Daiseki / 9793 COVERAGE INITIATED ON: 2010.06.18 LAST UPDATE: 2019.10.01 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. Daiseki / 9793 RCoverage LAST UPDATE: 2019.10.01 Research Coverage Report by Shared Research Inc. | www.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 ---------------------------------------------------------------------------------------------------------------------------------------- 6 Highlights ------------------------------------------------------------------------------------------------------------------------------------------------------------ 6 Trends and outlook ----------------------------------------------------------------------------------------------------------------------------------- 7 Monthly trends ----------------------------------------------------------------------------------------------------------------------------------------------------- 7 Quarterly trends and results ----------------------------------------------------------------------------------------------------------------------------------- 8 Company forecasts for FY02/20 ---------------------------------------------------------------------------------------------------------------------------- 16 Outlook ------------------------------------------------------------------------------------------------------------------------------------------------------------- 27 Business ------------------------------------------------------------------------------------------------------------------------------------------------ 32 Business description -------------------------------------------------------------------------------------------------------------------------------------------- 32 Strengths and weaknesses ------------------------------------------------------------------------------------------------------------------------------------ 40 Market and value chain ---------------------------------------------------------------------------------------------------------------------------------------- 41 Strategy ------------------------------------------------------------------------------------------------------------------------------------------------------------- 45 Historical performance and financial statements ------------------------------------------------------------------------------------------ 46 Income statement ----------------------------------------------------------------------------------------------------------------------------------------------- 46 Balance sheet ----------------------------------------------------------------------------------------------------------------------------------------------------- 49 Cash flow statement -------------------------------------------------------------------------------------------------------------------------------------------- 50 Historical performance ---------------------------------------------------------------------------------------------------------------------------------------- 51 Other information ---------------------------------------------------------------------------------------------------------------------------------- 63 News----------------------------------------------------------------------------------------------------------------------------------------------------------------- 63 History -------------------------------------------------------------------------------------------------------------------------------------------------------------- 64 Top management ----------------------------------------------------------------------------------------------------------------------------------------------- 65 Employees --------------------------------------------------------------------------------------------------------------------------------------------------------- 65 Major shareholders --------------------------------------------------------------------------------------------------------------------------------------------- 66 Dividends and shareholder returns ------------------------------------------------------------------------------------------------------------------------ 66 Investor relations ------------------------------------------------------------------------------------------------------------------------------------------------ 67 Company profile ------------------------------------------------------------------------------------------------------------------------------------------------- 67 02/68 Daiseki / 9793 RCoverage LAST UPDATE: 2019.10.01 Research Coverage Report by Shared Research Inc. | www.sharedresearch.jp Executive summary Business overview ◤ Daiseki is an environmental specialist company whose main focus is industrial waste recycling. The parent company's primary business is intermediate processing of liquid wastes (waste oil, wastewater, sludge) and their separation into reusable components (such as recycled heavy oil) that can then be resold. Subsidiaries include Daiseki Eco. Solution Co., Ltd. (TSE1: 1712), in which Daiseki holds a 54% stake, Daiseki MCR, and System Kikou. In FY02/19, Daiseki Eco. Solution, whose main businesses are soil decontamination and plasterboard recycling, generated JPY32.1bn in sales; Daiseki MCR, whose main business is refining and selling lead recovered from used batteries, reported JPY14.2bn in sales; and System Kikou, which provides cleanup services for large oil tanks and also does industrial piping installation and maintenance, reported JPY2.2bn in sales. The parent company's operating profit margin of 25.8% is high, an indication of its competitive strength as an environmental specialist company. ◤ Just as Daiseki group companies have increasingly embraced ESG initiatives, so too has there been a steady increase in societal demand in Japan for environmental protection and growing environmental awareness among the many domestic manufacturers that comprise the bulk of Daiseki's customer base. Japan's environmental regulations are getting stricter over time, especially in the area of industrial waste treatment. As an environmental specialist company whose main focus is industrial waste recycling, Daiseki has the expertise needed to assure proper treatment of industrial waste and, as it has gained the trust of more and more client companies, has also steadily increased its share of the industrial waste treatment market. ◤ In June 2018, the company unveiled its long-term management vision. Dubbed Vision 2030, the plan is based on the company's philosophy of contributing to society by creating a better environment, and introduces specific targets that are aligned with the sustainable development goals set forth in the United Nation's 2030 Agenda for Sustainable Development (adopted in September 2015). Under Vision 2030, the company is targeting FY02/30 sales of JPY150.0bn (roughly a 3.0-fold increase over FY02/18), operating profit of JPY25.0bn (roughly a 2.8-fold increase over FY02/18), and an ROE of 15% (versus 9.9% in FY02/18). Earnings trends ◤ For FY02/19, Daiseki reported full-year consolidated sales of JPY51.3bn (+4.3% YoY), an operating profit of JPY9.1bn (+3.8% YoY), and net income attributable to owners of the parent of JPY6.1bn (+4.7% YoY). This represented a new record high for earnings. Gains at parent company drove overall results. Aided by increases in waste oil processing volumes, parent operating profit rose 15.7% YoY to JPY8.3bn. This offset lower earnings at subsidiaries, including Daiseki Eco. Solution, which saw operating profit decline 33.0% YoY to JPY898mn as it was hit by falling prices for soil decontamination work, and falling earnings at Daiseki MCR, which reported an operating loss of JPY205mn (versus year-earlier profit of JPY64mn). ◤ For FY02/20, the company is forecasting consolidated sales of JPY53.5bn (+4.3% YoY) and an operating profit of JPY10.1bn (+10.9% YoY). In addition to higher earnings at the parent, which is expected to continue benefiting from increased demand for waste oil processing and market share gains, the company is expecting higher earnings at Daiseki Eco. Solution as pricing for soil decontamination work bottoms out; it also sees Daiseki MCR moving back into the black after logging operating losses in FY02/19 as regulatory changes allow it to procure used lead batteries more cheaply. ◤ Under its medium-term business plan, the company is targeting FY02/22 consolidated sales of JPY58.5bn, an operating profit of JPY11.7bn,