Fisco: Company Research and Analysis Report

COMPANY RESEARCH AND ANALYSIS REPORT

SAKAI HEAVY INDUSTRIES, LTD.

6358

Tokyo Stock Exchange Prime Market

4-Oct.-2023

FISCO Ltd. Analyst

Noboru Terashima

FISCO Ltd.

https://www.fisco.co.jp

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

COMPANY RESEARCH AND ANALYSIS REPORT

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

4-Oct.-2023

https://www.sakainet.co.jp/en/ir/

• Index

■						01
Summary----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1.	Outline of results for FY3/24 1Q	01
2.	Outlook for FY3/24	01
3.	Medium-termgrowth strategy	01
■						02
Company profile---------------------------------------------------------------------------------------------------------------------------------------------------------
■						03
Business overview	----------------------------------------------------------------------------------------------------------------------------------------------------
1.	Business description	03
2.	Characteristics and strengths	03
3.	Market share and competitors	04
■						04
Results trends	---------------------------------------------------------------------------------------------------------------------------------------------------------------
1.	Outline of results for FY3/24 1Q	04
2.	Trends by region	05
3.	Financial condition	06
■						07
Outlook	--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
• Outlook for FY3/24	07
■						08
Medium-term growth strategy	----------------------------------------------------------------------------------------------------------------------
1.	Business strategy	08
2.	Capital strategy	08
3.	Initiatives for ESG			09
			........................................................................................................................................
■						10
Shareholder return policy----------------------------------------------------------------------------------------------------------------------------------

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

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

COMPANY RESEARCH AND ANALYSIS REPORT

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

4-Oct.-2023

https://www.sakainet.co.jp/en/ir/

• Summary

For FY3/24, operating profit increased by 22.8% YoY. Particularly strong sales to North America

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 highest 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 1Q

In the consolidated results for FY3/24 1Q, net sales increased 9.7% year on year (YoY) to ¥7,529mn, operating profit increased 22.8% to ¥551mn, ordinary profit rose 34.0% to ¥692mn, and profit attributable to owners of parent increased 17.2% to ¥471mn. By region, net sales were down 0.4% YoY due to delays in construction progress caused by unseasonable weather and other factors, but demand itself remained stable against a backdrop of measures to accelerate the national resilience plan. Overseas sales were also strong, especially in the U.S., where net sales grew 33.1% YoY due to increasing investment in road construction following the passing of the Infrastructure Investment and Jobs Act. Sales to Asia were down 4.2% YoY due to signs of slowing growth in some markets, despite a recovery in demand in Indonesia. Although the Company did not announce its initial forecast for 1Q, the results were largely in line with its plan.

2. Outlook for FY3/24

For FY3/24 consolidated results, the Company forecasts remain unchanged from the initial forecasts for net sales of ¥33,000mn (up 4.9% YoY), operating profit of ¥2,950mn (up 17.7%) ordinary profit of ¥2,800mn (up 20.3%), and profit attributable to owners of parent of ¥1,830mn (up 8.0%). The outlook for net sales and profit by customer 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. Although concerns regarding further increases in material prices still remain, the Company expects profit margins to improve due to factors such as the further penetration of price revisions, and it is forecasting that the operating profit margin will increase by 0.9 points YoY. However, it plans to review its progress on a quarterly basis and revise its financial results if necessary.

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%. Although results have been strong in the first year of the plan in FY3/22 and the next year in FY3/23, but the plan currently remains the same, and the Company has kept these numerical targets unchanged. For FY3/24, given the ROE forecast to exceed 6.0% and the promised dividend payout ratio of 50%, it announced an increased annual dividend of ¥215.0 (interim dividend of ¥90.0 and fiscal year-end dividend of ¥125.0). 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.

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

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10

COMPANY RESEARCH AND ANALYSIS REPORT

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

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

4-Oct.-2023

https://www.sakainet.co.jp/en/ir/

Summary

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
• For FY3/24 1Q, the operating profit increased by 22.8% YoY, but the Company did not change its full-year forecasts
• As medium-term numerical targets, the Company is aiming for net sales of ¥30.0bn, operating profit of ¥3.1bn, and ROE of 8% in FY3/26

Results trends

(¥mn)						Net sales (left)			Operating profit (right)					(¥mn)
35,000									33,000			3,500
											31,459
30,000																				3,000
								26,599	2,506
														2,950
25,000		22,744																2,500
		21,624
20,000																				2,000
								1,383
15,000																		1,500
959
10,000					701													1,000
5,000																				500
0																					0
			FY3/20			FY3/21	FY3/22			FY3/23	FY3/24E

Note: The Accounting Standard for Revenue Recognition, etc., has been applied from FY3/22

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

• Company profile

The top manufacturer of road rollers with a long history

The Company develops as a specialized manufacturer of road rollers for paving roads and other road construction equipment, and currently, the Company is the top 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 March 31, 2023, 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.

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

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10

SAKAI HEAVY INDUSTRIES, LTD.

6358 Tokyo Stock Exchange Prime Market

COMPANY RESEARCH AND ANALYSIS REPORT

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

4-Oct.-2023

https://www.sakainet.co.jp/en/ir/

• Business overview

The top 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 equipment business."

The term "road roller" actually covers quite a wide range of machines in terms of capabilities and size, among other features. The Company has roughly 20 platforms alone for road rollers, and when different variations are added the total number of products is in the 70-80 range. There is also a wide range in sizes, from 1 ton to 20 tons (for large civil engineering projects). The core price range is from ¥5mn (medium-size rollers) to ¥10mn (large rollers), but the Company also has road cutters and other machines that cost tens of millions in yen. Production is carried out on an expected production basis, and the Company does not manufacture machines based on individual orders. The useful lives of the Company's products are in the 20-30 years range, but very few customers use a machine until the end of its useful life. In most cases, they replace it after statutory depreciation (6-7 years) with a new one. Most of the depreciated equipment are resold as used machines to overseas customers (especially in developing countries).

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 to other regions totaled ¥703mn (2.2%). Moreover, in terms of net sales by region in FY3/24 1Q, net sales in Japan were ¥2,798mn (37.2%), net sales in North America were ¥2,301mn (30.5%), net sales in Asia were ¥2,092mn (27.8%), and net sales to other regions totaled ¥337mn (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.

(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.

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

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