Bridge Report:（8061）Seika the fiscal year March 2020

President Akihiko Sakurai	Seika Corporation (8061)

Company Information

Stock Information

*The share price is the closing price on June 29. The numbers were taken from the brief financial report for the term ended March 2020.

Earnings Trend

*Unit: million yen or yen. 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 2020 earnings results.

Table of Contents

Key Points
1. Company Overview
2. Fiscal Year March 2020 Earnings Results
3. Fiscal Year March 2021 Earnings Forecasts
4. Mid-term management plan “Re-SEIKA 2023”
5. Conclusions
<Reference1: The Long-term Management Vision>
<Reference2: Regarding Corporate Governance>

Key Points

• The sales for the term ended March 2020 were 140.6 billion yen, down 10.5% year-on-year. Sales decreased due to the recoil from the delivery of a newly constructed generation equipment in the Chemicals and Energy Plant during the previous year. Overseas sales were 13.3 billion yen, down 18.8% year-on-year due to the decrease of negotiations for exports to the Chinese market, while the overseas sales ratio was 9.5%, down 0.9% year-on-year. Gross profit margin improved 1.7% and gross profit increased 6.2% year-on-year. However, SG&A expenses only increased 1.5% year-on-year and operating income increased 32.6% year-on-year to 2.8 billion yen. Net income changed to a loss of 1.2 billion yen as the company’s printed circuit boards manufacturing subsidiary posted an impairment loss and an adjustment amount, which was the result of revising the price of a part of domestic business transactions, was posted as an extraordinary loss. Both sales and profit exceeded estimates.

   

• The sales for the term ending March 2021 are projected to be 135 billion yen, down 4.0% year-on-year, and operating income is estimated to be 2.4 billion yen, down 14.6% year-on-year. Response to the spread of COVID-19, when the company investigated the impact of COVID-19 on orders received at the end of March, the company found no information of customers canceling their investment plans, thus the impact seemed minor, however, as infections continued to spread, some customers froze their new investments. The company is still investigating the situation. Nonetheless, the company expects that the company will be able to avoid the significant drop of its business performance because its main business has been related to social infrastructure, mainly power generation and the company’s operation bases, which are scattered nationwide, can perform meticulous operation activities, etc. Regarding the sales department, it works towards increasing the profit ratio for each business negotiation, aspires to make efficient operation, and secures the target operating income. The dividend is estimated to remain unchanged at 45 yen/share. The estimated payout ratio is 33.5%.

   

• The mid-term management plan, “CS2020,” which was the first step toward achieving the long-term management vision “Envisioned Seika Group 10 years from now” set in 2017, unfortunately, did not reach its goals. As a result, the company carefully examined its contents and formulated the mid-term management plan “Re-SEIKA 2023,” which will cover the period for the 3 years from April 2020 until March 2023.

   

• The company set the basic policy and basic strategy after clarifying its goals and the basis behind the set numbers in order to deepen all employees’ understanding of the mid-term management plan. Further, it analyzed the evaluation items of the stock market and studied the competency of each business. Although a sense of uncertainty is overwhelming the world due to the spread of COVID-19, the company announced that it is confident in the growth strategies it has been thoroughly refining over a long time. The company aspires to grow into a strong company with value by concentrating on change and challenge.

   

• The goals of the “Mid-term Management Plan CS2020” were not achieved, and the mid-term management plan “Re-SEIKA 2023,” which is the second step in the long-term management vision, had a rough start facing the global spread of COVID-19. However, attaining the goals is essential in order to gain the market’s trust and valuation. We will pay attention to the progress of the industrial machinery business and the global business, which are expected to achieve high growth.

   

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 78 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.
The company is currently implementing the long-term management vision “Envisioned Seika Group 10 years from now” and its second step 3-year plan “Mid-term Management Plan Re-SEIKA 2023,” in preparation for 2027, which will mark the 80th anniversary of the company’s founding.

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.
In addition, the company procures equipment for manufacturing chemical products, etc. from Japanese and foreign 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 and foreign manufacturers, and offers maintenance services.
These days, the company deals with lithium ion battery-related equipment and motor manufacturing equipment for electric vehicles (EV) and China.

④ Advanced Materials and Measuring Instruments
Seika Corporation sells 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 public 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 90% or more, however, the cultivation of overseas markets where there is significant room for growth and expanding overseas sales ratio are challenges for the company.

Ratio of sales in each region in term ended March 2020   (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 78 bases in Japan and overseas
Ten years ago, the company only had thirty bases, but, thanks to M&A, they did not only expand their bases domestically, but also have been rapidly expanding the number of bases in Europe and Southeast Asia in anticipation of globalization. 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 for business, 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

The negative ROE in the previous term is only temporary due to the posting of impairment loss. Assuming that the ratio of net income to sales for this term will be 1.2%, ROE will recover to the range of 5-6%, however, it will not be able to maintain the standard 8% in a stable manner, which is commonly required for Japanese companies.
Since leverage is relatively high, profit rate is expected to improve.
If the target net income of 2.5 billion yen for the term ending March 2023 is achieved in the mid-term management plan “Re-SEIKA 2023,” ROE will be 8% or more.

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 equipment for chemical and semiconductor factories. The amount of orders in the term ended March 2020 were 13,479 (up 10.4% from the previous year) and 94.75 billion yen (down 8.6% from the previous year), 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 (Casual day at the same time)
●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 the Corporate Governance Code, 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 2021, 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 33.5%.
The company will actively return profit to shareholders while comprehensively considering the dividend policy, full-year results, etc.

2. Fiscal Year March 2020 Earnings Results

(1) Consolidated Business Results

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

Sales decreased and profit increased, exceeded estimates.
The sales for the term ended March 2020 were 140.6 billion yen, down 10.5% year-on-year. Sales decreased due to the recoil from the delivery of a newly constructed generation equipment in the Chemicals and Energy Plant during the previous year. Overseas sales were 13.3 billion yen, down 18.8% year-on-year due to the decrease of negotiations for exports to the Chinese market, while the overseas sales ratio was 9.5%, down 0.9% year-on-year. Gross profit margin improved 1.7% and gross profit increased 6.2% year-on-year. However, SG&A expenses only increased 1.5% year-on-year and operating income increased 32.6% year-on-year to 2.8 billion yen. Net income changed to a loss of 1.2 billion yen as the company’s printed circuit boards manufacturing subsidiary posted an impairment loss and an adjustment amount, which was the result of revising the price of a part of domestic business transactions, was posted as an extraordinary loss. Both sales and profit exceeded estimates.

(2) Overview of business performance in each segment

◎Sales and Profit

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

①Power Plant
Sales decreased and profit increased.
The sales of large-scale projects including each regular inspection work for electricity companies have decreased, however, the company increased the profit through small and medium scale projects including updating parts of thermal power plants and making new developments in the field of nuclear power.

②Chemicals and Energy Plant
Sales decreased and profit increased.
The sales of new power generation equipment aimed at oil companies, etc. decreased, however, profit increased thanks to orders of small to medium scale projects including upgrading manufacturing equipment.

③Industrial Machinery
Sales and profit increased.
The sales to domestic plants, manufacturers of synthetic fiber, and food products as well as export business negotiations have been producing good results, thus sales increased. Profit increased thanks to a significant contribution from the earnings of the subsidiary, Nippon Daiya Valve Co., Ltd.

④Advanced Materials and Measuring Instruments
Sales decreased and profit was restored.
The sales of measurement equipment, such as printed circuit boards and gas monitors, were on par with that of the previous term, however, the sales of the subsidiary, Seika Digital Image CORPORATION, declined and sales decreased. Thanks to structural reforms such as revising the business strategy and restructuring the organization, the company restored profitability.

⑤Global Business
Sales and profit decreased.
Sales in the U.S., Europe, and Southeast Asia, mainly by the Tsurumi (Europe) GmbH, were on par with that of the previous term, but profit decreased due to the poor business performance by subsidiaries such as Seika YKC Circuit (Thailand) Co., Ltd.

(3) Financial standing and cash flows

◎Main BS

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

Total assets were 92,668 million yen, up 6,926 million yen from the end of the previous term thanks to the increase in cash, advance payments, etc. Total liabilities were 66,757 million yen, up 10,082 million yen year-on-year, thanks to the increase in advances received, etc.
Net assets decreased 3,155 million yen year-on-year to 25,911 million yen due to the decrease in retained earnings and such.
Equity ratio decreased 6.0% from the end of the previous term to 27.2%.

◎Cash Flow

*Unit: million yen

Net income before taxes and other adjustments turned to a loss, but thanks to the posting of impairment loss, the increase in payables, etc., operating CF and free CF turned positive.
The cash position improved.

(4) Topics

◎Environmentally friendly products
As ESG has become mainstream, the company aims to contribute to the achievement of a sustainable society by proactively handling the environmentally friendly products below.

◎Exhaust gas cleaning systems for ships
The regulations related to the concentration of Sulphur Oxides (SOx) in ships' exhaust gas were strengthened, according to MARPOL, the International Convention for the Prevention of Pollution from Ships, which aims to curb the marine pollution caused by accidents and regular navigation of ships.
One of the countermeasures that attract attention is the exhaust gas cleaning system “Scrubber.”
The company cooperates with the manufacturer and provides shipbuilders with dumpers for Scrubber, high-efficiency bulbs, etc.

◎Laser-based gas concentration meter
The laser-based gas concentration meter measures the concentration of oxygen and carbon monoxide found in exhaust gas from thermal power plants and waste incineration plants; it features laser-based real-time measurement and maintenance-free operation.
It can improve combustion efficiency and contributes to the reduction of greenhouse gas and fuel. In addition, it is used for measuring the contents of nitrogen oxide, sulfur oxide, and other toxic substances found in the exhaust gas from production equipment in chemical plants.

3. Fiscal Year March 2021 Earnings Forecasts

◎Consolidated Earnings Forecasts

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

Sales and profits are expected to decrease.
The sales for the term ending March 2021 are projected to be 135 billion yen, down 4.0% year-on-year, and operating income is estimated to be 2.4 billion yen, down 14.6% year-on-year. Response to the spread of COVID-19, when the company investigated the impact of COVID-19 on orders received at the end of March, the company found no information of customers canceling their investment plans, thus the impact seemed minor, however, as infections continued to spread, some customers froze their new investments. The company is still investigating the situation. Nonetheless, the company expects that the company will be able to avoid the significant drop of its business performance because its main business has been related to social infrastructure, mainly power generation and the company’s operation bases, which are scattered nationwide, can perform meticulous operation activities, etc. Regarding the sales department, it works towards increasing the profit ratio for each business negotiation, aspires to make efficient operation, and secures the target operating income. The dividend is estimated to remain unchanged at 45 yen/share. The estimated payout ratio is 33.5%.

4. Mid-term management plan “Re-SEIKA 2023”

The mid-term management plan, “CS2020,” which was the first step toward achieving the long-term management vision “Envisioned Seika Group 10 years from now” set in 2017, unfortunately, did not reach its goals.

(Goals of the mid-term management plan, “CS2020,” compared to actual results)

* Unit: million yen

As a result, the company carefully examined its contents and formulated the mid-term management plan “Re-SEIKA 2023,” which will cover the period for the 3 years from April 2020 until March 2023.

The company set the basic policy and basic strategy after clarifying its goals and the basis behind established numbers in order to deepen all employees’ understanding of the mid-term management plan. Further, it analyzed the evaluation items of the stock market and studied the competency of each business. Although a sense of uncertainty is overwhelming the world due to the spread of COVID-19, the company announced that it is confident in the growth strategies it has been thoroughly refining over a long time. The company aspires to grow into a strong company with value by concentrating on change and challenge.

(1) Basic policy

The company set the basic policy as “we will change our conventional way of thinking and behavior (Re-formation), continue to challenge all kinds of hardships time after time (Re-challenge), establish a sustainable growth cycle (Re-gain), and create a new stage for improving the corporate value further (Re-start)”

(2) Basic strategy

(3) Management's Numerical targets

* Unit: million yen

The industrial machinery business unit and the global business unit, which are classified as revenue growth fields, will grow significantly and lead the business growth.
If the target net income of 2.5 billion yen for the term ending March 2023 is achieved, ROE will be 8% or higher.

5. Conclusions

The goals of the “Mid-term Management Plan CS2020” were not achieved, and the mid-term management plan “Re-SEIKA 2023,” which is the second step in the long-term management vision, had a rough start facing the global spread of COVID-19. However, attaining the goals is essential in order to gain the market’s trust and valuation. We will pay attention to the progress of the industrial machinery business and the global business, which are expected to achieve high growth.

<Reference 1：The Long-term Management Vision>

Seika Corporation formulated a long-term management vision for the year 2027 “Envisioned Seika Group 10 years from now”.

◎Long-term management vision: “Envisioned Seika Group 10 years from now”
*Objective
The year 2027 is a turning point, commemorating the 80th 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.

<Reference2: Regarding Corporate Governance>

◎Organization type, and the composition of directors and auditors

◎Corporate Governance Report
Last update date: ：June 25, 2020

< 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)>

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