■Future Outlook

● Performance outlook for the fiscal year ending March 2025

The consolidated performance forecast for Sanyo Chemical Industries <4471> for the fiscal year ending March 2025 (with upward revisions to each profit announced on September 27, 2024) estimates revenue at 145 billion yen, a decrease of 9.1% YoY, operating profit at 9 billion yen, an increase of 84.2% YoY, ordinary profit at 10 billion yen, an increase of 22.1% YoY, and net income attributable to shareholders of the parent company at 4 billion yen (the previous period recorded a special loss of 8.501 billion yen). Taking into consideration the situation of the first half, while maintaining the revenue forecast from the previous estimate (initially announced on May 14, 2024, with revenue of 145 billion yen, operating profit of 8 billion yen, ordinary profit of 9.5 billion yen, and net income attributable to shareholders of the parent company at 2.5 billion yen), operating profit was revised upward by 1 billion yen, ordinary profit by 500 million yen, and net income attributable to shareholders of the parent company was revised upward by 1.5 billion yen. The net income attributable to shareholders of the parent company is also benefited by the fact that the special loss to be recorded from the withdrawal of the super absorbent resin business is expected to be approximately 1 billion yen less than initially anticipated.

Compared to the previous period, although revenue has decreased due to the exit from the super absorbent resin business, each profit is expected to significantly increase (turning to a final profit) due to the expanded sales effects of high value-added products such as lubricant additives and permanent antistatic agents, and improved profitability from exiting the super absorbent resin business. The progress rates for the revised full-year estimates for the first half are 53.1% for revenue, 49.5% for operating profit, and 49.9% for ordinary profit. The progress rate for net income attributable to shareholders of the parent company is at 23.5% due to the special loss recorded in the first half, but its impact will dissipate in the latter half. The company expects a V-shaped recovery in earnings from the fiscal year ending March 2025, with the fiscal year ending March 2024 serving as the bottom.

■ Growth strategy 1. Business environment Considering the business environment surrounding the "AIAI Three Education Zones" developed by the AIAI group <6557>, AIAI NURSERY in the field of licensed nursery schools is expected to experience a large shift in nursery policies from 2024, as the organization responsible for child and family services was established in April 2023 with the aim of improving the quality of early childhood education and care, and as a response to the "unprecedented decline in the number of children" in Japan. However, despite the encouragement from the government, the saturated market feeling cannot be ignored due to the declining birth rate and the significant reduction in the number of newly opened nursery schools, taking into account factors such as the resolution of the waiting list problem in the industry. We also believe that the elimination of small-scale operating companies, considering the shortage of childcare workers, is a possibility to consider. On the other hand, the number of children with developmental disabilities is increasing even in the declining birth rate, and the demand for facilities for disabled children (child development support, medical child development support, after-school day services, visit support for nursery facilities, etc.) is rapidly increasing. Considering this situation, we believe that, not only is the business environment for AIAI PLUS and AIAI VISIT positive, the business environment for the "AIAI Three Education Zones", which provides integrated child care, therapeutic care, and education, is also favorable. 2. AIAI Group Mid-term Management Plan 2023-2025 The company formulated the AIAI Group Mid-term Management Plan 2023-2025 in May 2023, which incorporated a reconsideration of the position of the tech field, the construction of new business models such as nursery school visit support (AIAI VISIT) and early childhood education programs. The target figures are listed as sales of 12-13 billion yen and operating profit of 300-500 million yen in the final fiscal year ending March 2026, and cumulative investment of 680 million yen over three years. In the first term of the plan, ending in March 2024, sales and operating profit exceeded the final year target value, and the total number of children, the total number of visits to nursery facilities, and the total number of internal license holders all exceeded the plan. The growth strategy is progressing smoothly, and there is no major change in the basic strategy of maximizing group synergy through the "AIAI Three Education Zones". Regarding AIAI NURSERY, considering the situation in which the speed of opening licensed nursery schools is slowing down throughout the industry due to the resolution of the waiting list problem, the company will slow down the speed of opening new facilities with the maturity of the market in mind. However, in addition to continuing to expand into regions with high needs and high investment efficiency, the company will promote efforts to reorganize the industry. On the other hand, due to the growing demand for facilities for disabled children, AIAI PLUS will be developed as a pillar of growth after AIAI NURSERY, and the expansion of AIAI VISIT will be fully implemented in the Tokyo metropolitan area as a new business model. Regarding the expansion of AIAI VISIT, securing specialized visiting support personnel is an important point, so we will strengthen our approach from a variety of channels and promote the excavation of potential qualified persons. 7. Corporate-related initiatives In terms of financial and capital aspects, the company will continue to improve its self-capital and aim to support the stable growth of its business from a financial perspective. In terms of human capital, we will promote the creation of a work environment in which all employees at the facilities and offices can work comfortably and foster human resources. In AIAI NURSERY and AIAI PLUS, we will increase the options for work styles based on the preferences and stages of life of the employees working in the facilities, and establish a workplace environment where work and family can be balanced.

Promoting the management policy "WakuWaku Explosion 2030"

1. Desired vision for 2030 and "New Mid-Term Management Plan 2025"

In March 2022, the company established "WakuWaku Explosion 2030" as a management policy towards its desired vision for 2030. The group slogan was renewed from "Change." to "WakuWaku" and encapsulated in the word "Explosion," conveying a strong desire for discontinuous growth, aiming for a circular society in harmony with the environment, a society where people can live healthily and securely, and a society where each individual shines. Meanwhile, based on the desired vision for 2030, the company reorganized its business activities for the year 2024 into "New Growth Trajectory," "Expansion from Core Business," and "Review of Core Business." In "New Growth Trajectory," the aim is to contribute to solving environmental and social issues through innovation that transcends the boundaries of Chemicals, while "Expansion from Core Business" aims for growth through expanding and deepening business areas that leverage strengths. "Review of Core Business" promotes the acceleration of structural reforms and business transformation from an environmental perspective.

Additionally, based on the desired future vision for 2030, the "New Mid-term Management Plan 2025 - Accelerating Transformation Towards the Desired Vision -" was formulated in May 2023 (covering the fiscal year ending March 2024 to the fiscal year ending March 2026). The basic policies include in the business strategy "expansion from core businesses," "review of core businesses," and "Global expansion," while for the future, it presents "new growth trajectories," "solution to social issues," and "mechanisms to support growth." Specific measures include accelerating investment in and sales expansion of high-value-added product groups from core businesses (focusing on five product groups contributing to Carbon Neutrality and improving QOL = special fiber additives, special electronic component additives, lubricant additives, permanent antistatic agents, and medical and pharmaceutical-related products), improving the profitability of core product groups through a review of core businesses, efficiency and profitability improvements across the supply chain through "big reform in manufacturing," structural reforms in the urethane and SAP businesses, and promoting sales expansion overseas under "Global expansion."

As for performance targets, the goal for the final year, ending March 2026, is revenue of 200 billion yen and operating profit of 15 billion yen. The plan to achieve the operating profit target (an increase of 6.6 billion yen compared to the fiscal year ending March 2023) includes an increase of 3.5 billion yen due to changes in the external environment (demand recovery), an increase of 3 billion yen from reforms across the entire supply chain (appropriate pricing linked to naphtha, efficiency and profitability improvements through "big reform in manufacturing"), an increase of 1 billion yen from structural reforms (urethane and SAP business reforms), and an increase of 2.5 billion yen from expanding high-value-added product groups, while a decrease of 3.4 billion yen is expected from rising fixed costs.

For the expansion of high-value-added product groups (focusing on five product groups) outlined under "expansion from core businesses," the target for the fiscal year ending March 2025 is revenue of 34.5 billion yen, operating profit of 5.3 billion yen, and an operating margin of 15.3%. The interim results show revenue of 17.3 billion yen, operating profit of 2.8 billion yen, and an operating margin of 16.5%, indicating smooth progress. The demand recovery for special fiber additives is driven by the Wind Power turbine demand resurgence, while special electronic component additives benefit from the electrification and EV transition in Automobiles, with the electrolyte for aluminum electrolytic capacitors "Sanerec" showing an upward trend. Although the overall automotive-related industry is struggling, the viscosity index improver "Acrube" is experiencing expanding sales. The permanent antistatic agents are performing well due to recovering demand in Semiconductors, and there is growing demand in medical and pharmaceutical applications for colonoscopy. Notably, the viscosity index improver "Acrube" benefits from the existence of a larger aftermarket compared to the new car market, demand is on the rise due to the increase in HV and PHV cars that use more "Acrube" than conventional gasoline vehicles, and sales expansions are also being promoted into new demands for diesel vehicles, EVs, and aircraft.

Additionally, under the review of core businesses, a limited liability partnership "Japan Polyol (responsible)" was established in May 2023 in cooperation with Mitsui Chemicals <4183> (jointly funded) to address common issues related to polypropylene glycol (PPG) production. The partnership will explore rationalization through production cooperation, raw material procurement cooperation, and further collaboration possibilities. Furthermore, in October of the same year, a new SCM headquarters was established to enhance value across the entire supply chain.

(Authored by FISCO guest analyst Masanobu Mizuta)