The subsidiary in Vietnam began operation
Vietnam actively invests in infrastructure, the environment, and the manufacturing industry, and is becoming more industrialized by attracting foreign capitals. As such, the company established a subsidiary in Vietnam, which is expected to experience an influx of Japanese companies, and started its operation in January 2019.
The subsidiary engages in the sale of machinery, electronics and communication equipment, measuring instruments, tools, and other related materials, and handles installation work, engineering, and after-sales service. it also distributes, imports, and exports the aforementioned products.
The company plans to cultivate markets in Southeast Asia in cooperation with the company groups based in Thailand and Singapore.

② Regarding the purchase of treasury shares
The board of directors resolved to acquire treasury shares on May 10, 2019.
Period: May 13, 2019 to March 19, 2020
Number of shares to be acquired (upper limit): 400,000 shares (3.16% of the total number of issued shares)
Acquisition price (upper limit): 700 million yen

By May 31, 2019, 43,100 shares (54 million yen) had been acquired.

3. Fiscal Year March 2020 Earnings Forecasts

(1) Consolidated Earnings Forecasts

*Unit: million yen. The estimates were announced by the company.

Sales are estimated to decrease while profits are expected to increase
Sales are expected to be 135 billion yen, down 14.1% year on year, and operating income is projected to rise 13.3% year on year to 2.4 billion yen.
The dividend amount is to be unchanged from the previous term; 45 yen/share. The estimated payout ratio is 34.5%.

(2) Trend in each segment

*Unit: million yen. Sales to external clients

①Power Plant
Sales are expected to decrease, but profits are estimated to increase.
Coal-fired power generation is in an unfavorable environment, but the company will continue to focus on business negotiations regarding crime- and disaster-prevention equipment for nuclear power plants.
The company established the office in Tsuruga in April 2019. It is the first base in the Hokuriku area, and the company plans to increase received orders for nuclear power and thermal power generation projects from Kansai Electric Power Company and Hokuriku Electric Power Company by utilizing the company’s experience.

②Chemicals and Energy Plant
Sales are expected to decrease but profits are estimated to increase
Although there are no expected large-scale transactions involving power generation facilities like in the previous term, profits are estimated to grow due to the performance of the subsidiary Shikishimakiki recovering.

③Industrial Machinery
Sales are expected to increase but profits are estimated to decline.
The company plans to take a wide range of small and medium-scale transactions. Some of the lithium-ion battery-related equipment, delivery of which was postponed, are expected to be delivered.

④Advanced Materials and Measuring Instruments
Sales are estimated to increase, and expect a turnaround to profitability.
The company will strengthen its measuring instruments business, such as gas concentration monitors for environmental preservation and safety equipment, etc. As the company expects the performance of the subsidiary Seika Digital Image to recover, it is estimated to move into the black.

⑤Global Business
While sales are projected to increase, profits are estimated to decrease.
The performance of European and U.S. subsidiaries remains steady. Sales from Tsurumi (Europe) GmbH marked a record high in the previous term, and the company is considering establishment of a new base.
The performance of Chinese subsidiary Seika Shanghai is also expected to recover.

(3) Efforts in the final fiscal year of the “Mid-term Management Plan CS2020”

This term is the final fiscal year of the “Mid-term Management Plan CS2020,” which is to be the first step for the long-term management vision.

*Unit: million yen.

Currently the goal has not been achieved due to extraordinary loss from overseas subsidiaries in the first year, and poor business performance from some of the company’s subsidiaries and the postponed delivery of equipment related to export negotiations with China in the second year. As for the subsidiaries with poor performance, the company has conducted reviews on business strategies and additional employment of human resources, and it is expected that the company will recover its performance after this term.
The business environment recognitions and business vision for each segment are as follows.
As the company believes it is time to solidify the second step of their long-term management vision, they will make every effort to do so as the whole company.

The company plans strategic M&As for all of their segments as a growth strategy.

4. Conclusions

Although profit for this term, which is the final fiscal year of the “Mid-term Management Plan CS2020,” is expected to grow to be positive for the first time in three terms, unfortunately the company will not achieve the goal: “a net income of 2.7 billion yen.” However, recovery of subsidiaries with unfavorable performance has been experiencing steady progress, and we should pay attention to how much the company will approach the goal, “net income of 2.7 billion yen,” for the final fiscal year in order to take the second step in the long-term management vision. In addition, we would like to expect the company to recover its overseas sales ratio, which declined considerably in the previous term.

<Reference 1：The Long-term Management Vision and Mid-term Management Plan>

(1) Outline of The Long-term Management Vision and Mid-term Management Plan
Seika Corporation formulated a long-term management vision for the year 2027 “Envisioned Seika Group 10 years from now” and a new three-year plan “Mid-term Management Plan CS2020,” which was started in April 2017.

(Taken from the website of the company)

① Long-term management vision: “Envisioned Seika Group 10 years from now”
*Objective
The year 2017 was a turning point, commemorating the 70th anniversary of the establishment of Seika Corporation, and the company set a long-term management vision “Envisioned Seika Group 10 years from now,” in addition to a mid-term management plan, which had been formulated every three years, in order to clarify the ideal path of the Seika group from the long-term viewpoint and realize drastic reform involving all employees.

*Overview
The following long-term policies have been set for actualizing the envisioned group.

② Mid-term management plan CS2020
*Overview
Envisioning “Seika Group 10 years from now,” the company considers a period from April 2017 to March 2020 as the first step of the long-term management vision, and implement the “mid-term management plan CS2020.”

*Basic policy “reform and evolution”
The previous mid-term management plan CS2017’s basic policy “Diversification of business domains” is an important issue to be addressed for the Seika group, but in order to proceed with it, it is imperative that they reform its business model and evolve conventional businesses. Accordingly, “reform and evolution” has been set as the basic policy of the “mid-term management plan CS2020.”

*Group-wide strategies

<Reference2: Regarding Corporate Governance>

◎Organization type, and the composition of directors and auditors

◎Corporate Governance Report
Last update date:　June 26, 2019

< Basic Stance on Corporate Governance>
Our corporate philosophy is “To Contribute to Society Through the Expansion of Business.” We are committed to improving corporate value over the mid-to-long term while establishing a good relationship with all stakeholders. We believe that “soundness and transparency of management” and “prompt decision-making and action” are critical for achieving these goals, and we continually strive to strengthen corporate governance.
In addition, our company intends to strengthen its supervisory structure by appointing independent outside directors and independent outside corporate auditors.

<Reasons for Non-compliance with the Principles of the Corporate Governance Code (Excerpts)>

<Disclosure Based on the Principles of the Corporate Governance Code (Excerpts)>