Performance trends of Koa Corporation Holdings <9273>

1. Overview of Performance for the Year Ending June 2024

For the consolidated results for the fiscal year ending June 2024, sales revenue increased by 0.4% to ¥22,134 million compared to the previous year, operating profit increased by 3.1% to ¥4,382 million, ordinary profit increased by 6.7% to ¥4,368 million, and net income attributable to parent company shareholders increased by 9.6% to ¥2,946 million, showing an increase in both revenue and profit. As a result, the operating profit margin improved to 19.8%, an increase of 0.5 points. Compared to the plan announced during the financial results for the fiscal year ending June 2023, while sales revenue fell 3.7% below the plan, operating profit and ordinary profit were generally in line with the plan, and net income attributable to parent company shareholders exceeded the plan by 6.4%. The lower-than-planned sales revenue was due to the decrease in revenue in the active pharmaceutical ingredient segment. The reason why the net income attributable to parent company shareholders exceeded the plan was that the public offering of shares in June 2024 reduced the shareholding ratio of the president and the president's asset management company to below 50%, exempting the owner-type company from reserve fund taxation, leading to a decrease in tax burden. Additionally, depreciation increased by 4.9% compared to the previous year to ¥726 million, and research and development expenses increased by 17.9% to ¥132 million. On the other hand, capital investment increased significantly to ¥1,348 million, a 227.2% increase over the previous period, due to projects such as the construction of pharmaceutical warehouses in the pharmaceutical segment, renovation of the Osaka Analysis Center in the active pharmaceutical ingredient segment, and construction of dangerous goods warehouses, indicating that the company group is heading towards growth.

In the fiscal year ending June 2024, the Japanese economy has been gradually recovering amidst the normalization of economic activities, improvement in corporate earnings and employment conditions. However, the outlook for the economy remains uncertain due to the prolonged situation in Ukraine, intensification of the Middle East situation, soaring fuel and resource prices, and yen depreciation caused by financial tightening policies in European and American countries. The impact of yen depreciation poses a risk of fluctuating raw material procurement prices. However, measures such as making exchange reserves when needed in the active pharmaceutical ingredient segment, price negotiations with overseas suppliers, and transition to exchange-linked pricing for clients have been implemented. In addition, in the pharmaceutical segment, efforts to improve production efficiency have been made through cost reduction, review of selling prices, and promotion of mass production.

The strong performance of the pharmaceutical segment covers the weakness of the active pharmaceutical ingredient segment

2.Business segment trends (1) SP business QuickBoot (QB: high-speed startup product), which is the company's main product and a major part of the SP business, was mainly sold to loyalty customers in automotive devices and overseas household appliances, but decreased by 18.6% compared to the previous year to JPY 324 million due to the discontinuation of some existing customer products. The database products (DB) increased by 46.4% to JPY 101 million due to an increase in royalty from industrial equipment customers and the acquisition of new development cases with commissioned development. For the Embedded Platform Products (EP), one-time payments at contract signing and commissioned orders for automotive equipment, medical and industrial equipment are doing well, resulting in an increase of 23.0% to JPY 187 million. GrapeSystem products (GS) recorded sales of JPY 77 million, mainly from sales and one-time payments at contract signing to existing and new customers of printer-related products and voice codec products. Operating profit was supported by the growth of commissioned development and commissioned orders in the existing business, excluding GrapeSystem, improving by JPY 40 million to a profit of JPY 17 million. It seems that strengthening digital marketing utilizing WEB and SNS, such as the enhancement of the company's website, also worked by increasing access and inquiries via the web. Demand for automotive ECU microcontrollers, static code analysis tools and services for analyzing bugs in software, and IoT device security verification tools and services are doing well, and sales of the existing SD business exceeded the previous year by JPY 131 million to JPY 1,137 million. Combined with GrapeSystem's sales of JPY 105 million, total sales were JPY 1,242 million, up 23.4% from the previous year. There was also an exchange rate gain effect due to the yen depreciation, as well as an increase in royalty from existing customers, new customer acquisition of IoT device security verification tools and services, and an increase in commissioned development sales related to product sales. Operating profit improved by JPY 78 million from the previous year, but remained at a loss of JPY 14 million.

(1) Raw Material Segment

In the active pharmaceutical ingredient segment (active pharmaceutical ingredient sales business), new product items saw increased sales volume in line with expanded market share and progress in development with key clients, leading to steady growth. However, a decrease in revenue was experienced due to inventory adjustments by clients based on policy changes and a decrease in sales volume from clients due to administrative penalties. On the other hand, increased profits were seen due to the increased sales of new product items with high profit margins, leading to an overall improvement in profit margins. The company hedges against exchange rate fluctuations through exchange reserves, negotiations with suppliers, and exchange-linked transactions. The total sales revenue (excluding internal sales or transfer between segments) was ¥15,455 million, a 3.4% decrease compared to the previous period, while operating profit (excluding internal transactions between segments and deducting total company expenses) reached ¥2,769 million, a 1.5% increase. Both sales revenue and operating profit fell below the initial plan. Sales revenue also includes internal sales within segments amounting to ¥1,721 million. As a result, the operating profit margin increased to 17.9%, up by 0.9 points.

(2) Pharmaceutical Segment

In the pharmaceutical segment (pharmaceutical manufacturing and sales business), an increase in sales volume was achieved due to a significant increase in production of the main injection product, and some existing products have performed well due to alternative demand resulting from the discontinuation of sales by other companies, etc. Furthermore, the increase in production volume, yield (the ratio of the actual amount obtained to the theoretically expected amount of the target substance in synthesis, refining, renovation, etc.), and productivity improvement led to an increase in profit margin. However, in the fourth quarter, delays in some production plans and prolonged regular maintenance at the Zao Plant necessitated adjustments, resulting in delays in planned product shipments, incurring additional costs, etc., which led to slower growth compared to other quarters. As a result, revenue was 83.99 billion yen (an increase of 6.5% from the previous period), operating profit was 16.99 billion yen (an increase of 10.8% from the previous period), both revenue and operating profit exceeded the initial plan, covering the poor performance of the bulk drug segment. Additionally, the operating profit margin increased to 20.2% (up 0.8 points from the previous period). One reason for the relatively high operating profit margin of the pharmaceutical segment is the consolidation of pharmaceutical products.

(Written by FISCO guest analyst Nozomi Kokushige).