■ Long-term Growth Strategy

1. Overview of the new medium-term management plan Waveblock Holdings <7940> announced a new medium-term management plan for the three years starting March 2025. The theme is to "achieve sustainable returns to employees and shareholders by acquiring long-term profits based on stable and continuous growth", and the business strategy focuses on (1) the reconstruction of earning power in mature fields, (2) expansion of growth fields, and (3) maximizing group synergy and further deepening relationships. In addition, the company will also work to improve employee engagement as a management policy. The performance targets for the final fiscal year, March 2027, were set at sales of 29.5 billion yen, operating profit of 130 million yen, and ROE of 6.3%. The average annual growth rate for the three-year period is 7.8% for sales and 49.6% for operating profit, indicating a focus on recovering profitability. The previous medium-term management plan (March 2022 to March 2024) set performance targets of sales of 24.5 billion yen, operating profit of 126 million yen, and ROE of 7.4% for the March 2024 fiscal year, but the results were sales of 23.559 billion yen, operating profit of 387 million yen, and ROE of 2.9%. In particular, the operating profit was far short of the target for the Material Solution Business (initial target of 1.4 billion yen, actual result of 1.01 billion yen) and the Advanced Technology Business (initial target of 0.5 billion yen, actual result of 0.4 billion yen). Factors contributing to the shortfall include the impact of rising raw material prices due to inflation and prolonged sluggish sales to home improvement stores due to the recoil of the surge in demand for the new coronavirus (hereinafter referred to as the "Corona Ka"). The operating profit margin fell from 7.7% in March 2021 to 3.4% in March 2023, recovered to 5.7% in March 2024, but did not reach the target of 7.5%. For the Advanced Technology Business, sales of the Metal Decoration Film Business, on which it has been actively investing as a growth area, did not reach the target due to the early end of production of adopted models, and the amortization burden increased and losses were incurred in establishing a new plant. In addition, the expansion of the geothermal business also required time to strengthen the sales structure, resulting in sales that did not reach the initial target. With regard to overseas expansion, business activity was stalled due to the Corona Ka, and no significant results were achieved. Taking into account these circumstances, the new medium-term management plan has formulated performance plans with a high degree of probability. For the performance targets for each business segment in March 2027, the Material Solution Business aims for sales of 20.8 billion yen and operating profit of 135 million yen, with an operating profit margin of 6.5%, which is expected to rise by 0.8 points from the previous year's actual performance. The Advanced Technology Business aims for sales of 8.7 billion yen and operating profit of 70 million yen, with an operating profit margin of 8.0%, aiming for an increase of 7.3 points from the same period. Although the profit margin of this business may fluctuate depending on the sales trend of purchasing and selling products, if the sales of the focus area, the metal decoration film, continue to grow steadily, it is expected to be achievable in terms of amount.

Flares Co., Ltd. has formulated a three-year medium-term management plan from the first year of the 2025 fiscal year to the final year of the 2027 fiscal year. The mission is to brighten Japan's at-home situation. Based on the market environment, they plan on expanding the facility-based nursing service business (hospice and visiting nursing machine business) significantly, aiming for sales of 16.678 billion yen and operating profit of 2.001 billion yen in the 2027 fiscal year with an aggressive growth plan centered around both the visiting massage business and the facility-based nursing service business. If this goal is achieved, it will grow 2.9 times in sales and 18.1 times in operating profit compared to the actual results of the 2024 fiscal year.

The facility-based nursing service business will be the driver of growth, planning to grow at an average annual growth rate of 128.6% in sales over the next three years at a pace of more than doubling every year. The direct massage business (6.8%) and massage franchise business (17.6%) will continue to grow steadily as before, but compared to the facility-based nursing service business, the pace will be slower. As a result, in terms of sales composition in the 2027 fiscal year, the facility-based nursing service business is expected to be 62.9%, which will shift from a 'massage company' to a 'company that provides comprehensive nursing services.' In terms of profit, the facility-based nursing service business is expected to become profitable in the second year of the medium-term management plan, the 2026 fiscal year, and contribute to profits, planning to become the core function with 1,762 million yen in segment profits in the third year, the 2027 fiscal year.

2. Strategies, measures, and goals for each business.

In terms of each business, the strategy, measures, and goals for the facility-based nursing service business are important. For hospice in particular, the business strategy is to proactively expand facilities (hospices and care machine facilities) to increase the number of locations from three to 26 by building an aggressive store and vertical launch structure, and to strengthen sales and training. Regarding the launch structure, they aim to accumulate the organization and know-how that can respond to continuous store openings, shorten the time from new store openings to full occupancy, and aim for early profitability of facilities. Regarding sales, they establish a regional coordination department as a dedicated sales team and increase and train sales staff to enhance acquisition of new users. Typically, it takes about two years to form a consensus with stakeholders and almost finalize concrete plans for the development of new bases. Based on this assumption, it is believed that plans for 18 of the 23 additional hospice bases to be added during the planned period have almost been completed already. Regarding talent, they aim to foster management layers and actively hire professionals to maintain the speed of new store openings. To operate the target number of bases, it is essential to add 750 people in the facility-based nursing service business by the 2027 fiscal year and to have a staff of 922 people (483 nurses and 439 care staff). Although it is a difficult time to secure human resources, the company has confidence in hiring and training because they have a track record of nurturing a 1,000-person organization and have organizational advantages in treatment and education.

Regarding the direct massage business, the massage franchise business, and other businesses, there will be no significant leap forward based on experience and achievements of the company so far, but it can be said to be a solid plan.

3. Assumed business model for the facility-based nursing service business.

The biggest key to the new medium-term management plan is whether the increase in revenue due to the expansion of hospice facilities is reasonable. The company divides the revenue of hospice facilities into three elements of "capacity", "unit price", and "operating rate" when calculating. The company takes a conservative approach to stacking these elements. Regarding "capacity", the company plans to have 1,006 people (rooms) in the March 2027 period. Divided by 26 locations, it becomes 38.7 people, which is larger than the existing 20-28 people (rooms) of three locations. Regarding future store openings, the company plans to increase middle-sized facilities with about 38-48 people. It takes some time to increase users and get on track, but the efficiency and profitability after getting on track become a highly profitable business model. The "unit price" per resident is set at about 0.89 million yen, which is lower than other listed companies (around 1.2 million yen). This is also because the company does not specialize in end-stage cancer patients or Parkinson's disease patients. In addition, by expanding middle-sized facilities, it enables efficient operation and presents competitive prices. Regarding the "operating rate", it is assumed to be about 82%. Although the actual performance of the company exceeds 90%, it estimates conservatively because the number of middle-sized facilities increases, and there are eight new facilities within one year of new opening in March 2027. In the company's hospice business model, the break-even point is around a 65% operating rate, and it assumes that it will reach 67% and become profitable on a monthly basis in the third month and reach 85% in the sixth month (assuming 48 rooms). Even if the operating rate does not reach 85%, it can relatively easily exceed 65%, and it can be said that the downside risk is low for this business model.

(Written by FISCO Guest Analyst, Hideo Kakuta)