Toyo Ink SC Holdings / 4634 COVERAGE INITIATED ON: 2019.07.12 LAST UPDATE: 2020.05.15 Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an “owner’s manual” to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at [email protected] or find us on Bloomberg. Research Coverage Report by Shared Research Inc. Toyo Ink SC Holdings/ 4634 RCoverage LAST UPDATE: 2020.05.15 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company’s most recent earnings. First-time readers should start at the business section later in the report. Executive summary ----------------------------------------------------------------------------------------------------------------------------------- 3 Key financial data ------------------------------------------------------------------------------------------------------------------------------------- 5 Recent updates ---------------------------------------------------------------------------------------------------------------------------------------- 7 Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------ 7 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 9 Quarterly trends and results ----------------------------------------------------------------------------------------------------------------------------------- 9 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 19 Business description -------------------------------------------------------------------------------------------------------------------------------------------- 19 Profitability -------------------------------------------------------------------------------------------------------------------------------------------------------- 39 Market and value chain---------------------------------------------------------------------------------------------------------------------------- 40 Trends in printing ink market -------------------------------------------------------------------------------------------------------------------------------- 40 Main competitors in printing inks -------------------------------------------------------------------------------------------------------------------------- 40 Benchmark companies in fine chemicals ---------------------------------------------------------------------------------------------------------------- 42 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 43 Historical performance and financial statements ------------------------------------------------------------------------------------------ 45 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 45 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 47 Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 48 Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 49 Other information ---------------------------------------------------------------------------------------------------------------------------------- 58 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 58 News and topics ------------------------------------------------------------------------------------------------------------------------------------------------- 58 Corporate governance and top management --------------------------------------------------------------------------------------------------------- 61 Dividend policy -------------------------------------------------------------------------------------------------------------------------------------------------- 65 Major shareholders (as of end February 2020) -------------------------------------------------------------------------------------------------------- 65 Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 66 Transition to a holding company and origin of company name --------------------------------------------------------------------------------- 66 Glossary ------------------------------------------------------------------------------------------------------------------------------------------------------------- 66 Profile ---------------------------------------------------------------------------------------------------------------------------------------------------------------- 68 02/69 Toyo Ink SC Holdings/ 4634 RCoverage LAST UPDATE: 2020.05.15 Research Coverage Report by Shared Research Inc. | https://sharedresearch.jp Executive summary Business overview ◤ The Toyo Ink group (62 domestic and overseas consolidated subsidiaries under the holding company Toyo Ink SC Holdings Co., Ltd. and seven equity method affiliates) is a specialty chemical manufacturer focusing on multifunctional printing inks. Its fine chemicals business accounts for roughly three-quarters of its profit. ◤ Established in 1896, the company has the largest market share in printing inks in Japan and the third largest globally (the largest is DIC [TSE1: 4631] and the second largest is Flint Group [Luxemburg]). In Japan, Toyo Ink is the largest manufacturer of colorants for PET bottle caps and can coatings, and the second largest manufacturer of electronics films. ◤ Toyo Ink has allocated business resources in areas that leverage its strengths in end-to-end production of inks from pigments and resins (raw materials) and processing technology in synthesis, dispersion, and deposition. It plans to create new businesses in new fields: next-generation display materials, image sensor materials, electromagnetic shields for high-speed communications, medicated patches, inkjet inks for digital printing, flexo inks for flexible packaging, and electron beam curing ink. ◤ Toyo Ink is an equity-method affiliate of Toppan Printing (TSE1: 7911), with which it has a strong business relationship that it has developed since its early days. These two companies have worked together to expand into the North American and Chinese markets and develop resist inks. Toyo Ink also has a capital alliance with Sakata INX Corporation (TSE1: 4633), the third largest player in the Japanese printing ink market. The company and Sakata INX cooperate in business, distribution, and production. ◤ The company breaks down its business into four main reporting segments split between the fine chemical and printing ink markets. In fine chemicals, a growth area but still subject to sharp price fluctuations, the company’s Colorants & Functional Materials segment generated 23.3% of consolidated sales in FY12/19 and the Polymers & Coatings segment 23.4%. In the mature printing ink market, the company’s Packaging Materials segment generated 24.1% of consolidated sales and the Printing & Information segment 27.4%. ◤ In terms of profitability, on the fine chemical side we find a FY12/19 operating profit margin of 5.2% at the Colorants & Functional Materials segment and 9.2% at the Polymers & Coatings segment, and on the printing ink side an operating profit margin of 4.5% at the Packaging Materials segment and 0.4% at the Printing & Information segment. Despite differences in profitability, these two domains complement each other in terms of raw material procurement, production, and R&D, which has enabled the company to maintain a consolidated OPM of about 4–7% over the past 10 years. ◤ The main printing ink customers are printing companies and packaging specialists, such as converters and cardboard manufacturers. In the fine chemicals domain, the company serves a broad range of client companies that make semiconductors, electronic parts, liquid crystals, and automotive components. It also competes with some chemical and electronic parts manufacturers. Toyo Ink has supplied solutions beyond printing with support from its stable, long-term, and direct business relationships with key customers (80% of sales are direct). ◤ In FY12/19, 46.0% of sales came from overseas. While printing ink markets are shrinking in advanced countries as information becomes digitalized, growth in emerging markets is promising. Packaging inks for food packaging and labels is growing worldwide, and the company is receiving many inquiries for value-added UV-curable inks and eco-friendly