Fisco: Company Research and Analysis Report

COMPANY RESEARCH AND ANALYSIS REPORT

SAKAI HEAVY INDUSTRIES, LTD.

6358

Tokyo Stock Exchange Prime Market

25-Mar.-2024

FISCO Ltd. Analyst

Noboru Terashima

FISCO Ltd.https://www.fisco.co.jp

COMPANY RESEARCH AND ANALYSIS REPORT

FISCO Ltd.

https://www.fisco.co.jp

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

■ Index

■ Summary --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 01

1. Outline of results for FY3/24 3Q .................................................................................................................. 01

2. Outlook for FY3/24 ...................................................................................................................................... 01

3. Medium-term growth strategy ..................................................................................................................... 02

■ Company profile--------------------------------------------------------------------------------------------------------------------------------------------------------- 03

■ Business overview --------------------------------------------------------------------------------------------------------------------------------------------------- 03

1. Business description ................................................................................................................................... 03

2. Characteristics and strengths ..................................................................................................................... 03

3. Market share and competitors .................................................................................................................... 04

■ Results trends -------------------------------------------------------------------------------------------------------------------------------------------------------------- 04

1. Outline of results for FY3/24 3Q .................................................................................................................. 04

2. Trends by region ......................................................................................................................................... 05

3. Financial condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 06

■ Outlook ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 07

• Outlook for FY3/24 ...................................................................................................................................... 07

■ Medium-term growth strategy --------------------------------------------------------------------------------------------------------------------- 08

1. Business strategy ........................................................................................................................................ 08

2. Capital strategy ........................................................................................................................................... 08

3. Medium-Term Management Policy: Progress on KPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 09

4. Sustainability initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 09

■ Shareholder return policy---------------------------------------------------------------------------------------------------------------------------------- 11

We encourage readers to review our complete legal statement on "Disclaimer" page.

COMPANY RESEARCH AND ANALYSIS REPORT

FISCO Ltd.

https://www.fisco.co.jp

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

■ Summary

For FY3/24 3Q, operating profit increased by 62.7% YoY. Particularly strong sales to North America, albeit with slightly slower profit growth

Sakai Heavy Industries, Ltd. <6358> (hereinafter also referred to as "the Company") is a manufacturer specializing in road rollers for road paving and other road construction equipment. It has a long history in this field, and boasts the industry's market share in Japan at over 70%. In recent years, the Company has been focusing on developing overseas markets, especially in North America and Southeast Asia.

1. Outline of results for FY3/24 3Q

In the consolidated results for FY3/24 3Q, net sales increased 9.8% year on year (YoY) to ¥24,301mn, operating profit increased 62.7% to ¥2,580mn, ordinary profit rose 68.7% to ¥2,676mn, and profit attributable to owners of parent increased 66.1% to ¥1,947mn. The results were largely in line with forecasts. By region, in Japan net sales were up 1.9% YoY as capital investment trends reached a standstill, faced with frequent sales price revisions and a broad range of cost increases, despite a firm market environment against the backdrop of measures to accelerate national land resilience. Overseas sales were strong, increasing 17.5%. In particular, net sales increased 31.8% YoY in the U.S., due to increasing investment in road construction following the passing of the Infrastructure Investment and Jobs Act and the effect of the weak yen. Sales to Asia were down 3.5%, due to slowdowns in the Chinese and ASEAN markets excluding Indonesia (primarily Thailand and Vietnam), despite a recovery in demand in Indonesia.

The gross margin improved to 29.1% (vs. 25.6% in the year-before 3Q), due to factors including the effects of sales price revisions, the normalization of transport costs, and the weak yen. SG&A expenses only increased 10.5%, so operating profit rose significantly. Nevertheless, when looking at the three-month 3Q period alone, operating profit only increased 18.5%, indicating slightly slower profit growth compared to 1H.

2. Outlook for FY3/24

For its FY3/24 consolidated results, the Company has not revised its forecasts from the upwardly revised forecasts in FY3/24 1H, with a forecast for net sales of ¥33,100mn (up 5.2% YoY), operating profit of ¥3,300mn (up 31.7%), ordinary profit of ¥3,300mn (up 41.8%), and profit attributable to owners of parent of ¥2,300mn (up 35.7%). Global demand for construction machinery is forecast to remain solid as infrastructure investment increases globally, but there are concerns about a dulling of demand in certain areas, so the Company has adopted a fairly cautious outlook for 2H. In the U.S. market, which has thus far driven business performance, the Company has also adopted a cautious outlook for 4Q in light of the possibility of delays in parts procurement due to conditions in the Panama Canal, despite firm demand. While it is unlikely for actual results to fall below full-year forecasts at this time, it would be unwise to harbor unrealistic expectations for additional upward revisions to the forecasts.

We encourage readers to review our complete legal statement on "Disclaimer" page.

COMPANY RESEARCH AND ANALYSIS REPORT

FISCO Ltd.

https://www.fisco.co.jp

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

Summary

3. Medium-term growth strategy

In June 2021, the Company released its "Medium-Term Management Policy" which runs through FY3/26. The ultimate goal is to increase corporate value and shareholder value, and in order to achieve this, the Company will promote a "business growth strategy" and an "efficient capital strategy." In terms of numerical targets, in FY3/26, the Company is aiming for net sales of ¥30.0bn, operating profit of ¥3.1bn, ROE (return on equity) of 8%, and will aim to maintain a stable dividend payout ratio of 50%. Results were strong in the first year of the plan in FY3/22 and the second year in FY3/23, and FY3/24 has been solid thus far, but the plan currently remains the same, and the Company has kept these numerical targets unchanged. Regarding the FY3/24 dividend, given the ROE is forecast to exceed 6.0% and the promised dividend payout ratio of 50%, the Company announced an increased annual dividend to ¥270.0 (interim dividend of ¥90.0 and fiscal year-end dividend of ¥180.0). The Company should be rated highly for announcing a clear capital policy to improve ROE and then implementing shareholder returns in accordance with that policy.

Key Points

• • Japan's leading manufacturer of road rollers with a long history. Domestic market share is over 70%, and the Company aims to grow by expanding its overseas market share

• • With a 62.7% YoY increase in operating profit during FY3/24 3Q, a 31.7% increase is forecast for the full year

• • Medium-term numerical targets (net sales of ¥30.0bn and operating profit of ¥3.1bn for FY3/26) remain unchanged

Results trends

Net sales (left)Operating profit (right)

FY3/20

FY3/21

FY3/22

FY3/23

FY3/24 E

Source: Prepared by FISCO from the Company's financial results

We encourage readers to review our complete legal statement on "Disclaimer" page.

COMPANY RESEARCH AND ANALYSIS REPORT

FISCO Ltd.

https://www.fisco.co.jp

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

■ Company profile

The leading manufacturer of road rollers with a long history

The Company is a specialized manufacturer of road rollers for paving roads and other road construction equipment, and currently, the Company is the leading manufacturer in Japan, and boasts a market share of over 70%. In 1970, the Company established a joint venture in Indonesia, as part of the Company's effort to expand business overseas at an early stage. As of the end of FY3/23, the Company has four domestic subsidiaries, and four overseas subsidiaries (U.S., China, two in Indonesia). The Company listed its shares on the Second Section of the Tokyo Stock Exchange in 1964, and its shares were reclassified to the First Section of the Tokyo Stock Exchange in 1981. In conjunction with the Tokyo Stock Exchange's market recategorization in April 2022, it moved to the Prime Market.

■ Business overview

The leading manufacturer of road rollers with a domestic market share of over 70%. Will seek growth by offering high added value and expanding overseas market share

1. Business description

The Company's main business is the manufacture and sale of road rollers used in road paving and other applications, and road roller-related net sales account for approximately 95% of all net sales. Also, the Company's corporate philosophy is to "Contribute to the social project of global land development through the road construction equip-ment business."

In terms of net sales by region in FY3/23, net sales in Japan were ¥15,208mn (48.3% of total net sales), net sales in North America were ¥7,751mn (24.7%), net sales in Asia were ¥7,796mn (24.8%), and net sales in other regions totaled ¥703mn (2.2%). Moreover, in terms of net sales by region in FY3/24 3Q, net sales in Japan were ¥11,070mn (45.6%), net sales in North America were ¥6,626mn (27.3%), net sales in Asia were ¥5,503mn (22.6%), and net sales in other regions totaled ¥1,101mn (4.5%).

2. Characteristics and strengths

As mentioned above, the Company is a specialized manufacturer of road rollers and other road construction equipment, and the Company has the following special characteristics and strengths.

(1) Long history as a specialized manufacturer

The Company's greatest strength is its long history as a specialized manufacturer of road rollers and other road construction equipment. In other words, by deploying a global niche strategy through selection and concentration, the Company has increased its level of expertise and accumulated its own unique technologies.

We encourage readers to review our complete legal statement on "Disclaimer" page.

COMPANY RESEARCH AND ANALYSIS REPORT

FISCO Ltd.

https://www.fisco.co.jp

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

Business overview

(2) Technological capabilities

When it comes to hardening and paving roads, the necessary pressure, torque, and other variables (compaction technology) differ depending on the specific land, land quality, soil, and other conditions. Therefore, roadwork companies often require different types of road rollers to match individual worksites (ground, etc.). Because the Company has been a specialized manufacturer of road rollers and other road construction equipment for many years, it boasts a high level of technological capabilities with respect to compaction technology, and it is not easy for its competitors to catch up to it.

(3) Credibility

Credibility backed by experience engineering and track record is also a strength of the Company. The technology to ensure underground compaction quality is a black box, and is not something that is easy for late-arriving manufacturers and non-specialized manufacturers to copy. For example, asphalt mixture brought in at high temperatures must be worked on within a limited time, and if the work is of poor quality, it must be redone which involves a large price. Also, work quality issues for roads and embankments are slow to emerge, and the compaction quality at the time that work is completed tends to be a black box. For this type of experience engineering, the Company's strength lies in the fact that it is a brand which customers have used for many years and that has accumulated long-term insight due to abundance of worksite experiences, and these are points that have earned the trust of many customers.

3. Market share and competitors

According to data from the Japan Construction Equipment Manufacturers Association, in FY2022 domestic construction equipment shipment value was ¥3.5tn, and road roller and other road construction equipment (the Company's main products) account for 2.3% of this amount. The Company has a share of over 70% in this road equipment market, making it the leading manufacturer in Japan. Competitors include companies such as Hitachi Construction Machinery Co., Ltd. <6305>, but none of these companies are specialized manufacturers. Some overseas manufacturers have entered the market in Japan, but none have much of a presence. In Japan, the Company's earnings rise and fall along with the ups and downs of the market.

In the global market, although there are no accurate statistics, the Company's market share (on a units produced basis) is estimated to be in the 5-6% range. However, this is on a global basis, and if we limit the scope to the main markets that the Company operates in (Japan, ASEAN, North America), the Company's market share appears to be around 15%. The Company's main competitors in the global market include Caterpillar , FAYAT SAS, HAMM AG, and Volvo Personvagnar AB, but none of these companies are manufacturers that specialize in road rollers.

■ Results trends

For FY3/24 3Q, operating profit increased by 62.7% YoY. Strong sales to North America and other overseas markets

1. Outline of results for FY3/24 3Q

In the consolidated results for FY3/24 3Q, net sales increased 9.8% YoY to ¥24,301mn, operating profit increased 62.7% to ¥2,580mn, ordinary profit rose 68.7% to ¥2,676mn, and profit attributable to owners of parent increased 66.1% to ¥1,947mn. The results were largely in line with plans.

We encourage readers to review our complete legal statement on "Disclaimer" page.

COMPANY RESEARCH AND ANALYSIS REPORT

FISCO Ltd.

https://www.fisco.co.jp

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

Results trends

The gross margin improved to 29.1% (vs. 25.6% in the year-before 3Q), due to factors including the effects of sales price revisions, the normalization of transport costs, and the weak yen. SG&A expenses only increased 10.5%, so operating profit rose significantly. Nevertheless, when looking at the three-month 3Q period alone, operating profit only increased 18.5%, indicating slightly slower profit growth compared to 1H.

Overview of FY3/24 3Q consolidated results

(¥mn)

FY3/23 3Q

FY3/24 3Q

ChangeResults

% of net sales

Results

% of net sales

Amount

%

Net sales Gross profit SG&A expenses Operating profit Ordinary profit

22,125

100.0%

24,301

100.0%

2,175

9.8%

5,654

25.6%

7,076

29.1%

1,422

25.1%

4,069

18.4%

4,496

18.5%

427

10.5%

1,585

7.2%

2,580

10.6%

994

62.7%

Profit attributable to owners of parent

1,586 1,172

7.2% 5.3%

2,676 1,947

11.0%

1,089

8.0%

775

68.7% 66.1%Source: Prepared by FISCO from the Company's financial results

2. Trends by region

Looking at each region, in Japan net sales increased 1.9% YoY to ¥11,070mn, as capital investment trends reached a standstill, faced with frequent sales price revisions and a broad range of cost increases, despite a firm market environment against the backdrop of measures to accelerate national land resilience. Overseas, net sales increased 17.5% to ¥13,231mn, due partly to progress in the recovery of demand for construction machinery in the main markets in addition to the effects of the weak yen. In particular, net sales rose 31.8% to ¥6,626mn in the U.S. due to increasing investment in road construction following the passing of the Infrastructure Investment and Jobs Act and the effect of the weak yen. Sales to Asia were down 3.5% to ¥5,503mn, due to slowdowns in the Chinese and ASEAN markets excluding Indonesia (primarily Thailand and Vietnam), despite a recovery in demand in Indonesia. In other markets, net sales increased 108.2% to ¥1,101mn, reflecting firm conditions in the Oceania market, along with ODA projects for Africa.

Net sales by region

(¥mn)

FY3/23 3Q

FY3/24 3Q

Change

Results	% of total	Results	% of total	Amount	%
Japan	10,864	49.1%	11,070	45.6%	205	1.9%
Oversea	11,261	50.9%	13,231	54.4%	1,970	17.5%
North America	5,028	22.7%	6,626	27.3%	1,598	31.8%
Asia	5,703	25.8%	5,503	22.6%	-200	-3.5%
Other regions	528	2.4%	1,101	4.5%	572	108.2%
Total	22,125	100.0%	24,301	100.0%	2,175	9.8%

Source: Prepared by FISCO from the Company's financial results

We encourage readers to review our complete legal statement on "Disclaimer" page.

COMPANY RESEARCH AND ANALYSIS REPORT

FISCO Ltd.

https://www.fisco.co.jp

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

Results trends

Stable financial condition, ample cash and deposits of ¥7,674mn. Inventory levels are slightly high in anticipation of sales growth

3. Financial condition

In terms of the Company's financial condition as of the end of FY3/24 3Q, current assets were ¥29,871mn (up ¥2,431mn from the end of the previous fiscal year). The main factors included a ¥190mn increase in cash and deposits, an ¥895mn decrease in notes and accounts receivable - trade (including electronically recorded monetary claims - operating), and a ¥2,610mn increase in inventories. Non-current assets were ¥15,000mn (up ¥1,635mn).

The main factors include a ¥265mn increase in property, plant and equipment, a ¥58mn decrease in intangible assets, and a ¥1,429mn increase in investments and other assets (mainly a ¥1,487mn increase in investment securities). As a result, total assets were up ¥4,067mn to ¥44,871mn. Inventories increased, but only owing to an increase in parts for increased production and safety stock. The increase in inventories is not a cause for concern because it represents the Company's adjustments to optimize inventory levels in response to an easing of supply constraints for parts and other items.

Total liabilities were ¥16,440mn (up ¥931mn from the end of the previous fiscal year). The main factors among current liabilities included a ¥657mn increase in payables (notes and accounts payable - trade and electronically recorded obligations - operating), a ¥10mn increase in short-term borrowings, and a ¥506mn increase in non-current liabilities.

Total net assets stood at ¥28,431mn (up ¥3,135mn). As a result, the equity ratio as of the end of FY3/24 3Q was 63.2% (61.8% at the end of the previous fiscal year).

Net working capital (trade receivables + inventories - trade payables) at the end of FY3/24 3Q increased by 10.2% to ¥12,827mn (up ¥1,182mn YoY). This was mainly due to a decrease in trade receivables (down ¥1,197mn), an increase in inventories (up ¥2,262mn) and a decrease in trade payable (down ¥117mn). The inventory turnover decreased 0.16 times YoY to 2.79 times per year, mainly reflecting an increase in inventory levels due to increased production and reduced risk of part shortages, despite steady sales (net sales).

Net working capital

(¥mn)

FY3/23 3Q resultsFY3/24 3Q results

ChangeAmount

%

Consolidated net sales (annualized consolidated net sales) Trade receivables

28,931

33,635

4,704

16.3%

9,765

8,568

-1,197

-12.3%

Inventories Trade payables Net working capital Inventory turnover (times)

9,800

12,062

2,262

23.1%

-7,920

-7,803

117

-1.5%

11,645

12,827

1,182

10.2%

2.95

2.79

-0.16

Note: Consolidated net sales (annualized) = Net sales of 1Q-3Q in the current fiscal year + 4Q in the previous fiscal year Source: Prepared by FISCO from the Company's results briefing materials

We encourage readers to review our complete legal statement on "Disclaimer" page.

COMPANY RESEARCH AND ANALYSIS REPORT

FISCO Ltd.

https://www.fisco.co.jp

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

■ Outlook

FY3/24 forecast is for a 31.7% YoY increase in operating profit

• • Outlook for FY3/24

For FY3/24 consolidated results, the Company is forecasting net sales of ¥33,100mn (up 5.2% YoY), operating profit of ¥3,300mn (up 31.7%), ordinary profit of ¥3,300mn (up 41.8%), and profit attributable to owners of parent of ¥2,300mn (up 35.7%). The upwardly revised forecasts in FY3/24 1H remain unchanged. The Company is assuming an exchange rate of ¥140/USD.

The outlook for net sales and profit by region has not been disclosed, but the Company's policy is to pursue sales increases in all regions. Demand for construction machinery is forecast to remain stable as infrastructure investments increase globally. On the other hand, there are many uncertain factors such as global inflation, security issues, and social structural changes, but by promoting profit structure reform, improving productivity and creating new added value, and modifying global business activities, it is forecasting that the operating profit margin will increase by 2.0 points YoY.

Global demand for construction machinery is forecast to remain solid as infrastructure investment increases globally, but there are concerns about a dulling of demand in certain areas, so the Company has adopted a fairly cautious outlook for 2H. In the U.S. market, which has thus far driven business performance, the Company has also adopted a cautious outlook for 4Q in light of the possibility of delays in parts procurement due to conditions in the Panama Canal, despite firm demand. While it is unlikely for actual results to fall below full-year forecasts at this time, it would be unwise to harbor unrealistic expectations for additional upward revisions to the forecasts.

Consolidated outlook for FY3/24

(¥mn)

FY3/23

FY3/24

ChangeResults

% of net sales

Results

% of net sales

Amount

%

Net sales Operating profit Ordinary profit

Profit attributable to owners of parent

31,459 2,506 2,327 1,694

100.0% 8.0% 7.4% 5.4%

33,100 3,300 3,300 2,300

100.0% 10.0% 10.0%

6.9%

1,641 794 973 606

5.2% 31.7% 41.8% 35.7%

Source: Prepared by FISCO from the Company's financial results

We encourage readers to review our complete legal statement on "Disclaimer" page.

COMPANY RESEARCH AND ANALYSIS REPORT

FISCO Ltd.

https://www.fisco.co.jp

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

■ Medium-term growth strategy

As its medium-term growth strategy, the Company will seek to grow its overseas market share, expand overseas business domains, and create added value by developing next-generation businesses. FY3/26 targets of net sales of ¥30.0bn and operating profit of ¥3.1bn are unchanged

In June 2021, the Company released its "Medium-Term Management Policy" which runs through FY3/26. The ultimate goal is to increase corporate value and shareholder value, and in order to achieve this the Company will promote a "business growth strategy" and an "efficient capital strategy." In terms of numerical targets, the Company is aiming for net sales of ¥30.0bn, operating profit of ¥3.1bn, ROE of 8% in FY3/26, and will aim to maintain a stable dividend payout ratio of 50% (DOE of 4%). As mentioned above, the forecasts for FY3/24 already exceed these targets, but the policy currently remains the same, and the Company has kept these numerical targets unchanged.

• 1. Business strategy

  (1) Domestic market: Create added value through stabilization and developing next-generation businesses The domestic market for road rollers is already in its mature phase and the Company's market share is large.

  Therefore, the Company will aim to grow by adding new value to existing products (high-performance, etc.), in other words, by developing next-generation businesses.

  (2) Overseas markets: Increase market share and expand business domains

  In overseas markets, there are many regions (countries) where demand is increasing, and there is significant room for growth given the Company's low market shares. Therefore, the Company will seek growth through the two strategies of more fully cultivating existing markets and expanding its business domains.

  (3) Numerical targets

  As medium-term numerical targets, the Company aims for net sales of ¥30.0bn, operating profit of ¥3.1bn, and ROE of 8% in FY3/26.

• 2. Capital strategy

As its basic policy for capital strategy, the Company will return profits to shareholders at a level that supports the Company's objective of ROE of 8%, and will increase shareholder value (improve capital efficiency). As a final target for FY3/26, the Company will strive to achieve ROE of 8% and a 50% dividend payout ratio.

Generally, two things need to be improved in order to increase ROE. One is of course increasing profit attributable to owners of parent, while the other is suppressing shareholders' equity (not increasing shareholders' equity more than necessary, or decreasing it). In order to increase operating profit, the Company plans to promote the business strategies discussed above, but at the same time, in order to keep from increasing shareholders' equity more than needed, the Company plans to execute a dividend policy in which, if ROE falls below 3%, the dividend payout ratio will be 100%, if ROE is between 3% and 6%, the DOE will be 3%, and if ROE is above 6%, the dividend payout ratio will be 50%.

We encourage readers to review our complete legal statement on "Disclaimer" page.