The medium-term management plan and growth strategy of Kyokuto Trading <8093>

3) Bio-products sector: A business that leads to the resolution of the plastic waste issue.

This theme is positioned as a new business theme for the medium to long term. In the bio-products sector, several themes have been considered, but "sales of biodegradable additive" and "biodegradable plastics: sales of mass balance bio-polypropylene" are prioritized and focused on. The "biodegradable additive" is sold under a partnership with the U.S. venture company EcoLogic LLC. "Eco-One" is an additive compliant with FDA (U.S. Food and Drug Administration) and is 100% organic. By adding about 1% of "Eco-One" to resin, biodegradable and marine-degradable functions can be granted to resin products. Applications include running shoes, office furniture, medical materials, cashier bags, etc., and the company believes it will be accepted by users who prioritize environmental value.

"Eco-One" biodegradable additive has completed its biodegradability testing at customer companies, confirming the "biodegradable function," and is currently investigating market needs and conducting surveys. Applications range widely, including food packaging films and agricultural materials, with particular attention to molded styrene products and textiles for clothing. It is said that "biodegradable plastics: mass balance bio-polypropylene" has received favorable evaluations from customer companies, as it does not differ in performance from current resin products in cosmetic containers and industrial films. To sell biomass products, international sustainability carbon certification (ISCC PLUS certification) is required. Although there were many applications and certification acceptance was temporarily stopped, it seems to have finally resumed recently. The company plans to quickly obtain international certification and start selling mass balance bio-polypropylene. The two promising bio-products are flow products, so once they flow out, continuous stable orders are expected. The bio-products related business is slightly delayed from the initial business plan, but aims for full-scale commercialization within three years.

4) Overseas business sector: Expansion of operations in the local corporation in India.

The company entered India in 2008 (establishing a local corporation in Chennai) and established a second office in the Gurgaon area in 2011. In the early stages of entry, it did not lead to the company’s business, but in May 2019, the establishment of a technical center in collaboration with a Japanese manufacturer prompted a full-scale expansion of the feeder business, advancing sales to local Japanese manufacturers. During the fiscal year ending March 2024, the company aims to expand its operations to local companies, leveraging items such as industrial weight continuous feeders, lubricants, and auto parts. Additionally, it intends to enter the Indian market in the precision fastener-related business, with future order expansion anticipated. India is attracting the most attention from global companies as a Global South market, and it is viewed as a promising market for the company post-China.

※ An industrial continuous feeder that facilities feeding of resin pellets.

5) Overseas business sector: New business of the local corporation in the USA.

Since its establishment in 1956, the company’s usa subsidiary has provided the latest technologies and products for heavy industry equipment, aerospace, and resource development in the domestic market. To support the supply chain of Japanese customers expanding into the usa, the company has ensured stable supply of products through its global procurement capabilities and inventory management. In 2022, the usa office moved from New York to Indianapolis. In recent years, it has actively developed new customers together with Japanese manufacturers possessing high technological capabilities aiming to enter the usa, creating new businesses. In June 2024, it began supplying thermoplastic elastomers to Japanese and usa auto parts manufacturers in collaboration with Nishida Giken, a manufacturer of functional composite materials, through its usa subsidiary: Nishida Art Specialty Composite America Inc. (Nasca Elastomers). In the future, there are plans to deepen collaboration with Nishida Giken to expand solution proposals to customers in the elastomer manufacturing field.

4. M&A Strategy and Its Implementation.

M&A symbolizes the group management of the company. To escape the management crisis of 2008, the company made a significant course change and worked on restructuring the business structure that lost one of its core businesses related to aerospace and defense. At that time, the company aimed to rebuild by incorporating new businesses through M&A. Subsequently, six M&A deals were executed consecutively until 2018 (over seven years), all achieving gross profit margins above the company average. As a result, sustainable growth and a transition to a high-profit structure were achieved. As a result of these accumulated successes, M&A has become an important growth strategy for the company, and in its mid-term management plan, a growth investment framework for M&A (5 billion yen) is established, preparing a system that can respond immediately once desirable M&A projects are found. Since 2018, no actual M&A has occurred, but discussions have continued behind the scenes, and it has been heard that some M&A deals fell through at the last minute. Amid such a situation, two M&A contracts were established this time. (Announced on August 30, 2024.)

(1) Acquisition of Shares in Sanko Shokai (Subsidiary).

Sanko Shokai is a specialized trading company handling general plastics & engineering plastics, as well as thermal spray materials. It contributes to the supply chain of resin materials across a wide range of industry sectors, from auto parts to semiconductors. To support the businesses of customers expanding overseas, it has established bases in china and southeast asia to broadly expand its materials supply business. While the company’s industrial materials division has dealt with a diverse range of varied products, it lacked a major business pillar. By incorporating Sanko Shokai into the group, a significant business pillar in the general plastics & engineering plastics field will be established, which will provide a major benefit in business development.

Thermal spray materials refer to materials such as metals, ceramics, and cermets used in a surface modification technology widely utilized in the industrial sector known as thermal spraying.

(2) Acquisition of Shares in Welston (Grandchild Company) for Ship Repair Materials.

Etto, a core subsidiary of the company’s machinery components division, operates as a specialized trading company focused on the sale of precision fasteners and related machinery tools for industrial purposes. To strongly support domestic and overseas customers, it evolves quality assurance, technical know-how, and supply chains based on its accumulated experience, and has broadly expanded its overseas operations in china, ASEAN, and north america. On the other hand, Welston is a specialized trading company that primarily exports and wholesales ship repair parts, holding numerous suppliers and many overseas customers mainly in southeast asia. It captures the growing demand for ship maintenance that has been expanding in recent years and is advancing its global business development. By making Welston a subsidiary (a grandchild company in relation to the company), Etto can enter a new market for ship repair parts and strengthen its revenue base by creating opportunities for product development. On the other hand, Welston can enhance its customer responsiveness by leveraging Etto's financial strength, diverse trading partners, and product management know-how, building an advantage in the ship repair parts market while utilizing the network of Etto and the company group, and diversifying its business. Although Etto and Welston operate in different industries with different trading partners, they share common products and technologies as metal cutting components, and their business flows in machinery parts show similarities. Therefore, from a medium to long-term perspective, significant business synergy is highly expected.

(Written by: Fisco guest analyst Keiji Shimizu)