Sanki Engineering operates mainly in the field of contracted HVAC (heating, ventilation, and air conditioning) and plumbing construction work for office buildings and manufacturing facilities. The company does not manufacture HVAC equipment; instead, it handles construction process design and manages contracted HVAC construction work. The company was founded in 1925 as a spinoff from former machinery department of Mitsui & Co., Ltd. and is now one of the four major HVAC construction firms in Japan, ranking third in terms of revenue (see below).
In FY03/21, the company recorded revenue of JPY190.1bn and gross profit of JPY28.8bn. The mainstay Facilities Construction business accounted for 81.8% of revenue and 80.9% of gross profit. Within the segment, contracted HVAC and plumbing work accounted for 62.8% of the segment revenue, while electrical systems work, which includes the construction and installation of lighting equipment and substation equipment, and facility systems work, which includes office building integration and relocation design work, together accounted for 19.0%. Among other segments, the Machinery Systems business, which manufactures systems for conveyance and material handling accounted for 4.7% of revenue and 5.4% of gross profit, the Environmental Systems business, which develops waste treatment equipment and systems, accounted for 12.4% of revenue and 11.0% of gross profit, and the Real Estate business accounted for 1.7% of revenue and 3.4% of gross profit. The company’s overseas business accounted for less than 2% of revenue.
The Facilities Construction business produced JPY155.5bn in revenue in FY03/21. In manufacturing, the top three client sectors were electrical machinery (17.3% of revenue), automobiles (10.7%), and chemicals (5.3%). In non-manufacturing, the top three client sectors were finance/insurance (14.4% of revenue), services and others (8.6%), and real estate (6.7%). The public sector accounted for 9.8% of revenue.
In terms of types of buildings and applications, office buildings, manufacturing facilities, and research facilities make up the majority of the company’s work. Of the JPY156.8bn in orders received by the Facilities Construction business in FY03/21, more than two-thirds came from these three sources, including JPY45.6bn for office buildings (29.1% of orders), JPY45.3bn for manufacturing facilities (28.9%), and JPY15.3bn for research facilities (9.8%). Public sector orders accounted for 10.6% of orders. On the other hand, public-sector orders accounted for about 80% of orders in the Environmental Systems business (FY03/21 revenue of JPY23.6bn), whose mainstay services are in industrial waste treatment systems and water supply and sewage systems.
Orders received are broken down into two categories, new construction orders (JPY86.0bn in FY03/21, 44.0% of total orders) and renewal construction orders (JPY109.6bn, 56.0%). New construction orders are secured through a process, with orders acquired through restricted bidding (only companies nominated by the client can participate in the bidding procedure) accounting for about 51.6% and those acquired through open bidding (any number of companies that meet the conditions set by the client can participate in the bidding procedure) accounting for about 48.4%. Compared to industry peers, Sanki Engineering has a high proportion of orders secured through restricted bidding in new construction orders, with the ratio for renewal orders also high.
The order value per construction project, including on new construction orders and renewal construction orders, can range from a few million yen to several billion yen, although more than a quarter of total orders are from projects valued at more than JPY1.0bn. While the total amount of orders received varies significantly from year to year, the overall trend is toward larger orders, i.e., those valued at JPY1.0bn or more.
On a non-consolidated basis in FY03/21, outsourcing costs accounted for 53.4% of completed construction costs, with material costs accounting for 27.0%, and other costs accounting for 19.6% (including personnel costs, which accounted for 8.7%). Material costs included HVAC, machinery, and piping costs. Outsourcing costs, which accounted for the majority of completed construction costs, included cost of orders placed with subcontractors (mainly personnel costs), but also in some cases costs associated with HVAC equipment purchased by the subcontractor. These ratios have not varied significantly from year to year, and gross profit at the company often fluctuates based on outsourcing costs.
In terms of facilities construction orders received in FY03/21 (mainly HVAC facilities work), the four largest recipients in the industry were Takasago Thermal Engineering (TSE1: 1969, orders of JPY281.6bn), Dai-Dan (TSE1: 1980, JPY176.5bn), Sanki Engineering (coming in third at JPY156.8bn), and Taikisha (TSE1: 1979, JPY135.5bn). These figures do not include coating systems orders at Taikisha or Plants & Machinery Systems business orders at Sanki Engineering.
GPM, the company’s key profitability indicator, stood at 15.1% on a company-wide basis in FY03/21. In contrast, GPM was 16.8% for Takisha, 13.6% for Dai-Dan, and 13.4% for Takasago Thermal Engineering. GPM on a most recent five-year and ten-year average was 14.7% and 13.1%, respectively, at the company, 15.6% and 14.8% at Taikisha, 13.1% and 12.2% at Dai-Dan, and 13.3% and 12.1% at Takasago Thermal Engineering. These figures put the company in second place behind Dai-Dan and ahead of industry leader Takasago Thermal Engineering. However, when looking at OPM on the same basis, the company ranks last among the big four, with five and ten-year averages of 4.3% and 3.2%, respectively (5.2% and 4.0% at Takasago Thermal Engineering, 5.7% and 5.2% at Taikisha, and 5.3% and 4.3% at Dai-Dan). Shared Research believes this is due to inefficiencies in SG&A spending, including in personnel expenses tied to indirect operations. However, the company’s FY03/21 OPM for HVAC operations alone was 4.9%, and its five and ten-year averages for the same were 5.0% and 3.5%, respectively, which are much closer to the averages at its industry peers.
The Plants & Machinery Systems business, which includes the Machinery Systems business and the Environmental Systems business, has posted positive gross profit on a sustained basis, but has also in the past booked segment losses (recurring profit/loss prior to adjustment) due to severe competition in securing orders and the company’s rather small size in comparison to industry peers. The Machinery Systems business is unique as it is the only one of the company’s manufacturing business (manufactures conveyors). The Environmental Systems business makes good use of the company’s technologies, and is seeing increased order volumes from local governments (CAGR of 7.9% over most-recent five years). Finally, the Real Estate business focuses mainly on the leasing and management of the company’s assets.
Earnings trends
In FY03/22, Sanki Engineering reported orders of JPY202.3bn (+3.4% YoY), sales of JPY193.2bn (+1.6% YoY), operating profit of JPY9.1bn (+21.5% YoY), recurring profit of JPY9.8bn (+19.8% YoY), and net income attributable to owners of the parent of JPY6.5bn (+10.0% YoY). EPS was JPY115.1. In addition to growth in sales and profit, GPM reached a historical high as profitability, a focus area for the company, continued to improve. The company plans to pay an annual dividend of JPY85.0 per share (JPY70.0 regular dividend and JPY15.0 special dividend). It paid an annual DPS of JPY80.0 in FY03/21 (JPY70.0 regular dividend, JPY10.0 special dividend). The dividend payout ratio including special dividend based on company forecast is 73.8% (77.6% in FY03/21).
The company forecast for FY03/23 calls for orders of JPY200.0bn (-1.1% YoY), sales of JPY200.0bn (+3.5% YoY), operating profit of JPY9.5bn (+4.3% YoY), recurring profit of JPY10.0bn (+1.9% YoY), and net income attributable to owners of the parent of JPY6.9bn (+6.3% YoY). EPS forecast is JPY123.7. The company expects sales to grow partly by working through its inventory backlog from FY03/22. It plans to pay a dividend of JPY70.0 per share for the year (FY03/22 forecast: JPY85.0). This represents a dividend payout ratio of 56.6% (73.8%) based on the company forecast, but it only includes regular dividends and does not incorporate a special dividend.
The company announced a medium-term business plan as Phase 3 of its “Century 2025” long-term vision, covering the final four years (FY03/23–FY03/26), on February 10, 2022. It aims to focus on strengthening existing businesses, rolling out its growth strategy, and sustainability management. In the final year (FY03/26), the company targets revenue of JPY220.0bn, GPM of 16.5%, and recurring profit of JPY12.0bn. Sanki Engineering plans to develop new energy-saving and energy-creating technologies, a key area of strength, and strengthen its organization in its mainstay industrial HVAC operations, with a view to future growth.
Strengths and weaknesses
Shared Research believes the company’s strengths include: 1) high GPM supported by its industry-leading labor productivity; 2) track record in technological development in areas such as energy conservation and energy creation (substantiated by its high proportion of projects acquired through restricted bidding); and 3) its ability, unlike its industry peers, to secure a range of construction orders—HVAC and plumbing construction, electrical facilities construction, and data center-related construction—as a comprehensive service provider.
Shared Research believes the company’s weaknesses include: 1) slow progress in streamlining SG&A expenses, which leads to a low OPM compared to its peers; 2) low asset efficiency, which is contributing to lower ROE than at its peers; and 3) low profitability in the Plants & Machinery Systems business.
Announcement of downward revision in FY03/22 forecast and special dividend
2022-05-02
On April 28, 2022, Sanki Engineering Co., Ltd. lowered its full-year guidance for FY03/22 earnings and raised its planned dividend payment, as detailed below.
The company lowered its full-year sales estimate to JPY193.2bn (versus JPY200bn previously) while reducing its operating profit estimate to JPY9.1bn (versus JPY9.5bn) and its recurring profit estimate to JPY9.8bn (versus JPY10.0bn). Despite the downward revision, the company sees improvement in profitability with its recurring profit margin now projected to come in at 5.1% (versus previous estimate of 5.0%) and up nearly 0.8ppts versus the 4.3% recurring profit margin recorded in FY03/21.
The company also revised its dividend forecast. It now reflects an increase in the fiscal year-end dividend payment, as it added a special dividend of JPY15.0 per share on top of the regular dividend of JPY35.0 per share indicated previously. This brings the total dividend payment for the fiscal year end to JPY50.0 per share (versus fiscal year-end dividend of JPY45.0 per share the previous year). Combined with the interim dividend payment (JPY35.0 per share), brings total dividends paid by the company for FY03/22 to JPY85.0 per share (versus JPY80.0 in FY03/21). Including the special dividend payment, the dividend payout ratio for the year results to 73.9% (versus 77.6% in FY03/21).
NOTE: The company plans to report consolidated results for FY03/22 on May 13, 2022. The company's full-year estimates for FY03/22 shown in this report reflect the company's guidance prior to this latest revision. Shared Research will update the remainder of this report after FY03/22 earnings are released.
Trends and outlook
Quarterly trends and results
Cumulative
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q1-Q2
Q1-Q3
Q1-Q4
Q1
Q1-Q2
Q1-Q3
Q1-Q4
% of Est.
FY Est.
Revenue
38,253
80,864
129,215
190,067
38,737
84,070
135,723
193,189
96.6%
200,000
YoY
-6.4%
-12.0%
-10.1%
-8.5%
1.3%
4.0%
5.0%
1.6%
5.2%
Gross profit
5,120
10,757
18,172
28,754
4,661
11,058
19,959
30,223
97.5%
31,000
YoY
-3.5%
-18.3%
-11.9%
-10.5%
-9.0%
2.8%
9.8%
5.1%
7.8%
Gross profit margin
13.4%
13.3%
14.1%
15.1%
12.0%
13.2%
14.7%
15.6%
15.5%
SG&A expenses
5,274
10,251
15,315
21,255
4,940
10,032
15,009
21,110
98.2%
21,500
YoY
5.8%
2.8%
1.8%
-0.8%
-6.3%
-2.1%
-2.0%
-0.7%
1.2%
SG&A ratio
13.8%
12.7%
11.9%
11.2%
12.8%
11.9%
11.1%
10.9%
10.8%
Operating profit
-154
505
2,856
7,498
-278
1,025
4,949
9,112
95.9%
9,500
YoY
-
-84.2%
-48.9%
-29.8%
-
103.0%
73.3%
21.5%
26.7%
Operating profit margin
-
0.6%
2.2%
3.9%
-
1.2%
3.6%
4.7%
4.8%
Recurring profit
66
842
3,370
8,196
-13
1,310
5,544
9,817
98.2%
10,000
YoY
-87.9%
-76.0%
-45.2%
-27.0%
-
55.6%
64.5%
19.8%
22.0%
Recurring profit margin
0.2%
1.0%
2.6%
4.3%
-
1.6%
4.1%
5.1%
5.0%
Net income
11
821
2,469
5,901
-35
863
3,684
6,489
92.7%
7,000
YoY
-97.4%
-67.0%
-42.6%
-22.1%
-
5.1%
49.2%
10.0%
18.6%
Net margin
0.0%
1.0%
1.9%
3.1%
-
1.0%
2.7%
3.4%
3.5%
Quarterly
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Revenue
38,253
42,611
48,351
60,852
38,737
45,333
51,653
57,466
YoY
-6.4%
-16.4%
-6.7%
-4.9%
1.3%
6.4%
6.8%
-5.6%
Gross profit
5,120
5,637
7,415
10,582
4,661
6,397
8,901
10,264
YoY
-3.5%
-28.3%
-0.6%
-7.8%
-9.0%
13.5%
20.0%
-3.0%
Gross profit margin
13.4%
13.2%
15.3%
17.4%
12.0%
14.1%
17.2%
17.9%
SG&A expenses
5,274
4,977
5,064
5,940
4,940
5,092
4,977
6,101
YoY
5.8%
-0.3%
0.0%
-7.1%
-6.3%
2.3%
-1.7%
2.7%
SG&A ratio
13.8%
11.7%
10.5%
9.8%
12.8%
11.2%
9.6%
10.6%
Operating profit
-154
659
2,351
4,642
-278
1,303
3,924
4,163
YoY
-
-77.0%
-1.9%
-8.7%
-
97.7%
66.9%
-10.3%
Operating profit margin
-
1.5%
4.9%
7.6%
-
2.9%
7.6%
7.2%
Recurring profit
66
776
2,528
4,826
-13
1,323
4,234
4,273
YoY
-87.9%
-73.7%
-4.4%
-4.9%
-
70.5%
67.5%
-11.5%
Recurring profit margin
0.2%
1.8%
5.2%
7.9%
-
2.9%
8.2%
7.4%
Net income
11
810
1,648
3,432
-35
898
2,821
2,805
YoY
-97.4%
-60.6%
-9.2%
4.8%
-
10.9%
71.2%
-18.3%
Net margin
0.0%
1.9%
3.4%
5.6%
-
2.0%
5.5%
4.9%
Source: Shared Research, based on company materials
Note: Figures may differ from those presented in company materials due to rounding differences.
Cumulative
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q1-Q2
Q1-Q3
Q1-Q4
Q1
Q1-Q2
Q1-Q3
Q1-Q4
% of Est.
FY Est.
Orders
47,660
103,236
146,447
195,580
56,023
96,506
145,794
202,250
101.1%
200,000
YoY
2.1%
2.3%
-3.0%
0.8%
17.5%
-6.5%
-0.4%
3.4%
2.3%
Facilities Construction
38,062
82,902
119,201
156,768
38,022
69,196
110,828
160,504
102.2%
157,000
YoY
10.4%
4.1%
-2.4%
-0.6%
-0.1%
-16.5%
-7.0%
2.4%
0.1%
HVAC and Plumbing for Buildings
14,235
33,153
45,520
65,371
13,889
26,814
39,808
-
-
63,000
YoY
9.3%
1.0%
-5.5%
5.3%
-2.4%
-19.1%
-12.5%
-
-3.6%
Industrial HVAC
18,054
34,553
49,032
59,234
11,228
21,947
40,648
-
-
57,000
YoY
63.4%
20.2%
10.8%
1.4%
-37.8%
-36.5%
-17.1%
-
-3.8%
Electrical Systems
3,125
9,802
16,649
21,472
10,756
15,393
22,532
-
-
25,000
YoY
-58.2%
-19.6%
-18.2%
-14.1%
244.2%
57.0%
35.3%
-
16.4%
Facility Systems
2,645
5,393
7,998
10,690
2,147
5,041
7,838
-
-
12,000
YoY
-9.4%
-8.7%
-14.2%
-12.2%
-18.8%
-6.5%
-2.0%
-
12.3%
Machinery Systems
2,016
4,268
6,169
7,858
3,096
4,972
7,134
8,914
74.3%
12,000
YoY
-10.7%
-22.1%
-25.2%
-24.1%
53.6%
16.5%
15.6%
13.4%
52.7%
Environmental Systems
7,066
15,049
19,412
28,710
14,393
21,331
26,259
30,640
105.7%
29,000
YoY
-25.2%
0.8%
1.1%
18.4%
103.7%
41.7%
35.3%
6.7%
1.0%
Real Estate
582
1,179
1,777
2,375
595
1,197
1,800
2,410
100.4%
2,400
YoY
10.9%
12.3%
9.2%
7.5%
2.2%
1.5%
1.3%
1.5%
1.1%
Other
133
274
432
609
128
275
399
563
112.6%
500
YoY
-31.8%
-15.4%
-9.2%
-33.6%
-3.8%
0.4%
-7.6%
-7.6%
-17.9%
Adjustments
-200
-438
-545
-742
-213
-467
-628
-782
-900
Backlog orders at end of period
145,569
158,534
153,395
141,676
158,962
154,112
151,747
150,737
YoY
-6.5%
-0.2%
-2.3%
4.0%
9.2%
-2.8%
-1.1%
6.4%
Quarterly
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Orders
47,660
55,576
43,211
49,133
56,023
40,483
49,288
56,456
YoY
2.1%
2.5%
-13.6%
14.0%
17.5%
-27.2%
14.1%
14.9%
Facilities Construction
38,062
44,840
36,299
37,567
38,022
31,174
41,632
49,676
YoY
10.4%
-0.8%
-14.5%
5.7%
-0.1%
-30.5%
14.7%
32.2%
HVAC and Plumbing for Buildings
14,235
18,918
12,367
19,851
13,889
12,925
12,994
YoY
9.3%
-4.4%
-19.5%
42.6%
-2.4%
-31.7%
5.1%
Industrial HVAC
18,054
16,499
14,479
10,202
11,228
10,719
18,701
YoY
63.4%
-6.7%
-6.6%
-27.9%
-37.8%
-35.0%
29.2%
Electrical Systems
3,125
6,677
6,847
4,823
10,756
4,637
7,139
YoY
-58.2%
41.2%
-16.1%
4.0%
244.2%
-30.6%
4.3%
Facility Systems
2,645
2,748
2,605
2,692
2,147
2,894
2,797
YoY
-9.4%
-7.9%
-23.8%
-5.4%
-18.8%
5.3%
7.4%
Machinery Systems
2,016
2,252
1,901
1,689
3,096
1,876
2,162
1,780
YoY
-10.7%
-30.1%
-31.3%
-19.8%
53.6%
-16.7%
13.7%
5.4%
Environmental Systems
7,066
7,983
4,363
9,298
14,393
6,938
4,928
4,381
YoY
-25.2%
45.6%
2.3%
84.1%
103.7%
-13.1%
12.9%
-52.9%
Real Estate
582
597
598
598
595
602
603
610
YoY
10.9%
13.7%
3.5%
2.7%
2.2%
0.8%
0.8%
2.0%
Other
133
141
158
177
128
147
124
164
YoY
-31.8%
9.3%
3.9%
-59.9%
-3.8%
4.3%
-21.5%
-7.3%
Adjustments
-200
-238
-107
-197
-213
-254
-161
-154
Backlog orders at end of period
145,569
158,534
153,395
141,676
158,962
154,112
151,747
150,737
YoY
-6.5%
-0.2%
-2.3%
4.0%
9.2%
-2.8%
-1.1%
6.4%
Source: Shared Research, based on company materials
Note: Figures may differ from those presented in company materials due to rounding differences.
Quarterly
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
% of Est.
FY Est.
Revenue
38,253
42,611
48,351
60,852
38,737
45,333
51,653
57,466
96.6%
200,000
YoY
-6.4%
-16.4%
-6.7%
-4.9%
1.3%
6.4%
6.8%
-5.6%
5.2%
Facilities Construction
32,220
35,587
38,532
49,162
31,820
35,245
41,712
46,707
96.6%
161,000
YoY
-7.1%
-18.3%
-8.1%
-4.2%
-1.2%
-1.0%
8.3%
-5.0%
3.5%
HVAC and Plumbing for Buildings
10,847
11,767
14,056
18,623
10,792
12,367
18,924
-
66,000
YoY
-28.9%
-32.1%
-16.0%
-13.2%
-0.5%
5.1%
34.6%
19.4%
Industrial HVAC
14,288
15,067
15,500
19,297
13,956
14,603
13,359
-
58,000
YoY
4.9%
-12.6%
-11.2%
-0.7%
-2.3%
-3.1%
-13.8%
-9.6%
Electrical Systems
5,068
6,372
6,203
7,298
5,037
5,996
6,749
-
25,000
YoY
28.0%
8.2%
8.9%
15.0%
-0.6%
-5.9%
8.8%
0.2%
Facility Systems
2,016
2,381
2,772
3,944
2,034
2,279
2,680
-
12,000
YoY
8.0%
-23.1%
34.0%
-3.5%
0.9%
-4.3%
-3.3%
8.0%
Machinery Systems
2,262
2,197
2,158
2,356
2,192
2,760
2,576
2,138
96.7%
10,000
YoY
-13.0%
-18.4%
-16.6%
-28.3%
-3.1%
25.6%
19.4%
-9.3%
11.4%
Environmental Systems
3,298
4,312
7,103
8,847
4,120
6,759
6,933
8,030
95.7%
27,000
YoY
4.9%
1.0%
3.1%
-1.2%
24.9%
56.7%
-2.4%
-9.2%
14.6%
Real Estate
582
597
598
598
595
602
603
610
100.4%
2,400
YoY
10.9%
13.7%
3.5%
2.7%
2.2%
0.8%
0.8%
2.0%
1.1%
Other
170
196
201
245
114
143
135
174
113.2%
500
YoY
-27.0%
-6.7%
23.3%
-24.6%
-32.9%
-27.0%
-32.8%
-29.0%
-38.4%
Adjustments
-280
-277
-242
-359
-106
-176
-307
-192
-900
Gross profit
5,120
5,637
7,415
10,582
4,661
6,397
8,901
10,264
97.5%
31,000
YoY
-3.5%
-28.3%
-0.6%
-7.8%
-9.0%
13.5%
20.0%
-3.0%
7.8%
Gross profit margin
13.4%
13.2%
15.3%
17.4%
12.0%
14.1%
17.2%
17.9%
15.5%
Facilities Construction
4,286
4,753
5,367
8,847
3,782
4,962
7,395
YoY
-2.4%
-32.1%
-5.0%
1.2%
-11.8%
4.4%
37.8%
Gross profit margin
13.3%
13.4%
13.9%
18.0%
11.9%
14.1%
17.7%
HVAC and Plumbing for Buildings, Industrial HVAC, Electrical Systems
4,103
4,272
4,923
7,740
3,526
4,623
6,799
YoY
-1.2%
-33.4%
-7.5%
0.2%
-14.1%
8.2%
38.1%
Gross profit margin
13.6%
12.9%
13.8%
17.1%
11.8%
14.0%
17.4%
Facility Systems
183
480
444
1,108
255
339
597
YoY
-23.8%
-17.8%
35.4%
8.8%
39.3%
-29.4%
34.5%
Gross profit margin
9.1%
20.2%
16.0%
28.1%
12.5%
14.9%
22.3%
Machinery Systems
427
280
364
485
331
488
560
YoY
-21.1%
-38.7%
-31.6%
-38.3%
-22.5%
74.3%
53.8%
Gross profit margin
18.9%
12.7%
16.9%
20.6%
15.1%
17.7%
21.7%
Environmental Systems
248
407
1,478
1,043
313
746
843
YoY
119.5%
49.1%
33.4%
-42.7%
26.2%
83.3%
-43.0%
Gross profit margin
7.5%
9.4%
20.8%
11.8%
7.6%
11.0%
12.2%
Real Estate
232
211
242
181
259
245
220
YoY
20.8%
67.5%
36.0%
2.3%
11.6%
16.1%
-9.1%
Gross profit margin
39.9%
35.3%
40.5%
30.3%
43.5%
40.7%
36.5%
Other
4
12
28
57
4
14
7
YoY
-95.7%
-60.0%
33.3%
3.6%
0.0%
16.7%
-75.0%
Gross profit margin
2.4%
6.1%
13.9%
23.3%
3.5%
9.8%
5.2%
Adjustments
-78
-27
-63
-31
-29
-59
-122
Recurring profit
66
776
2,528
4,826
-13
1,323
4,234
4,273
98.2%
10,000
YoY
-87.9%
-73.7%
-4.4%
-4.9%
-
70.5%
67.5%
-11.5%
22.0%
Recurring profit margin
0.2%
1.8%
5.2%
7.9%
0.0%
2.9%
8.2%
7.4%
5.0%
Facilities Construction
241
554
1,579
5,303
23
631
3,820
4,351
YoY
-66.5%
-81.0%
-28.4%
30.8%
-90.5%
13.9%
141.9%
-18.0%
-
Recurring profit margin
0.7%
1.6%
4.1%
10.8%
0.1%
1.8%
9.2%
9.3%
-
Machinery Systems
-55
-217
-113
-8
-74
31
107
-257
YoY
-
-
-
-
-
-
-
-
-
Recurring profit margin
-2.4%
-9.9%
-5.2%
-0.3%
-3.4%
1.1%
4.2%
-12.0%
-
Environmental Systems
-613
-389
647
375
-527
-64
30
745
YoY
-
-
86.5%
-57.6%
-
-
-95.4%
98.7%
-
Recurring profit margin
-18.6%
-9.0%
9.1%
4.2%
-12.8%
-0.9%
0.4%
9.3%
-
Real Estate
209
198
230
140
252
245
209
92
YoY
34.0%
127.6%
38.6%
-2.8%
20.6%
23.7%
-9.1%
-34.3%
-
Recurring profit margin
35.9%
33.2%
38.5%
23.4%
42.4%
40.7%
34.7%
15.1%
-
Other
-9
1
7
41
-9
-1
-9
25
YoY
-
-50.0%
-30.0%
-22.6%
-
-
-
-39.0%
-
Recurring profit margin
-5.3%
0.5%
3.5%
16.7%
-7.9%
-0.7%
-6.7%
14.4%
-
Adjustments
294
630
177
-1,027
321
482
77
-685
Source: Shared Research, based on company materials
Note: Figures may differ from those presented in company materials due to rounding differences.
Trend by orders
FY03/21
FY03/22
Quarterly (JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Orders (Facilities Construction alone)
36,356
42,807
34,869
35,246
35,938
29,563
38,985
YoY
14.4%
0.2%
-13.3%
8.5%
-1.1%
-30.9%
11.8%
Indirect orders
13,900
22,237
13,396
14,011
13,105
8,921
12,513
YoY
51.7%
122.8%
-19.7%
12.9%
-5.7%
-59.9%
-6.6%
Orders (cons.)
47,660
55,576
43,211
49,133
56,023
40,483
49,288
56,456
YoY
2.1%
2.5%
-13.6%
14.0%
17.5%
-27.2%
14.1%
14.9%
Overseas construction orders
736
629
416
1,008
989
807
1,750
YoY
4.5%
-2.9%
-36.4%
-11.3%
34.4%
28.3%
320.7%
Renewal construction orders
26,223
27,322
27,178
28,862
22,891
26,732
33,683
YoY
-11.8%
-12.1%
-3.0%
19.9%
-12.7%
-2.2%
23.9%
Renewal construction revenue
18,814
21,099
26,983
34,251
20,297
25,505
28,672
YoY
-11.0%
-22.5%
-4.1%
-9.2%
7.9%
20.9%
6.3%
Source: Shared Research, based on company materials
Note: Figures may differ from those presented in company materials due to rounding differences.
FY03/22 results (out May 13, 2022)
Full-year FY03/22 earnings overview
Full-year FY03/22 (April 2021–March 2022) results were as follows.
Orders: JPY202.3bn (+3.4% YoY, initial company forecast JPY200.0bn)
Net income attributable to owners of the parent: JPY6.5bn (+10.0% YoY, JPY7.0bn)
EPS was JPY115.1. The company plans to pay a year-end dividend of JPY50.0 per share (JPY35.0 regular dividend, JPY15.0 special dividend) for an annual DPS of JPY85.0 (JPY70.0 regular dividend, JPY15.0 special dividend). It paid an annual DPS of JPY80.0 in FY03/21 (JPY70.0 regular dividend, JPY10.0 special dividend). The dividend payout ratio including special dividend based on company forecast is 73.8% (77.6% in FY03/21).
On April 28, 2022, the company revised its full-year FY03/22 earnings forecast. Figures above are from the initial forecast announced on May 14, 2021, prior to revision.
While sales and profit grew, they fell short of the initial forecast. The shortfall was primarily due to sales coming in below expectations, while orders exceeded the initial forecast. However, on the profitability front, a focus for the company, GPM and recurring profit margin increased YoY and came in above the initial forecast. GPM reached a new historical high (previous peak was 15.5% in FY03/20). Profitability improved on higher sales in the mainstay Facilities Construction business, as well as in Machinery Systems and Environmental Systems and other factors.
Q4 earnings overview (January–March, three months)
The most recent Q4 FY03/22 (January-March 2022) results were as follows.
Orders: JPY56.5bn (+14.9% YoY)
Sales: JPY57.5bn (-5.6% YoY)
Gross profit: JPY10.3bn (-3.0% YoY)
GPM: 17.9% (+0.5pp YoY)
Operating profit: JPY4.2bn (-10.3% YoY)
Recurring profit: JPY4.3bn (-11.5% YoY)
RPM: 7.4% (-0.5pp YoY)
Net income attributable to owners of the parent: JPY2.8bn (-18.3% YoY)
On a quarterly (three-month) basis, sales fell YoY for the first time in four quarters and recurring profit declined YoY for the first time in three quarters. While orders were up nearly 15% YoY, sales fell. Profit from the operating line downward declined on lower sales, but profitability continued to improve with GPM up 0.5pp YoY.
Shared Research plans to update this report following an upcoming earnings briefing and interviews with management.
FY03/23 company forecast (out May 13, 2022)
FY03/21
FY03/22
FY03/23
(JPYmn)
1H
2H
Full year
1H
2H
Full year
1H Est.
2H Est.
FY Est.
Revenue
80,864
109,203
190,067
84,070
109,119
193,189
200,000
YoY
-12.0%
-5.7%
-8.5%
4.0%
-0.1%
1.6%
3.5%
Gross profit
10,757
17,997
28,754
11,058
19,165
30,223
YoY
-18.3%
-5.0%
-10.5%
2.8%
6.5%
5.1%
Gross profit margin
13.3%
16.5%
15.1%
13.2%
17.6%
15.6%
SG&A expenses
10,251
11,004
21,255
10,032
11,078
21,110
YoY
2.8%
-4.0%
-0.8%
-2.1%
0.7%
-0.7%
SG&A ratio
12.7%
10.1%
11.2%
11.9%
10.2%
10.9%
Operating profit
505
6,993
7,498
1,025
8,087
9,112
9,500
YoY
-84.2%
-6.5%
-29.8%
103.0%
15.6%
21.5%
4.3%
Operating profit margin
0.6%
6.4%
3.9%
1.2%
7.4%
4.7%
4.8%
Recurring profit
842
7,354
8,196
1,310
8,507
9,817
10,000
YoY
-76.0%
-4.8%
-27.0%
55.6%
15.7%
19.8%
1.9%
Recurring profit margin
1.0%
6.7%
4.3%
1.6%
7.8%
5.1%
5.0%
Net income
821
5,080
5,901
863
5,626
6,489
6,900
YoY
-67.0%
-0.2%
-22.1%
5.1%
10.7%
10.0%
6.3%
Net margin
1.0%
4.7%
3.1%
1.0%
5.2%
3.4%
3.5%
Source: Shared Research, based on company materials
Note: Figures may differ from those presented in company materials due to rounding differences.
Summary of company forecast
The company released its earnings forecastfor FY03/23 as shown below.
Orders: JPY200.0bn (-1.1% YoY)
Sales: JPY200.0bn (+3.5% YoY)
Operating profit: JPY9.5bn (+4.3% YoY)
Recurring profit: JPY10.0bn (+1.9% YoY)
RPM: 5.0% (-0.1pp YoY)
Net income attributable to owners of the parent: JPY6.9bn (+6.3% YoY)
EPS forecast is JPY123.7. The company plans to pay a
dividend of JPY70.0 per share for the year (FY03/22 forecast: JPY85.0). This
represents a dividend payout ratio of 56.6% (73.8%) based on the company forecast,
but it only includes regular dividends and does not incorporate a special dividend.
The company expects sales to grow partly by working through its inventory backlog and orders received during the year. It forecasts orders of JPY200.0bn (-1.1% YoY).
Shared Research plans to update this report following an upcoming earnings briefing and interviews with management.
By segment
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Est.
Orders
165,800
168,295
173,398
183,270
185,880
191,113
217,096
194,018
195,580
200,000
YoY
-5.4%
1.5%
3.0%
5.7%
1.4%
2.8%
13.6%
-10.6%
0.8%
2.3%
Facilities Construction
136,144
143,838
150,032
152,432
146,612
153,443
182,533
157,659
156,768
157,000
YoY
0.9%
5.7%
4.3%
1.6%
-3.8%
4.7%
19.0%
-13.6%
-0.6%
0.1%
HVAC and Plumbing for Buildings
68,476
74,921
70,778
66,172
65,763
62,274
65,639
62,095
65,371
63,000
YoY
6.4%
9.4%
-5.5%
-6.5%
-0.6%
-5.3%
5.4%
-5.4%
5.3%
-3.6%
Industrial HVAC
39,828
39,870
46,765
52,522
49,823
58,907
82,729
58,391
59,234
57,000
YoY
-11.4%
0.1%
17.3%
12.3%
-5.1%
18.2%
40.4%
-29.4%
1.4%
-3.8%
Electrical Systems
19,103
19,328
23,215
22,667
21,576
22,675
23,342
25,000
21,472
25,000
YoY
4.7%
1.2%
20.1%
-2.4%
-4.8%
5.1%
2.9%
7.1%
-14.1%
16.4%
Facility Systems
8,735
9,718
9,272
11,070
9,450
9,585
10,821
12,171
10,690
12,000
YoY
18.9%
11.3%
-4.6%
19.4%
-14.6%
1.4%
12.9%
12.5%
-12.2%
12.3%
Machinery Systems
10,817
8,482
5,716
10,309
8,130
12,100
12,049
10,351
7,858
12,000
YoY
15.6%
-21.6%
-32.6%
80.4%
-21.1%
48.8%
-0.4%
-14.1%
-24.1%
52.7%
Environmental Systems
16,623
15,029
16,767
19,610
30,626
24,247
21,705
24,247
28,710
29,000
YoY
-42.3%
-9.6%
11.6%
17.0%
56.2%
-20.8%
-10.5%
11.7%
18.4%
1.0%
Real Estate
2,747
1,077
1,285
1,532
1,592
1,755
1,926
2,210
2,375
2,400
YoY
-2.7%
-60.8%
19.3%
19.2%
3.9%
10.2%
9.7%
14.7%
7.5%
1.1%
Other
-
583
481
524
491
587
960
917
609
500
YoY
-
-
-17.5%
8.9%
-6.3%
19.6%
63.5%
-4.5%
-33.6%
-17.9%
Adjustments
-533
-717
-884
-1,139
-1,573
-1,020
-2,078
-1,367
-742
-900
Source: Shared Research, based on company materials
Note: Figures may differ from those presented in company materials due to rounding differences.
By segment
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Est.
Revenue
154,658
171,496
179,598
178,901
168,512
170,157
212,314
207,684
190,067
200,000
YoY
4.5%
10.9%
4.7%
-0.4%
-5.8%
1.0%
24.8%
-2.2%
-8.5%
5.2%
Facilities Construction
128,626
143,697
151,169
149,952
141,567
139,688
179,300
171,501
155,501
161,000
YoY
11.8%
11.7%
5.2%
-0.8%
-5.6%
-1.3%
28.4%
-4.3%
-9.3%
3.5%
HVAC and Plumbing for Buildings
-
-
72,371
64,492
60,376
63,782
71,558
70,756
55,293
66,000
YoY
-
-
-
-10.9%
-6.4%
5.6%
12.2%
-1.1%
-21.9%
19.4%
Industrial HVAC
-
-
47,015
52,084
49,440
46,556
73,493
67,736
64,152
58,000
YoY
-
-
-
10.8%
-5.1%
-5.8%
57.9%
-7.8%
-5.3%
-9.6%
Electrical Systems
-
-
21,884
22,958
21,542
20,653
23,214
21,889
24,941
25,000
YoY
-
-
-
4.9%
-6.2%
-4.1%
12.4%
-5.7%
13.9%
0.2%
Facility Systems
-
-
9,897
10,416
10,208
8,695
11,033
11,119
11,113
12,000
YoY
-
-
-
5.2%
-2.0%
-14.8%
26.9%
0.8%
-0.1%
8.0%
Machinery Systems
6,501
9,846
9,953
9,217
8,192
9,254
11,791
11,169
8,973
10,000
YoY
-39.9%
51.5%
1.1%
-7.4%
-11.1%
13.0%
27.4%
-5.3%
-19.7%
11.4%
Environmental Systems
17,145
17,169
17,485
18,734
18,271
19,909
20,471
23,261
23,560
27,000
YoY
-13.5%
0.1%
1.8%
7.1%
-2.5%
9.0%
2.8%
13.6%
1.3%
14.6%
Real Estate
2,747
1,077
1,285
1,532
1,592
1,755
1,926
2,210
2,375
2,400
YoY
-2.7%
-60.8%
19.3%
19.2%
3.9%
10.2%
9.7%
14.7%
7.5%
1.1%
Other
-
607
508
542
499
578
718
931
812
500
YoY
-
-
-16.3%
6.7%
-7.9%
15.8%
24.2%
29.7%
-12.8%
-38.4%
Adjustments
-362
-902
-803
-1,077
-1,611
-1,030
-1,893
-1,389
-1,158
-900
Gross profit
17,590
18,423
17,966
22,929
22,538
25,060
31,684
32,110
28,754
31,000
YoY
-3.5%
4.7%
-2.5%
27.6%
-1.7%
11.2%
26.4%
1.3%
-10.5%
7.8%
Gross profit margin
11.4%
10.7%
10.0%
12.8%
13.4%
14.7%
14.9%
15.5%
15.1%
15.5%
Facilities Construction
-
-
-
-
-
19,122
25,590
25,781
23,253
-
YoY
-
-
-
-
-
-
33.8%
0.7%
-9.8%
-
Gross profit margin
-
-
-
-
-
13.7%
14.3%
15.0%
15.0%
-
HVAC and Plumbing for Buildings, Industrial HVAC, Electrical Systems
-
-
-
-
-
17,656
23,712
23,610
21,038
-
YoY
-
-
-
-
-
-
34.3%
-0.4%
-10.9%
-
Gross profit margin
-
-
-
-
-
13.5%
14.1%
14.7%
14.6%
-
Facility Systems
-
-
-
-
-
1,465
1,877
2,170
2,215
-
YoY
-
-
-
-
-
-
28.1%
15.6%
2.1%
-
Gross profit margin
-
-
-
-
-
16.8%
17.0%
19.5%
19.9%
-
Machinery Systems
-
-
-
-
-
1,749
2,136
2,316
1,556
-
YoY
-
-
-
-
-
-
22.1%
8.4%
-32.8%
-
Gross profit margin
-
-
-
-
-
18.9%
18.1%
20.7%
17.3%
-
Environmental Systems
-
-
-
-
-
3,666
3,622
3,314
3,176
-
YoY
-
-
-
-
-
-
-1.2%
-8.5%
-4.2%
-
Gross profit margin
-
-
-
-
-
18.4%
17.7%
14.2%
13.5%
-
Real Estate
-
-
-
-
-
543
567
673
866
-
YoY
-
-
-
-
-
-
4.4%
18.7%
28.7%
-
Gross profit margin
-
-
-
-
-
30.9%
29.4%
30.5%
36.5%
-
Other
-
-
-
-
-
192
178
200
101
-
YoY
-
-
-
-
-
-
-7.3%
12.4%
-49.5%
-
Gross profit margin
-
-
-
-
-
33.2%
24.8%
21.5%
12.4%
-
Adjustments
-
-
-
-
-
-213
-411
-176
-199
-
Recurring profit
2,680
3,146
3,809
8,135
6,880
7,434
11,204
11,224
8,196
10,000
YoY
18.2%
17.4%
21.1%
113.6%
-15.4%
8.1%
50.7%
0.2%
-27.0%
22.0%
Recurring profit margin
1.7%
1.8%
2.1%
4.5%
4.1%
4.4%
5.3%
5.4%
4.3%
5.0%
Facilities Construction
1,196
3,260
2,943
7,698
6,404
6,010
9,905
9,893
7,677
-
YoY
-
172.6%
-9.7%
161.6%
-16.8%
-6.2%
64.8%
-0.1%
-22.4%
-
Recurring profit margin
0.9%
2.3%
1.9%
5.1%
4.5%
4.3%
5.5%
5.8%
4.9%
-
Machinery Systems
-1,119
-287
105
275
-138
-40
238
320
-393
-
YoY
-
-
-
161.9%
-
-
-
34.5%
-
-
Recurring profit margin
-
-
1.1%
3.0%
-
-
2.0%
2.9%
-
-
Environmental Systems
689
-23
24
-315
671
575
312
20
20
-
YoY
-21.6%
-
-
-
-
-14.3%
-45.7%
-93.6%
-
-
Recurring profit margin
4.0%
-0.1%
0.1%
-1.7%
3.7%
2.9%
1.5%
0.1%
0.1%
-
Real Estate
1,305
147
207
233
189
476
471
553
777
-
YoY
-2.0%
-88.7%
40.8%
12.6%
-18.9%
151.9%
-1.1%
17.4%
40.5%
-
Recurring profit margin
47.5%
13.6%
16.1%
15.2%
11.9%
27.1%
24.5%
25.0%
32.7%
-
Other
-
63
48
52
22
49
52
131
40
-
YoY
-
-
-23.8%
8.3%
-57.7%
122.7%
6.1%
151.9%
-69.5%
-
Recurring profit margin
-
10.4%
9.4%
9.6%
4.4%
8.5%
7.2%
14.1%
4.9%
-
Adjustments
608
-13
479
191
-270
362
223
305
74
-
Source: Shared Research, based on company materials
Note: Figures may differ from those presented in company materials due to rounding differences.
Company forecasts versus results
Results vs. Initial Est.
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
FY03/23
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Revenue
Initial Est.
170,000
180,000
180,000
185,000
180,000
187,000
200,000
200,000
200,000
200,000
Act.
171,496
179,598
178,901
168,512
170,157
212,314
207,684
190,067
193,189
Difference
0.9%
-0.2%
-0.6%
-8.9%
-5.5%
13.5%
3.8%
-5.0%
-3.4%
Operating profit
Initial Est.
3,200
3,200
3,500
6,500
7,000
7,500
8,800
9,000
9,500
9,500
Act.
2,818
2,951
6,509
6,012
6,593
10,637
10,674
7,498
9,112
Difference
-11.9%
-7.8%
86.0%
-7.5%
-5.8%
41.8%
21.3%
-16.7%
-4.1%
Recurring profit
Initial Est.
3,500
3,500
4,000
7,000
7,500
8,000
9,000
9,500
10,000
10,000
Act.
3,146
3,809
8,135
6,880
7,434
11,204
11,224
8,196
9,817
Difference
-10.1%
8.8%
103.4%
-1.7%
-0.9%
40.1%
24.7%
-13.7%
-1.8%
Net income
Initial Est.
2,000
2,200
2,600
4,900
5,000
5,500
6,200
6,500
7,000
6,900
Act.
1,763
2,461
5,327
4,698
3,906
9,046
7,576
5,901
6,489
Difference
-11.9%
11.9%
104.9%
-4.1%
-21.9%
64.5%
22.2%
-9.2%
-7.3%
Source: Shared Research, based on company materials
Note: Figures may differ from those presented in company materials due to rounding differences.
Medium-term management plan
Phase1
Phase2
Phase3
Mid-term management plan
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
FY03/23
FY03/24
FY03/25
FY03/26
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Est.
Mid-term
Mid-term
Mid-term
Mid-term
Revenue
168,512
170,157
212,314
207,684
190,067
200,000
-
220,000
YoY
-5.8%
1.0%
24.8%
-2.2%
-8.5%
5.2%
-
-
-
-
Gross profit
22,538
25,060
31,684
32,110
28,754
31,000
-
36,000
YoY
-1.7%
11.2%
26.4%
1.3%
-10.5%
7.8%
-
-
-
-
Gross profit margin
13.4%
14.7%
14.9%
15.5%
15.1%
15.5%
-
-
-
16.5%
Recurring profit
6,880
7,434
11,204
11,224
8,196
10,000
-
12,000
YoY
-15.4%
8.1%
50.7%
0.2%
-27.0%
22.0%
-
-
-
-
Recurring profit margin
4.1%
4.4%
5.3%
5.4%
4.3%
5.0%
-
-
-
5.5%
Source: Shared Research, based on company materials
Note: Figures may differ from those presented in company materials due to rounding differences.
Mid-term management plan
FY03/26
Management targets
Target
Dividend (JPY)
Minimum 70.0
Payout ratio
Minimum 50%
Acquisition of treasury stock ('000 shares)
5,000
ROE
At least 8.0%
Growth investment (JPYmn)
About 20,000
Source: Shared Research, based on company materials Note: Share buyback and growth investment figures are cumulative four-year totals.
Unveiled new medium-term management plan (Phase 3, four years)
Overview of new medium-term plan
On February 10, 2022, Sanki Engineering announced Phase 3, its new medium-term management plan (four-year plan starting in FY03/23). Phase 3 is the final phase of the “Century 2025” 10-year long-term vision, which the company launched in FY03/17 to mark the centenary of its founding in April 2025. Phase 1 has ended and Phase 2 is ongoing, as summarized below.
Phase 1: FY03/17–FY03/19 (three years): Three years of enhancing quality
Phase 2: FY03/20–Y03/22 (three years): Three years of enhancing trust
The new medium-term plan is Phase 3, to put the finishing touches on the Century 2025 long-term vision and defined as "four years of being the chosen company."
Final year (FY03/26) targets
Earnings targets
In Phase 3, the company will continue with the key initiatives undertaken in phases 1 and 2, while adding three new ones; Helping to make society more sustainable, accelerating work style reforms, and investing in future generations. Earnings targets for the final year (FY03/26) are as follows:
The company’s key focus is on an ongoing improvement in margins to underpin profit, while also aiming to increase revenue. This falls under its policies to improve quality.
Business and financial targets
In the four years of the new medium-term plan, the company set the following business and financial targets:
RPM of over 5.0% (FY03/22 company forecast: 5.0%)
Dividend payout ratio of over 50% (56.4%)
Dividend per share of over JPY70 (JPY70)
Share buybacks of around 5,000,000 shares
ROE of over 8.0%
Investment in growth of over JPY20.0bn
Of the above targets, the figures for share buybacks and investment in growth are four-year totals. The FY03/22 company forecast for the dividend payout ratio is an estimate by Shared Research based on EPS and dividend forecasts.
Ultra long-term vision: 2050 image
One major objective in putting together the medium-term plan was to develop an ultra-long-term vision of what the company might look like in 2050. The vision includes:
Being a company that helps create a sustainable future by bringing engineering to bear to solve social issues such as carbon neutrality and create a pleasant environment.
The company’s aim can be encapsulated in its ambition to make Sanki “the enduring company of choice.”
The company set out the following three elements of Phase 3 with a view to its ultra-long-term vision.
Implement sustainability management
Formulate sustainability policies
Determine materialities and key issues
The company sees sustainability management as an approach that enables ongoing improvement in corporate value while also improving environmental and social value, so is committed to its thorough implementation.
Sanki's Carbon neutral declaration
The Sanki group is making serious efforts to address global climate change, and aims to achieve carbon neutrality for its own greenhouse gas emissions (Scope 1 and 2) by 2030, extending to those of its supply chain (Scope 1, 2, and 3) by 2050. The company prides itself on its ambitious targets, which are a step ahead of its peers.
Phase 3 policies
The company developed its medium-term plan to put the finishing touches on its Century 2025 long-term vision. It aims to become the company of choice by maturing and evolving its longstanding efforts to enhance quality and reliability, with three additional measures: contribute to the sustainability of society, accelerate work style reforms, and invest with a view to the next generation.
To enhance quality and reliability during Phase 3, the company plans to carry on with its efforts from Phases 1 and 2, while further instilling and evolving them. This involves five key elements.
Strengthen core businesses (started in Phase 1)
Roll out growth strategies (started in Phase 1)
Enhance Sanki brand (started in Phase 1)
Improve communication capabilities (started in Phase 2)
Disclose financial and capital management policies (started in Phase 2)
Strengthen core businesses
Shared initiatives
The company has five shared initiatives aimed at strengthening each of its core businesses: Facilities Construction, Facility Systems, Machinery Systems, and Environmental Systems.
Upgrade technology to prevent workplace accidents and problems
Work with the company’s Health and Safety Cooperative Association to further occupational health & safety
Train human resources with the aim of acquiring unique new technologies
Improve workflow efficiency with new business systems
Roll out precise marketing activities using the latest sales force automation (SFA) systems
The new business system concept entails a new accounting system the company is developing. As its core system, it will coordinate with a range of internal systems and databases to streamline workflows. The company plans to use this to address long working hours, a serious issue in the construction industry.
Facilities Construction
Strengthen business base
Build up pipeline of recurring revenue projects in growth areas such as major urban redevelopments, semiconductor manufacturing facilities, and data centers
Strengthen maintenance systems to win renewal projects
Strengthen and optimize coordination between headquarters (management divisions) and worksites to boost productivity
Use electronic procurement system to obtain a wide range of suppliers and reduce procurement costs by centralized purchasing
Make best use of digital and robotic technologies
Use Building Information Modeling (BIM: systems that produce 3D computer models of buildings used in design and construction) to improve design and construction productivity and quality
Enhance security of systems that share information with external parties
Develop technologies to enable robots to carry out various worksite tasks
Facility Systems
Strengthen building ICT (communication using information and communication technologies) total integration business
Expand on-site information and communication infrastructure business
Expand consulting service lineup
Major urban redevelopment projects are likely to require ICT infrastructure, so the company aims to expand and grow its business through “hard” aspects such as construction and “soft” aspects such as consulting for office buildings.
Machinery
Systems
Tap more deeply into automation and labor-saving markets with AI, IoT, ICT, and robots
Expand sales of sorting systems to logistics sector
Commercialize predictive maintenance business using AI diagnostics
To address demographics-driven labor shortages, the company plans to develop new products that meet needs for automation and labor saving. In particular, it aims to grow earnings by expanding sales of systems targeting the logistics sector, which has good growth prospects.
Environmental Systems
Develop energy-creation businesses such as renewable power generation to expand sales of products that meet energy conservation needs
Develop life-cycle engineering (LCE: providing services through a building’s life-cycle), a recurring-revenue business
Tap into needs of the carbon neutral era and expand sales of mainstay products while developing a broad suite of products in energy creation-related business such as renewable power generation.
Roll out growth strategies
Develop new technologies geared toward a carbon-free society and expand proposals to meet needs for energy saving and energy creation in customers’ equipment
Strengthen company's forte, industrial HVAC systems, in Japan and overseas, geared toward new and expanded manufacturing facilities amid global semiconductor shortage and spread of electric vehicles
Expand in water treatment facilities overseas (Environmental Systems business)
Pursue open innovation (collaborate with other industries, academia, and start-ups)
Use digital technologies to reform workflows and create new business opportunities
The company’s key growth strategies are the development of new technologies geared toward a carbon-free society and strengthening industrial HVAC systems. The company aims to develop carbon-free technologies to expand proposals in areas where its strengths lie, namely energy saving and energy creation.
In HVAC systems, the company plans to focus on strengthening personnel systems. In its mainstay Industrial HVAC and HVAC and Plumbing for Buildings businesses, quality worksite management as well as technological development are important. However, construction management cannot be learned in a few months of training. It generally takes a decade before a site manager is able to oversee a major project. The company has constantly trained its construction managers, and intends to step up its efforts with a view to growing industrial HVAC demand and subsequent overseas development.
Enhance Sanki brand
Establish the Earth MIRAI Project to explore new technologies
Spend on capex to make the company carbon neutral (install solar power facilities and switch to renewables for power the company uses)
Strengthen SANKI YOU Eco Contribution Point system
Continue to support environmental conservation in Antarctica
Contribute to society by supporting sports and the arts
Improve communication capabilities
Employ communication methods in line with the times, such as online videos and digital signage
Enhance communication content to cover corporate governance, news releases about technological developments, and activities that contribute to society
Disclose
financial and capital management policies
Basic policy is for stable and sustainable returns to stakeholders
Minimum dividend payout ratio: 50% (simplified from Phase 2 target of total return ratio)
Minimum annual DPS: JPY70.0
Buyback of around 5.0mn shares during Phase 3 (four years)
Improve payment terms for business partners
ROE target: At least 8.0%
Shared Research understands that ESG policies set out in Phase 2 have evolved to sustainability policies in Phase 3.
New policies
The company has adopted three new policies for Phase 3 in addition to five carried over from Phases 1 and 2. It aims to use the eight policies to achieve the targets in its long-term vision, Century 2025, in FY03/26, as well as its ultra-long-term vision.
Contribute to sustainable society
Develop new technologies for a carbon-free society
Reduce overall greenhouse gas emissions, including across supply chain (company set ambitious targets a step ahead of competitors)
CSR procurement considering environmental impact and human rights
Strengthen SANKI YOU Eco Contribution Point system
Formulate and employ business continuity management system (BCMS) to maintain effective business continuity planning (BCP)
Accelerate work style reforms
Endeavor to make colleagues happy
Facilitate feelings of accomplishment, growth, self-actualization, contribution to advancement of society; respect human rights; and treat people appropriately
Smile Project driven by top management to continue
Reform personnel system around proactive promotion of young people and extension of retirement age
Use digital technology to boost quality and productivity and reduce working hours
Employ and train human resources with a view to promoting diversity
Invest with a view to the next generation
Investment areas
Decarbonization technologies (energy saving, energy creation, etc.)
Automation and labor-saving technologies (materials handling)
LCE business (recurring-revenue business)
Digital transformation (DX)
Methodology
Growth investment: JPY20bn
Collaboration with external parties such as through open innovation
M&A
With a view to the future, nurture the green shoots that will become new engineering businesses in areas with emerging societal needs
Business portfolio strategy
The company has two major objectives: (1) expand operations in
the Facility Systems and Machinery Systems businesses and (2) expand the share
of revenue of the plant division (Machinery Systems and Environmental Systems) to
20%. As a result, it expects the share of revenue of its mainstay Facilities
Construction business to decline from 78% in FY03/17 to 72% in FY03/26.
However, this is in the context of company-wide growth (from consolidated revenue of JPY168.5bn
in FY03/17 to JPY220.0bn in FY03/26), including in the Facilities Construction
business.
While Facilities Construction will remain the mainstay, the company’s focus will be on expanding the other businesses. Note: Facility Systems was part of the Facilities Construction segment in FY03/21. The company has not said whether it will be disclosed as a standalone segment, but nevertheless, its expansion is definitely a priority focus during Phase 3.
Shared Research prepared the following comments focusing on Phase 2 before the company announced the new medium-term management plan in February 2022. As Phase 3 has been released, Shared Research plans to remove this information at some point, but it will remain for now to facilitate comparisons with Phase 2.
Medium-term management plan summary (Phase 2)
Sanki Engineering is now in the final year of Phase 2 (FY03/20–FY03/22) in the ten-year “Century 2025” long-term vision it launched in FY03/17. In FY03/20, the first year in Phase 2, operating profit and recurring profit reached record highs, but the impact from the COVID-19 pandemic, which erupted shortly afterward, resulted in revenue and profit declining in FY03/21. Amid some uncertainty over when the pandemic will be contained, the company for the final year in Phase 2 targets RPM of 5.0% or more, an annual DPS of JPY60.0 or more, the repurchasing of about 5.0mn shares, a total return ratio of 70% or more, and ROE of 8.0% or more. The company looks to announce Phase 3 targets, covering the final four years in the ten-year period, when it releases FY03/22 results (currently expected around May 2022).
The current medium-term management plan: Phase 2
The company’s medium-term management plan is a ten-year long-term vision launched in FY03/17 called “Century 2025.” The ten-year vision includes the following three phases:
Phase 1: FY03/17-FY03/19 (three years)
Phase 2: FY03/20-FY03/22 (three years)
Phase 3: FY03/23-FY03/26 (four years)
The plan does not follow a rolling format, under which it would be updated at the beginning of each new fiscal year. Instead, the targets for the following Phase are determined at the end of the preceding Phase. In addition, since performance each year depends largely on the volume of orders the company received in the preceding year, the plans only set management targets for the final year in each Phase.
The targets for Phase 2 and FY03/22, the final year in the three years covered by Phase 2, are as follows.
RPM: 5.0% or more
DPS: JPY60.0 or more
Share buybacks: About 5.0mn shares
Total returns ratio: 70% or more
ROE: 8.0% or more
Progress achieved toward meeting these targets is as follows.
RPM: 4.3% (FY03/21), company target for FY03/22 is 5.0%
DPS: JPY80.0 (FY03/21), ordinary DPS forecast for FY03/22 is JPY70.0
Share buybacks: Acquired 2.958mn shares through the end of FY03/21
Total return ratio: 97.3% (FY03/21), company target for FY03/22 is 79.1%
ROE: 6.6% (FY03/21), the company has not set a target for FY03/22
Performance targets and results for the first two years in Phase 2 (FY03/20 and FY03/21) are as follows.
FY03/20 (first year of Phase 2) targets and results (targets set in May 2019)
FY03/20 targets: revenue of JPY200.0bn, gross profit of JPY30.0bn, GPM of 15.0%, recurring profit of JPY9.0bn. RPM of 4.5%.
FY03/20 results: revenue of JPY207.6bn, gross profit of JPY32.1bn, GPM of 15.5%, recurring profit of JPY11.2bn, RPM of 5.4%.
Results exceeded the targets. Moreover, thanks to a robust level of orders carried over from FY03/19, when orders reached a record-high level, gross profit, operating profit, and recurring profit all reached record-high levels in FY03/20, with revenue reaching its second highest level on record. However, with the spread of COVID-19 from the beginning of 2020, Q4 (January–March 2020) orders declined 30% YoY, which impacted performance in FY03/21.
The Japanese government declared a state of emergency in April 2020, which was also the start of the second year of Phase 2 for the company (FY03/21), and this state of emergency resulted in a sharp slowdown in economic and production activity in Japan. Indeed, some economic and production activity came to a complete halt albeit for a limited time during this period. In light of these conditions, the company set the following targets for FY03/21.
FY03/21 (second year of Phase 2) targets and results (targets revised in November 2020)
FY03/21 targets: revenue of JPY192.0bn, gross profit of JPY29.5bn, GPM of 15.4%, recurring profit of JPY8.5bn, RPM of 4.4%.
FY03/21 results: revenue of JPY190.1bn, gross profit of JPY28.8bn, GPM of 15.1%, recurring profit of JPY8.2bn, RPM of 4.3%.
Results fell short of the company’s downwardly revised targets. Irrespective of the pandemic, the company’s targets factored in FY03/21 being the beginning of a transition period for large-scale projects in the HVAC and Plumbing for Buildings business. Nonetheless, performance fell short of expectations, largely due to the aforementioned slowdown in large-scale projects, a greater-than-expected deterioration in small-scale maintenance and repair work due to the pandemic, as well as restrictions on sales activities. For additional information, please see the historical performance section for FY03/21 of this report.
The company plans to release details related to Phase 3 targets, covering the final four years in the “Century 2025” long-term vision, when it announces FY03/22 results.
ESG initiatives as part of sustainable management
With the aim of creating sustainable social value, the company in its mid-term management plan has set clear ESG policies and targets for each fiscal year. Targets for FY03/21, the final year in Phase 2, are as follows.
Environment
Policy
Develop products and technologies that contribute to realizing a decarbonized society and reduce the environmental impact of the company’s business activities.
FY2021 KPIs (indicators for evaluating FY2021 results)
The company targets orders based on CO2 reduction proposals under the SANKI YOU Eco Contribution Point system accounting for 50% or more of total proposals, with the number of CO2 reduction proposals under this system reaching at least 300 per year. The company aims to reduce CO2 emissions as a result of business activity by 1.0% YoY.
Initiatives taken thus far
The company has actively promoted energy-saving and energy-creating businesses, and has won large-scale construction project orders as a result. In commemoration of the 10th anniversary of the SANKI YOU Eco Contribution Point system, the company created “Kansha no Mori” (forest of appreciation) as part of its tree-planting program.
The company views environmental management as a key pillar in sustainable management. For additional information, please see the Environment: policies, initiatives, and specific measures section below.
Social
Policy
Sanki Engineering aims to contribute to building sustainable infrastructure by working together with local communities. The company looks to create work environments that are safe and easy to work in, while also promoting diversity to enhance its human resources.
FY2021 KPIs (indicators for evaluating FY2021 results)
In terms of ensuring quality and improving its technical capabilities, the company targets through divisional cooperation a 5% YoY reduction in the rate of conflicts and complaints during construction. The company also aims to increase the number of projects using new technologies to reduce construction-related labor. As part of its effort to ensure occupational health and safety, the company intends to promote divisional cooperation to reduce the number of accidents by 20% YoY. In line with this goal, the company will implement disaster prevention measures as well as health and safety education programs at its subcontractors. In terms of supply chain management, the company will exchange opinions with its suppliers on the subject and promote the digitalization of operations to ensure fair and appropriate transactions. Sanki Engineering will also work to stabilize management at its partner companies. With an eye toward improving the value of its human resources and the working environment, the company will strengthen its employee feedback system and work to improve the work-life balance of its employees through the Smile Project, which focuses on reducing average overtime per employee and increasing the percentage of paid leave taken by each employee. Finally, the company looks to coexist with local communities, and in pursuit of this goal will participate in local disaster prevention activities and clean environment projects.
Initiatives taken thus far
Sanki Engineering has advanced workstyle reforms in order to take advantage of its diverse workforce while introducing a flexible working hours system and a variety of paid leave programs for all its employees. The company further promoted workstyle reforms through the Smile Project and launched the four-group Smile Site Plan. The company also reviewed its payment terms to improve the cash flow at the subcontractors who are also its business partners.
Governance
Policy
Reinforce the governance system
FY2021 KPIs (indicators for evaluating FY2021 results)
Sanki Engineering aims to create a corporate governance system that meets the demands of the age, with reviews conducted on an annual basis. The company will also strengthen activities to promote compliance and build a system to enhance its risk management.
Initiatives taken thus far
An outside director was appointed as the chairman of the company’s board of directors, and a third-party organization conducted interviews to evaluate the effectiveness of the board of directors. In addition, the company formed an Advisory Committee on Nominations and Remuneration composed entirely of outside directors, and made the legal department independent and under the direct control of the company president. As part of its efforts to promote compliance, the company launched an internal reporting system that is already proving effective. In terms of risk management, the company focused on addressing the credit risks of its customers and suppliers, while also bolstering its ability to respond to information security risks, overseas business risks, and disaster risks. In order to prevent the further spread of COVID-19, the company in April 2020 established a COVID-19 task force headed by the president and entrenched basic infection prevention measures. It also actively promoted telecommuting and flexible work hours. In July and August 2021, the company provided vaccinations to 1,500 individuals, including employees, their families, and affiliate company workers.
Environment: policies, initiatives, and specific measures
Among Sanki Engineering’s ESG-related initiatives, the environment (E) carries the strongest weighting in terms of the company’s business and technological development. Moreover, one of the key social activities of focus for the company involves ecology and the conservation of the environment. As a member of society, the company considers environmental concerns to be among its most important management issues. To that extent, the company has set two missions.
Mission one: protect the global environment using the company’s advanced technological capabilities
In line with this mission, the company focuses on the development and introduction of energy-saving and energy-creating technologies, a key area of strength for Sanki Engineering, so as to better capture energy, more efficiently use energy, and enable the reuse of resources.
Mission two: minimize the environmental impact from the company’s business activities
In line with this mission, the company aims to minimize its consumption of energy and resources, promote recycling and waste reduction, and provide environmental education to its employees.
With the goal of fulfilling these two missions, the company is actively promoting environmental management. It is also actively working to protect working environments, local environments, and the global environment.
Policy
Develop products and technologies that contribute to realizing a decarbonized society and reduce the environmental impact of the company’s business activities.
Initiatives
The company is contributing to decarbonization, energy conservation, and energy creation through the development of products and technologies, and will maintain the SANKI YOU Eco Contribution Point system that has now been in effect for ten years. The company will also work to reduce the environmental impact of its business activities.
Contributing through products and technologies
Contributing through the development of products and technologies is one of the key points in the company’s environmental management efforts. In particular, the development of these products and technologies in the company’s various businesses offers the potential for customers to save and create energy, and to reduce CO2 emissions. Moreover, through its LCE business, the company can help to reduce the life cycle costs of its customers and contribute to the creation of a decarbonized and sustainable society.
LCE business: LCE is an abbreviation for Life Cycle Engineering and is a business concept created aimed at providing new construction, management, maintenance, renewal, and reconstruction services throughout a building’s lifecycle.
The company has about 460 registered patents for technologies it has developed, and is able to provide its customers with unique technologies and services based on those patents.
Examples of the company’s energy-saving and energy-creating technologies
As it promotes environmental management, the company is focusing in particular on the development of technologies related to energy conservation and energy creation. The following are some examples of the proprietary energy-saving and energy-creating technologies created over the last few years, although this does not represent the full list of such technologies.
Woody biomass gasification plants
This facility uses wood chips as a raw material to achieve gasification and then generates electricity using a gas engine. It also uses wood chips as a fuel source for a steam turbine. The facility has been working since 2017. According to data from the company and the Ministry of Economy, Trade and Industry (METI), the share of renewable energy in Japan’s power supply mix is expected to grow from 11% in FY2013 to 24% in FY2030. Within the renewable energy group, power generated from biomass is expected to almost triple, with the expected expansion second only to that for solar power. The company intends to aggressively market its woody biomass gasification plant moving forward.
Trans-heat containers
Trans-heat containers are used as part of a heat delivery service that stores low-temperature heat in a tank and transports it by vehicle (truck) to the destination. It involves taking waste heat from factories and incineration facilities and storing it using heated latent heat storage materials, and then delivering it via special containers by car (truck) to facilities that need the heat. The offline heat delivery service can deliver heat up to 30 kilometers away, enabling the use of energy that might otherwise be wasted and the reduction of CO2 emissions.
AEROWING
AEROWING products are energy-saving diffusers (devices that turn compressed air into bubbles and send them into the water) with improved oxygen transfer efficiency, and are used in water and sewage systems. The microbubbles reduce air and power consumption, and the product itself has already shown strong level of durability, with a longer service life than conventional products. The company has already introduced the upgraded AEROWING II, offering a favorable contribution to the Environmental Systems business that uses the product.
Periloop
Periloop is an air-conditioning system for large spaces such as factories and gymnasiums. It saves energy by forming temperature stratification layers when cooling during summer. When heating during winter, it suppresses cold air to achieve heating near the ground. It is already being used by major automobile manufacturers. One of the key features is that during cooling operations in summer, only the lower-level space is cooled (the upper space circulates hot air), which can result in energy savings of up to 40%.
SANKI YOU Eco Contribution Point system
Sanki Engineering launched the SANKI YOU Eco Contribution Point system ten years ago to contribute, alongside its customers, to the realization of a sustainable society and the prevention of global warming. Under the system, the company makes energy-saving proposals to its customers using equipment that contributes to reduced CO2 emissions. If those proposals are accepted, the amount of the achieved emissions reduction is converted to Eco Contribution Points (each metric ton (MT) reduction equating to JPY100), which are then committed to activities aimed at preserving the environment. The cumulative amount of CO2 reductions by customers in the SANKI YOU Eco Contribution Point system through the end of FY03/21 was 231,000MT (including a reduction in FY03/21 of about 45,000MT), with the cumulative amount of point donations at that time exceeding JPY20mn and the number of trees planted reaching about 18,000. The SANKI YOU Eco Contribution Point system has become symbolic of the company’s environmental management efforts.
Reducing the environmental impact from business activities
Sanki Engineering calculates and manages CO2 emissions stemming from its business activities, including at the headquarters, offices, and construction sites, as well as in the Real Estate business as part of its effort to reduce those emissions. The company’s medium-term management plan targets non-consolidated emissions reductions of 1% YoY. However, the company’s energy use in FY2019 actually increased 10% YoY on the launch of the new R&D center and an expansion in business. As such, reducing CO2 emissions in line with its stated targets will not be an easily achieved. That said, even under current circumstances the company is working to reduce energy usage through the introduction of several energy-saving systems featuring proprietary technologies. The company is also focused on the comprehensive management of industrial waste, largely generated at construction sites (in particular, sites where the company is the prime contractor) so as to get a better idea of actual conditions. Finally, the company is appropriately treating industrial water and has achieved a stable recycling rate of about 98% (excluding waste treated at final landfill sites).
Establishment of a Sustainability Committee and agreement with the TCFD recommendations
Sanki Engineering in November 2021 announced the establishment of a Sustainability Committee, chaired by the president. The committee is one of the company's new strategic committees charged with accelerating the group's efforts to contribute to the realization of a sustainable society.
In addition to contributing to the realization of a decarbonized society, the new committee will decide on important issues to help the company achieve sustainability management, including in regard to further promoting diversity, respecting human rights, and contributing to the building of resilient cities. The company also aims to actively promote measures aimed at improving corporate value as well as environmental and social value. The company's efforts in energy conservation and energy creation under the theme of decarbonization are tied directly to the core business of the group, which is focused on the development of comprehensive engineering services. Moving forward, the company plans to continue its group-wide promotional activities through the Sustainability Promotion Department, which is composed of key personnel from each division. Finally, with the aim of contributing to a carbon-neutral and sustainable society, the company will promote the disclosure of information and specific initiatives, including in regard to medium- to long-term policies and the identification of materiality.
Acknowledging the importance of addressing climate change, the company has expressed its support for the recommendations put forth by the Task Force on Climate-related Financial Disclosure (TCFD). Management targets the disclosure of information on the four key themes in organizational management recommended by the TCFD, namely governance, strategy, risk management, and metrics and targets, by June 2022.
Business
Business model overview
Summary
Sanki Engineering operates mainly in the field of contracted HVAC (heating, ventilation, and air conditioning) and plumbing construction work for office buildings and manufacturing facilities. The company does not manufacture HVAC equipment; instead, it handles construction process design and manages contracted HVAC construction work. The company was founded in 1925 as a spinoff from former machinery department of Mitsui & Co., Ltd. In FY03/21, the company recorded revenue of JPY190.1bn, with the Facilities Construction business accounting for 81.8% of this. Within the Facilities Construction business, contract work in HVAC and plumbing systems accounted for 62.8% of the segment revenue, with electrical systems (construction and installation of lighting equipment and substation equipment) facility systems (office building integration and relocation design work) together accounting for 19.0%. The Machinery Systems business (manufacture of conveyors and logistics systems) accounted for 4.7% of total revenue, with the Environmental Systems business (development of water and waste treatment equipment and systems) accounting for 12.4%, and the Real Estate business accounting for 1.7%. Of the JPY28.8bn in gross profit reported in FY03/21, the Facilities Construction business accounted for 80.9%, the Machinery Systems business 5.4%, the Environmental Systems business 11.0%, and the Real Estate business 3.4%. The overseas business recorded orders of JPY2.8bn and accounted for less than 2% of total revenue.
Facilities Construction business
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Facilities Construction
Orders
134,877
136,142
143,837
150,030
152,431
146,612
153,441
182,531
157,657
156,767
YoY
N.A.
0.9%
5.7%
4.3%
1.6%
-3.8%
4.7%
19.0%
-13.6%
-0.6%
HVAC and Plumbing for Buildings
(64,341)
(68,476)
(74,921)
(70,778)
(66,172)
(65,763)
(62,274)
(65,639)
(62,095)
(65,371)
Industrial HVAC
(44,945)
(39,828)
(39,870)
(46,765)
(52,522)
(49,823)
(58,907)
(82,729)
(58,391)
(59,234)
Electrical Systems
(18,244)
(19,103)
(19,328)
(23,215)
(22,667)
(21,576)
(22,675)
(23,342)
(25,000)
(21,472)
Other
(7,347)
(8,735)
(9,718)
(9,272)
(11,070)
(9,450)
(9,585)
(10,821)
(12,171)
(10,690)
Revenue
115,019
128,626
143,697
151,167
149,950
141,566
139,686
179,298
171,500
155,499
YoY
-2.2%
11.8%
11.7%
5.2%
-0.8%
-5.6%
-1.3%
28.4%
-4.3%
-9.3%
Gross profit
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
19,121
25,589
25,780
23,253
YoY
-----
-----
-----
-----
-----
-----
-----
33.8%
0.7%
-9.8%
Gross profit margin
-----
-----
-----
-----
-----
-----
13.7%
14.3%
15.0%
15.0%
Segment profit
-561
1,196
3,260
2,943
7,698
6,404
6,010
9,905
9,893
7,677
YoY
N.A.
N.A.
172.6%
-9.7%
161.6%
-16.8%
-6.2%
64.8%
-0.1%
-22.4%
Segment profit margin
-0.5%
0.9%
2.3%
1.9%
5.1%
4.5%
4.3%
5.5%
5.8%
4.9%
Capital expenditures
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
Depreciation
396
377
347
322
330
330
389
754
919
955
No. of employees
1,562
1,526
1,516
1,524
1,569
1,600
1,607
1,660
1,743
1,781
Revenue per employee (JPY'000)
73,144
83,307
94,475
99,452
96,961
89,344
87,113
109,763
100,793
88,251
Profit per employee (JPY'000)
-357
775
2,143
1,936
4,978
4,042
3,748
6,064
5,814
4,357
Notes: Gross profit was disclosed only from FY03/18; there is no available gross profit data before that point.
Segment profit (profit before consolidated adjustments) is tied to recurring profit on the company’s balance sheet.
Business outline
The Facilities Construction business accounted for 81.8% of total revenue in FY03/21 and includes the HVAC and Plumbing for Buildings business (35.6% of FY03/21 segment revenue), the industrial HVAC business (41.3%), the electrical systems business (16.0%), and the facility systems business (7.1%). The HVAC and Plumbing for Buildings business focuses on office and general-use buildings, while the industrial HVAC business centers on corporate work associated with production, including for manufacturing facilities, laboratories, and cleanrooms. The electrical systems business mainly involves lighting and power supply work for office buildings and factories, while the facility systems business centers mainly on network solutions services as well as office relocation-related project management and consulting services.
FY03/21 revenue and revenue weightings by customer sector
The Facilities Construction business recorded FY03/21 revenue of JPY155.5bn (-9.3% YoY), including JPY137.6bn from the private sector (88.5% of segment revenue), JPY15.2bn from the public sector (9.8%), and JPY2.7bn from others (1.8%). Within the private sector, revenue was JPY69.0bn (44.3% of total revenue) from the manufacturing sector and JPY68.6bn (44.1%) from the non-manufacturing sector. Among manufacturers, the top three client sectors were electrical machinery (17.3% of revenue), automobiles (10.7%), and chemicals (5.3%). Among non-manufacturers, the top three client sectors were finance/insurance (14.4% of revenue), services and others (8.6%), and real estate (6.7%).
In terms of types of buildings and applications, office buildings, manufacturing facilities, and research facilities make up the majority of the company’s work. Of the JPY156.8bn in orders received by the Facilities Construction business in FY03/21, more than two-thirds came from these three sources, including JPY45.6bn for office buildings (29.1% of orders), JPY45.3bn for manufacturing facilities (28.9%), and JPY15.3bn for research facilities (9.8%). Public-sector orders were JPY16.7bn (10.6% of orders).
The orders process: from new orders to the booking of revenue
Orders received in the Facilities Construction business, focused mainly on HVAC and plumbing work, are broken down into two categories, new construction orders (JPY86.0bn in FY03/21, 44.0% of total orders) and renewal construction orders (JPY109.6bn, 56.0%). These ratios have remained generally stable from year to year. New construction orders are secured through a bidding process, with orders acquired through restricted bidding (only companies nominated by the client can participate in the bidding procedure) accounting for about 51.6% and those acquired through open bidding accounting for about 48.4%. Compared to other companies in the sector, Sanki Engineering has a high proportion of orders secured through restricted bidding. In renewal construction orders, which will be discussed later in this report, the company tends to receive more direct orders (direct requests from clients, not through general contractors) than indirect orders (orders received through general contractors).
Restricted bidding: Construction order bids consist of restricted bids and open bids. The restricted bidding system allows only companies nominated by the client to bid. Under this method, the client needs to conduct sufficient research on technological strengths and past performance in order to select a reliable construction company or operator. Since the reasons for the client’s selection will be made public, and in detail, each company competing for the order needs to ensure the strength of its technological expertise and delivery record. On the other hand, open bidding allows any number of companies to submit bids, as long as they meet the stated requirements. As a general rule, public works projects ordered by the national and local governments must be secured through open bidding. Profit margins on restricted bidding projects tend to be higher than those on open bidding projects as contract values for the former in many cases are higher due to the strict requirements of the ordering party. Restricted bidding may not be limited to only one company. In some cases, multiple construction companies may be selected to bid for the project.
About 60% of new orders are booked under the percentage-of-completion method, while small-scale maintenance and repair work that does not exceed construction periods and relatively low-value projects (generally around JPY10.0mn) are booked under the completed-contract method. Roughly 40% of orders received have construction periods lasting less than one year (orders and revenue booked in the same fiscal year). While the company does not disclose the ratio of maintenance and repair work to the revenue of Facilities Construction business, Shared Research believes it to be around 10%.
Renewal construction orders
More than half of construction projects delivered by the company lead to subsequent renewal construction orders. In FY03/21, renewal construction orders accounted for about 56% of total orders. The cycle for renewal construction orders is generally ten to 15 years, and for some small-scale projects less than ten years. This reflects the fact that the legal useful lifespan of heating and cooling equipment within buildings is 13 to 15 years. The truth, however, is that the equipment is rarely used beyond its legal useful lifespan, and while the cycle may be more than 10 years, the company can almost certainly expect to receive renewal construction orders within this period.
To add to this, orders for all-encompassing large-scale renewal construction generally come every thirty to forty years. This renewal construction work involves rebuilding from the design stage (referred to as skeleton work), and centers on the physical lifespan of pipes and air ducts that deteriorate over time. It has little to do with the useful lifespan of the buildings and other structures themselves. Including these types of renewal construction orders, the value per construction project ranges from several million yen to several billion yen, though more than a quarter of total orders are for projects of JPY1.0bn or more. While the total amount of orders received varies significantly from year to year, the overall trend is toward larger orders, i.e., those valued at JPY1.0bn or more.
It is extremely rare for renewal construction orders to be placed not with the original company, but with other companies operating in the same business. This is because the job involves far more than the simple replacement of HVAC equipment, as HVAC facilities work involves not only the actual equipment installation, but also plumbing work, and in some cases electrical work. In construction works by other companies, the methods used by the original company, including in design, may in many cases be unclear. New methods may be used in renewal construction projects where the original construction was by a different company, but costs to the client may be higher. For more information on HVAC facilities construction, please see the Market and Value Chain section later in this report.
Cost structure
On a FY03/21 non-consolidated basis, outsourcing costs accounted for 53.4% of completed construction costs, i.e., contractor construction costs, with material costs accounting for 27.0%, and other costs accounting for 19.6% (including personnel costs, which accounted for 8.7%). Material costs include purchased HVAC, machinery, and piping costs. Outsourcing costs, which accounted for the largest share of completed construction costs, include subcontractor order costs (mainly personnel costs ), but also in some cases costs associated with HVAC equipment purchased by subcontractors. The cost structure ratios have not varied significantly and gross profit at the company often fluctuates based on outsourcing costs incurred. In the past, the company was forced to pursue low-priced orders, which led to operating losses in FY03/07–FY03/08, but it now rarely has any unprofitable projects.
The advantage of having an electrical systems business within the Facilities Construction business
The electrical systems business accounted for 16.0% of revenue in the Facilities Construction business in FY03/21 and plays a key role in the company’s HVAC and plumbing-related work. Since the qualifications required for electrical systems work are different from those required for HVAC and plumbing work, so too are the engineers working in these fields. For this and other reasons, some industry peers have elected to outsource electrical systems operations rather than maintaining an in-house business. However, with the growing sophistication of electrical systems, HVAC, plumbing, and electrical systems have become increasingly intertwined and orders encompassing all three are no longer uncommon. This is especially true for industrial HVAC equipment, where electricity usage is indeed substantial, and having an electrical systems business gives the company the advantage of being able to produce synergies with the HVAC and plumbing work. In addition, data center work, where the scale of projects has been increasing, is almost entirely electrical systems work, and having an electrical systems business can often lead to the company also receiving HVAC and plumbing project orders from these same clients. As such, having an electrical systems business can lead to an expansion in business opportunities.
Facility systems business
The facility systems business (7.1% of Facilities Construction business revenue in FY03/21) centers mainly on network solutions services as well as office relocation-related project management and consulting services. There is a growing trend of reexamining ways to improve office productivity, especially with telecommuting becoming increasingly common and the financial and other sectors reducing the number of offices in operation.
For additional information on profitability in the Facilities Construction business, in which the HVAC and plumbing business is a part, please see the Profitability analysis section later in this report.
Machinery Systems business
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Machinery Systems
Orders
9,361
10,817
8,482
5,716
10,309
8,130
12,100
12,049
10,351
7,858
YoY
N.A.
15.6%
-21.6%
-32.6%
80.4%
-21.1%
48.8%
-0.4%
-14.1%
-24.1%
Revenue
10,823
6,501
9,846
9,953
9,217
8,192
9,254
11,791
11,169
8,973
YoY
14.1%
-39.9%
51.5%
1.1%
-7.4%
-11.1%
13.0%
27.4%
-5.3%
-19.7%
Gross profit
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
1,749
2,136
2,316
1,556
YoY
-----
-----
-----
-----
-----
-----
-----
22.1%
8.4%
-32.8%
Gross profit margin
-----
-----
-----
-----
-----
-----
18.9%
18.1%
20.7%
17.3%
Segment profit
-187
-1,119
-287
105
275
-138
-40
238
320
-393
YoY
N.A.
N.A.
N.A.
N.A.
161.9%
N.A.
N.A.
N.A.
34.5%
N.A.
Segment profit margin
-1.7%
-17.2%
-2.9%
1.1%
3.0%
-1.7%
-0.4%
2.0%
2.9%
-4.4%
Capital expenditures
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
Depreciation
103
74
60
51
52
33
39
96
228
262
No. of employees
183
174
171
164
154
149
150
153
166
172
Revenue per employee (JPY'000)
58,821
36,420
57,078
59,421
57,969
54,073
61,900
77,828
70,025
53,095
Profit per employee (JPY'000)
-1,016
-6,269
-1,664
627
1,730
-911
-268
1,571
2,006
-2,325
Source: Shared Research, based on company materials
*Gross profit was disclosed only from FY03/18; there is no available gross profit data before that point.
*Segment profit (profit before consolidated adjustments) is tied to recurring profit on the company’s balance sheet.
Business outline
The Machinery Systems business is focused mainly on the manufacture and sales of systems for conveyance and material handling. The company manufactures and sells a variety of conveyors, though this is the only manufacturing business in its portfolio. Revenue can vary from year to year, but generally remains within the JPY8.0bn–JPY12.0bn range. The business has produced segment losses in six of the last ten years.
Details of the business
The types of products that the company deals with in the business include FA systems, clean conveyance systems, material handling systems, airport baggage and cargo handling systems, and information control systems. FA systems and clean conveyance systems improve the efficiency of manufacturing processes at production sites. In the field of cleanroom conveyance technology, an area of expertise for the company in its HVAC installation operations, the business provides optimal conveyance systems emphasizing improved efficiency and a high level of cleanliness. In material handling systems, the company specializes in publishing-related products, and also boasts a strong brand in computer center-related material handling systems. The company has supplied a number of fast, safe, and reliable airport baggage and cargo handling systems to major airports.
Lightweight conveyors, including curved belt conveyors, are the only products that the company manufactures itself. These products accounted for roughly half of the JPY9.0bn in revenue in the Machinery Systems business in FY03/21, and this ratio has generally remained stable. While conveyors are sold through catalogs, the company is working to strengthen its sales system to promote sales based on the specific needs of the regional markets in which the products are sold. The company launched operations at the new conveyor plant in September 2019, creating a system that not only improves productivity but also reduces costs.
Market environment and outlook
The company does not view the market environment in which the Machinery Systems business operates as difficult, noting in particular an expansion in capital investment in logistics facilities amid the growing need for automation and reduced labor as the working population in Japan declines. With the goal of strengthening the Machinery Systems business moving forward, management is focused on expanding sales and sales channels for its hybrid equipment, which combines purchased robotics with its own conveyors.
With customers being impacted by the COVID-19 pandemic, conveyor sales took a hit in FY03/21, but now appear to be on a recovery track. Moreover, there is a growing need for fully automated systems that go one step beyond systems that merely reduce labor, which appears a promising development for the company. That being said, price competition is getting increasingly severe with each passing year as many manufacturers, including major manufacturers, enter the market. Finally, given the aforementioned cost burden of depreciation and other expenses associated with the launch of the new plant, the company expects that earnings in the business will be somewhat constrained for at least a little while longer.
Executive summary
Business overview
Sanki Engineering operates mainly in the field of contracted HVAC (heating, ventilation, and air conditioning) and plumbing construction work for office buildings and manufacturing facilities. The company does not manufacture HVAC equipment; instead, it handles construction process design and manages contracted HVAC construction work. The company was founded in 1925 as a spinoff from former machinery department of Mitsui & Co., Ltd. and is now one of the four major HVAC construction firms in Japan, ranking third in terms of revenue (see below).
In FY03/21, the company recorded revenue of JPY190.1bn and gross profit of JPY28.8bn. The mainstay Facilities Construction business accounted for 81.8% of revenue and 80.9% of gross profit. Within the segment, contracted HVAC and plumbing work accounted for 62.8% of the segment revenue, while electrical systems work, which includes the construction and installation of lighting equipment and substation equipment, and facility systems work, which includes office building integration and relocation design work, together accounted for 19.0%. Among other segments, the Machinery Systems business, which manufactures systems for conveyance and material handling accounted for 4.7% of revenue and 5.4% of gross profit, the Environmental Systems business, which develops waste treatment equipment and systems, accounted for 12.4% of revenue and 11.0% of gross profit, and the Real Estate business accounted for 1.7% of revenue and 3.4% of gross profit. The company’s overseas business accounted for less than 2% of revenue.
The Facilities Construction business produced JPY155.5bn in revenue in FY03/21. In manufacturing, the top three client sectors were electrical machinery (17.3% of revenue), automobiles (10.7%), and chemicals (5.3%). In non-manufacturing, the top three client sectors were finance/insurance (14.4% of revenue), services and others (8.6%), and real estate (6.7%). The public sector accounted for 9.8% of revenue.
In terms of types of buildings and applications, office buildings, manufacturing facilities, and research facilities make up the majority of the company’s work. Of the JPY156.8bn in orders received by the Facilities Construction business in FY03/21, more than two-thirds came from these three sources, including JPY45.6bn for office buildings (29.1% of orders), JPY45.3bn for manufacturing facilities (28.9%), and JPY15.3bn for research facilities (9.8%). Public sector orders accounted for 10.6% of orders. On the other hand, public-sector orders accounted for about 80% of orders in the Environmental Systems business (FY03/21 revenue of JPY23.6bn), whose mainstay services are in industrial waste treatment systems and water supply and sewage systems.
Orders received are broken down into two categories, new construction orders (JPY86.0bn in FY03/21, 44.0% of total orders) and renewal construction orders (JPY109.6bn, 56.0%). New construction orders are secured through a process, with orders acquired through restricted bidding (only companies nominated by the client can participate in the bidding procedure) accounting for about 51.6% and those acquired through open bidding (any number of companies that meet the conditions set by the client can participate in the bidding procedure) accounting for about 48.4%. Compared to industry peers, Sanki Engineering has a high proportion of orders secured through restricted bidding in new construction orders, with the ratio for renewal orders also high.
The order value per construction project, including on new construction orders and renewal construction orders, can range from a few million yen to several billion yen, although more than a quarter of total orders are from projects valued at more than JPY1.0bn. While the total amount of orders received varies significantly from year to year, the overall trend is toward larger orders, i.e., those valued at JPY1.0bn or more.
On a non-consolidated basis in FY03/21, outsourcing costs accounted for 53.4% of completed construction costs, with material costs accounting for 27.0%, and other costs accounting for 19.6% (including personnel costs, which accounted for 8.7%). Material costs included HVAC, machinery, and piping costs. Outsourcing costs, which accounted for the majority of completed construction costs, included cost of orders placed with subcontractors (mainly personnel costs), but also in some cases costs associated with HVAC equipment purchased by the subcontractor. These ratios have not varied significantly from year to year, and gross profit at the company often fluctuates based on outsourcing costs.
In terms of facilities construction orders received in FY03/21 (mainly HVAC facilities work), the four largest recipients in the industry were Takasago Thermal Engineering (TSE1: 1969, orders of JPY281.6bn), Dai-Dan (TSE1: 1980, JPY176.5bn), Sanki Engineering (coming in third at JPY156.8bn), and Taikisha (TSE1: 1979, JPY135.5bn). These figures do not include coating systems orders at Taikisha or Plants & Machinery Systems business orders at Sanki Engineering.
GPM, the company’s key profitability indicator, stood at 15.1% on a company-wide basis in FY03/21. In contrast, GPM was 16.8% for Takisha, 13.6% for Dai-Dan, and 13.4% for Takasago Thermal Engineering. GPM on a most recent five-year and ten-year average was 14.7% and 13.1%, respectively, at the company, 15.6% and 14.8% at Taikisha, 13.1% and 12.2% at Dai-Dan, and 13.3% and 12.1% at Takasago Thermal Engineering. These figures put the company in second place behind Dai-Dan and ahead of industry leader Takasago Thermal Engineering. However, when looking at OPM on the same basis, the company ranks last among the big four, with five and ten-year averages of 4.3% and 3.2%, respectively (5.2% and 4.0% at Takasago Thermal Engineering, 5.7% and 5.2% at Taikisha, and 5.3% and 4.3% at Dai-Dan). Shared Research believes this is due to inefficiencies in SG&A spending, including in personnel expenses tied to indirect operations. However, the company’s FY03/21 OPM for HVAC operations alone was 4.9%, and its five and ten-year averages for the same were 5.0% and 3.5%, respectively, which are much closer to the averages at its industry peers.
The Plants & Machinery Systems business, which includes the Machinery Systems business and the Environmental Systems business, has posted positive gross profit on a sustained basis, but has also in the past booked segment losses (recurring profit/loss prior to adjustment) due to severe competition in securing orders and the company’s rather small size in comparison to industry peers. The Machinery Systems business is unique as it is the only one of the company’s manufacturing business (manufactures conveyors). The Environmental Systems business makes good use of the company’s technologies, and is seeing increased order volumes from local governments (CAGR of 7.9% over most-recent five years). Finally, the Real Estate business focuses mainly on the leasing and management of the company’s assets.
Earnings trends
In FY03/22, Sanki Engineering reported orders of JPY202.3bn (+3.4% YoY), sales of JPY193.2bn (+1.6% YoY), operating profit of JPY9.1bn (+21.5% YoY), recurring profit of JPY9.8bn (+19.8% YoY), and net income attributable to owners of the parent of JPY6.5bn (+10.0% YoY). EPS was JPY115.1. In addition to growth in sales and profit, GPM reached a historical high as profitability, a focus area for the company, continued to improve. The company plans to pay an annual dividend of JPY85.0 per share (JPY70.0 regular dividend and JPY15.0 special dividend). It paid an annual DPS of JPY80.0 in FY03/21 (JPY70.0 regular dividend, JPY10.0 special dividend). The dividend payout ratio including special dividend based on company forecast is 73.8% (77.6% in FY03/21).
The company forecast for FY03/23 calls for orders of JPY200.0bn (-1.1% YoY), sales of JPY200.0bn (+3.5% YoY), operating profit of JPY9.5bn (+4.3% YoY), recurring profit of JPY10.0bn (+1.9% YoY), and net income attributable to owners of the parent of JPY6.9bn (+6.3% YoY). EPS forecast is JPY123.7. The company expects sales to grow partly by working through its inventory backlog from FY03/22. It plans to pay a dividend of JPY70.0 per share for the year (FY03/22 forecast: JPY85.0). This represents a dividend payout ratio of 56.6% (73.8%) based on the company forecast, but it only includes regular dividends and does not incorporate a special dividend.
The company announced a medium-term business plan as Phase 3 of its “Century 2025” long-term vision, covering the final four years (FY03/23–FY03/26), on February 10, 2022. It aims to focus on strengthening existing businesses, rolling out its growth strategy, and sustainability management. In the final year (FY03/26), the company targets revenue of JPY220.0bn, GPM of 16.5%, and recurring profit of JPY12.0bn.
Sanki Engineering plans to develop new energy-saving and energy-creating technologies, a key area of strength, and strengthen its organization in its mainstay industrial HVAC operations, with a view to future growth.
Strengths and weaknesses
Shared Research believes the company’s strengths include: 1) high GPM supported by its industry-leading labor productivity; 2) track record in technological development in areas such as energy conservation and energy creation (substantiated by its high proportion of projects acquired through restricted bidding); and 3) its ability, unlike its industry peers, to secure a range of construction orders—HVAC and plumbing construction, electrical facilities construction, and data center-related construction—as a comprehensive service provider.
Shared Research believes the company’s weaknesses include: 1) slow progress in streamlining SG&A expenses, which leads to a low OPM compared to its peers; 2) low asset efficiency, which is contributing to lower ROE than at its peers; and 3) low profitability in the Plants & Machinery Systems business.
Key financial data
Recent updates
Announcement of downward revision in FY03/22 forecast and special dividend
On April 28, 2022, Sanki Engineering Co., Ltd. lowered its full-year guidance for FY03/22 earnings and raised its planned dividend payment, as detailed below.
The company lowered its full-year sales estimate to JPY193.2bn (versus JPY200bn previously) while reducing its operating profit estimate to JPY9.1bn (versus JPY9.5bn) and its recurring profit estimate to JPY9.8bn (versus JPY10.0bn). Despite the downward revision, the company sees improvement in profitability with its recurring profit margin now projected to come in at 5.1% (versus previous estimate of 5.0%) and up nearly 0.8ppts versus the 4.3% recurring profit margin recorded in FY03/21.
The company also revised its dividend forecast. It now reflects an increase in the fiscal year-end dividend payment, as it added a special dividend of JPY15.0 per share on top of the regular dividend of JPY35.0 per share indicated previously. This brings the total dividend payment for the fiscal year end to JPY50.0 per share (versus fiscal year-end dividend of JPY45.0 per share the previous year). Combined with the interim dividend payment (JPY35.0 per share), brings total dividends paid by the company for FY03/22 to JPY85.0 per share (versus JPY80.0 in FY03/21). Including the special dividend payment, the dividend payout ratio for the year results to 73.9% (versus 77.6% in FY03/21).
NOTE: The company plans to report consolidated results for FY03/22 on May 13, 2022. The company's full-year estimates for FY03/22 shown in this report reflect the company's guidance prior to this latest revision. Shared Research will update the remainder of this report after FY03/22 earnings are released.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from those presented in company materials due to rounding differences.
Note: Figures may differ from those presented in company materials due to rounding differences.
Note: Figures may differ from those presented in company materials due to rounding differences.
Note: Figures may differ from those presented in company materials due to rounding differences.
FY03/22 results (out May 13, 2022)
Full-year FY03/22 earnings overview
Full-year FY03/22 (April 2021–March 2022) results were as follows.
EPS was JPY115.1. The company plans to pay a year-end dividend of JPY50.0 per share (JPY35.0 regular dividend, JPY15.0 special dividend) for an annual DPS of JPY85.0 (JPY70.0 regular dividend, JPY15.0 special dividend). It paid an annual DPS of JPY80.0 in FY03/21 (JPY70.0 regular dividend, JPY10.0 special dividend). The dividend payout ratio including special dividend based on company forecast is 73.8% (77.6% in FY03/21).
On April 28, 2022, the company revised its full-year FY03/22 earnings forecast. Figures above are from the initial forecast announced on May 14, 2021, prior to revision.
While sales and profit grew, they fell short of the initial forecast. The shortfall was primarily due to sales coming in below expectations, while orders exceeded the initial forecast. However, on the profitability front, a focus for the company, GPM and recurring profit margin increased YoY and came in above the initial forecast. GPM reached a new historical high (previous peak was 15.5% in FY03/20). Profitability improved on higher sales in the mainstay Facilities Construction business, as well as in Machinery Systems and Environmental Systems and other factors.
Q4 earnings overview (January–March, three months)
The most recent Q4 FY03/22 (January-March 2022) results were as follows.
On a quarterly (three-month) basis, sales fell YoY for the first time in four quarters and recurring profit declined YoY for the first time in three quarters. While orders were up nearly 15% YoY, sales fell. Profit from the operating line downward declined on lower sales, but profitability continued to improve with GPM up 0.5pp YoY.
Shared Research plans to update this report following an upcoming earnings briefing and interviews with management.
FY03/23 company forecast (out May 13, 2022)
Note: Figures may differ from those presented in company materials due to rounding differences.
Summary of company forecast
The company released its earnings forecast for FY03/23 as shown below.
EPS forecast is JPY123.7. The company plans to pay a dividend of JPY70.0 per share for the year (FY03/22 forecast: JPY85.0). This represents a dividend payout ratio of 56.6% (73.8%) based on the company forecast, but it only includes regular dividends and does not incorporate a special dividend.
The company expects sales to grow partly by working through its inventory backlog and orders received during the year. It forecasts orders of JPY200.0bn (-1.1% YoY).
Shared Research plans to update this report following an upcoming earnings briefing and interviews with management.
Note: Figures may differ from those presented in company materials due to rounding differences.
Note: Figures may differ from those presented in company materials due to rounding differences.
Company forecasts versus results
Note: Figures may differ from those presented in company materials due to rounding differences.
Medium-term management plan
Note: Figures may differ from those presented in company materials due to rounding differences.
Note: Share buyback and growth investment figures are cumulative four-year totals.
Unveiled new medium-term management plan (Phase 3, four years)
Overview of new medium-term plan
On February 10, 2022, Sanki Engineering announced Phase 3, its new medium-term management plan (four-year plan starting in FY03/23). Phase 3 is the final phase of the “Century 2025” 10-year long-term vision, which the company launched in FY03/17 to mark the centenary of its founding in April 2025. Phase 1 has ended and Phase 2 is ongoing, as summarized below.
The new medium-term plan is Phase 3, to put the finishing touches on the Century 2025 long-term vision and defined as "four years of being the chosen company."
Final year (FY03/26) targets
Earnings targets
In Phase 3, the company will continue with the key initiatives undertaken in phases 1 and 2, while adding three new ones; Helping to make society more sustainable, accelerating work style reforms, and investing in future generations. Earnings targets for the final year (FY03/26) are as follows:
The company’s key focus is on an ongoing improvement in margins to underpin profit, while also aiming to increase revenue. This falls under its policies to improve quality.
Business and financial targets
In the four years of the new medium-term plan, the company set the following business and financial targets:
Of the above targets, the figures for share buybacks and investment in growth are four-year totals. The FY03/22 company forecast for the dividend payout ratio is an estimate by Shared Research based on EPS and dividend forecasts.
Ultra long-term vision: 2050 image
One major objective in putting together the medium-term plan was to develop an ultra-long-term vision of what the company might look like in 2050. The vision includes:
The company’s aim can be encapsulated in its ambition to make Sanki “the enduring company of choice.”
The company set out the following three elements of Phase 3 with a view to its ultra-long-term vision.
The company sees sustainability management as an approach that enables ongoing improvement in corporate value while also improving environmental and social value, so is committed to its thorough implementation.
Sanki's Carbon neutral declaration
The Sanki group is making serious efforts to address global climate change, and aims to achieve carbon neutrality for its own greenhouse gas emissions (Scope 1 and 2) by 2030, extending to those of its supply chain (Scope 1, 2, and 3) by 2050. The company prides itself on its ambitious targets, which are a step ahead of its peers.
Phase 3 policies
The company developed its medium-term plan to put the finishing touches on its Century 2025 long-term vision. It aims to become the company of choice by maturing and evolving its longstanding efforts to enhance quality and reliability, with three additional measures: contribute to the sustainability of society, accelerate work style reforms, and invest with a view to the next generation.
To enhance quality and reliability during Phase 3, the company plans to carry on with its efforts from Phases 1 and 2, while further instilling and evolving them. This involves five key elements.
Strengthen core businesses
Shared initiatives
The company has five shared initiatives aimed at strengthening each of its core businesses: Facilities Construction, Facility Systems, Machinery Systems, and Environmental Systems.
The new business system concept entails a new accounting system the company is developing. As its core system, it will coordinate with a range of internal systems and databases to streamline workflows. The company plans to use this to address long working hours, a serious issue in the construction industry.
Facilities Construction
Strengthen business base
Make best use of digital and robotic technologies
Facility Systems
Major urban redevelopment projects are likely to require ICT infrastructure, so the company aims to expand and grow its business through “hard” aspects such as construction and “soft” aspects such as consulting for office buildings.
Machinery Systems
To address demographics-driven labor shortages, the company plans to develop new products that meet needs for automation and labor saving. In particular, it aims to grow earnings by expanding sales of systems targeting the logistics sector, which has good growth prospects.
Environmental Systems
Tap into needs of the carbon neutral era and expand sales of mainstay products while developing a broad suite of products in energy creation-related business such as renewable power generation.
Roll out growth strategies
Develop new technologies geared toward a carbon-free society and expand proposals to meet needs for energy saving and energy creation in customers’ equipment
Strengthen company's forte, industrial HVAC systems, in Japan and overseas, geared toward new and expanded manufacturing facilities amid global semiconductor shortage and spread of electric vehicles
Expand in water treatment facilities overseas (Environmental Systems business)
Pursue open innovation (collaborate with other industries, academia, and start-ups)
Use digital technologies to reform workflows and create new business opportunities
The company’s key growth strategies are the development of new technologies geared toward a carbon-free society and strengthening industrial HVAC systems. The company aims to develop carbon-free technologies to expand proposals in areas where its strengths lie, namely energy saving and energy creation.
In HVAC systems, the company plans to focus on strengthening personnel systems. In its mainstay Industrial HVAC and HVAC and Plumbing for Buildings businesses, quality worksite management as well as technological development are important. However, construction management cannot be learned in a few months of training. It generally takes a decade before a site manager is able to oversee a major project. The company has constantly trained its construction managers, and intends to step up its efforts with a view to growing industrial HVAC demand and subsequent overseas development.
Enhance Sanki brand
Improve communication capabilities
Disclose financial and capital management policies
Basic policy is for stable and sustainable returns to stakeholders
New policies
The company has adopted three new policies for Phase 3 in addition to five carried over from Phases 1 and 2. It aims to use the eight policies to achieve the targets in its long-term vision, Century 2025, in FY03/26, as well as its ultra-long-term vision.
Contribute to sustainable society
Accelerate work style reforms
Invest with a view to the next generation
Investment areas
Methodology
With a view to the future, nurture the green shoots that will become new engineering businesses in areas with emerging societal needs
Business portfolio strategy
The company has two major objectives: (1) expand operations in the Facility Systems and Machinery Systems businesses and (2) expand the share of revenue of the plant division (Machinery Systems and Environmental Systems) to 20%. As a result, it expects the share of revenue of its mainstay Facilities Construction business to decline from 78% in FY03/17 to 72% in FY03/26. However, this is in the context of company-wide growth (from consolidated revenue of JPY168.5bn in FY03/17 to JPY220.0bn in FY03/26), including in the Facilities Construction business.
While Facilities Construction will remain the mainstay, the company’s focus will be on expanding the other businesses. Note: Facility Systems was part of the Facilities Construction segment in FY03/21. The company has not said whether it will be disclosed as a standalone segment, but nevertheless, its expansion is definitely a priority focus during Phase 3.
Shared Research prepared the following comments focusing on Phase 2 before the company announced the new medium-term management plan in February 2022. As Phase 3 has been released, Shared Research plans to remove this information at some point, but it will remain for now to facilitate comparisons with Phase 2.
Medium-term management plan summary (Phase 2)
Sanki Engineering is now in the final year of Phase 2 (FY03/20–FY03/22) in the ten-year “Century 2025” long-term vision it launched in FY03/17. In FY03/20, the first year in Phase 2, operating profit and recurring profit reached record highs, but the impact from the COVID-19 pandemic, which erupted shortly afterward, resulted in revenue and profit declining in FY03/21. Amid some uncertainty over when the pandemic will be contained, the company for the final year in Phase 2 targets RPM of 5.0% or more, an annual DPS of JPY60.0 or more, the repurchasing of about 5.0mn shares, a total return ratio of 70% or more, and ROE of 8.0% or more. The company looks to announce Phase 3 targets, covering the final four years in the ten-year period, when it releases FY03/22 results (currently expected around May 2022).
The current medium-term management plan: Phase 2
The company’s medium-term management plan is a ten-year long-term vision launched in FY03/17 called “Century 2025.” The ten-year vision includes the following three phases:
The plan does not follow a rolling format, under which it would be updated at the beginning of each new fiscal year. Instead, the targets for the following Phase are determined at the end of the preceding Phase. In addition, since performance each year depends largely on the volume of orders the company received in the preceding year, the plans only set management targets for the final year in each Phase.
The targets for Phase 2 and FY03/22, the final year in the three years covered by Phase 2, are as follows.
Progress achieved toward meeting these targets is as follows.
Performance targets and results for the first two years in Phase 2 (FY03/20 and FY03/21) are as follows.
FY03/20 (first year of Phase 2) targets and results (targets set in May 2019)
FY03/20 targets: revenue of JPY200.0bn, gross profit of JPY30.0bn, GPM of 15.0%, recurring profit of JPY9.0bn. RPM of 4.5%.
FY03/20 results: revenue of JPY207.6bn, gross profit of JPY32.1bn, GPM of 15.5%, recurring profit of JPY11.2bn, RPM of 5.4%.
Results exceeded the targets. Moreover, thanks to a robust level of orders carried over from FY03/19, when orders reached a record-high level, gross profit, operating profit, and recurring profit all reached record-high levels in FY03/20, with revenue reaching its second highest level on record. However, with the spread of COVID-19 from the beginning of 2020, Q4 (January–March 2020) orders declined 30% YoY, which impacted performance in FY03/21.
The Japanese government declared a state of emergency in April 2020, which was also the start of the second year of Phase 2 for the company (FY03/21), and this state of emergency resulted in a sharp slowdown in economic and production activity in Japan. Indeed, some economic and production activity came to a complete halt albeit for a limited time during this period. In light of these conditions, the company set the following targets for FY03/21.
FY03/21 (second year of Phase 2) targets and results (targets revised in November 2020)
FY03/21 targets: revenue of JPY192.0bn, gross profit of JPY29.5bn, GPM of 15.4%, recurring profit of JPY8.5bn, RPM of 4.4%.
FY03/21 results: revenue of JPY190.1bn, gross profit of JPY28.8bn, GPM of 15.1%, recurring profit of JPY8.2bn, RPM of 4.3%.
Results fell short of the company’s downwardly revised targets. Irrespective of the pandemic, the company’s targets factored in FY03/21 being the beginning of a transition period for large-scale projects in the HVAC and Plumbing for Buildings business. Nonetheless, performance fell short of expectations, largely due to the aforementioned slowdown in large-scale projects, a greater-than-expected deterioration in small-scale maintenance and repair work due to the pandemic, as well as restrictions on sales activities. For additional information, please see the historical performance section for FY03/21 of this report.
The company plans to release details related to Phase 3 targets, covering the final four years in the “Century 2025” long-term vision, when it announces FY03/22 results.
ESG initiatives as part of sustainable management
With the aim of creating sustainable social value, the company in its mid-term management plan has set clear ESG policies and targets for each fiscal year. Targets for FY03/21, the final year in Phase 2, are as follows.
Environment
Policy
Develop products and technologies that contribute to realizing a decarbonized society and reduce the environmental impact of the company’s business activities.
FY2021 KPIs (indicators for evaluating FY2021 results)
The company targets orders based on CO2 reduction proposals under the SANKI YOU Eco Contribution Point system accounting for 50% or more of total proposals, with the number of CO2 reduction proposals under this system reaching at least 300 per year. The company aims to reduce CO2 emissions as a result of business activity by 1.0% YoY.
Initiatives taken thus far
The company has actively promoted energy-saving and energy-creating businesses, and has won large-scale construction project orders as a result. In commemoration of the 10th anniversary of the SANKI YOU Eco Contribution Point system, the company created “Kansha no Mori” (forest of appreciation) as part of its tree-planting program.
The company views environmental management as a key pillar in sustainable management. For additional information, please see the Environment: policies, initiatives, and specific measures section below.
Social
Policy
Sanki Engineering aims to contribute to building sustainable infrastructure by working together with local communities. The company looks to create work environments that are safe and easy to work in, while also promoting diversity to enhance its human resources.
FY2021 KPIs (indicators for evaluating FY2021 results)
In terms of ensuring quality and improving its technical capabilities, the company targets through divisional cooperation a 5% YoY reduction in the rate of conflicts and complaints during construction. The company also aims to increase the number of projects using new technologies to reduce construction-related labor. As part of its effort to ensure occupational health and safety, the company intends to promote divisional cooperation to reduce the number of accidents by 20% YoY. In line with this goal, the company will implement disaster prevention measures as well as health and safety education programs at its subcontractors. In terms of supply chain management, the company will exchange opinions with its suppliers on the subject and promote the digitalization of operations to ensure fair and appropriate transactions. Sanki Engineering will also work to stabilize management at its partner companies. With an eye toward improving the value of its human resources and the working environment, the company will strengthen its employee feedback system and work to improve the work-life balance of its employees through the Smile Project, which focuses on reducing average overtime per employee and increasing the percentage of paid leave taken by each employee. Finally, the company looks to coexist with local communities, and in pursuit of this goal will participate in local disaster prevention activities and clean environment projects.
Initiatives taken thus far
Sanki Engineering has advanced workstyle reforms in order to take advantage of its diverse workforce while introducing a flexible working hours system and a variety of paid leave programs for all its employees. The company further promoted workstyle reforms through the Smile Project and launched the four-group Smile Site Plan. The company also reviewed its payment terms to improve the cash flow at the subcontractors who are also its business partners.
Governance
Policy
Reinforce the governance system
FY2021 KPIs (indicators for evaluating FY2021 results)
Sanki Engineering aims to create a corporate governance system that meets the demands of the age, with reviews conducted on an annual basis. The company will also strengthen activities to promote compliance and build a system to enhance its risk management.
Initiatives taken thus far
An outside director was appointed as the chairman of the company’s board of directors, and a third-party organization conducted interviews to evaluate the effectiveness of the board of directors. In addition, the company formed an Advisory Committee on Nominations and Remuneration composed entirely of outside directors, and made the legal department independent and under the direct control of the company president. As part of its efforts to promote compliance, the company launched an internal reporting system that is already proving effective. In terms of risk management, the company focused on addressing the credit risks of its customers and suppliers, while also bolstering its ability to respond to information security risks, overseas business risks, and disaster risks. In order to prevent the further spread of COVID-19, the company in April 2020 established a COVID-19 task force headed by the president and entrenched basic infection prevention measures. It also actively promoted telecommuting and flexible work hours. In July and August 2021, the company provided vaccinations to 1,500 individuals, including employees, their families, and affiliate company workers.
Environment: policies, initiatives, and specific measures
Among Sanki Engineering’s ESG-related initiatives, the environment (E) carries the strongest weighting in terms of the company’s business and technological development. Moreover, one of the key social activities of focus for the company involves ecology and the conservation of the environment. As a member of society, the company considers environmental concerns to be among its most important management issues. To that extent, the company has set two missions.
Mission one: protect the global environment using the company’s advanced technological capabilities
In line with this mission, the company focuses on the development and introduction of energy-saving and energy-creating technologies, a key area of strength for Sanki Engineering, so as to better capture energy, more efficiently use energy, and enable the reuse of resources.
Mission two: minimize the environmental impact from the company’s business activities
In line with this mission, the company aims to minimize its consumption of energy and resources, promote recycling and waste reduction, and provide environmental education to its employees.
With the goal of fulfilling these two missions, the company is actively promoting environmental management. It is also actively working to protect working environments, local environments, and the global environment.
Policy
Develop products and technologies that contribute to realizing a decarbonized society and reduce the environmental impact of the company’s business activities.
Initiatives
The company is contributing to decarbonization, energy conservation, and energy creation through the development of products and technologies, and will maintain the SANKI YOU Eco Contribution Point system that has now been in effect for ten years. The company will also work to reduce the environmental impact of its business activities.
Contributing through products and technologies
Contributing through the development of products and technologies is one of the key points in the company’s environmental management efforts. In particular, the development of these products and technologies in the company’s various businesses offers the potential for customers to save and create energy, and to reduce CO2 emissions. Moreover, through its LCE business, the company can help to reduce the life cycle costs of its customers and contribute to the creation of a decarbonized and sustainable society.
The company has about 460 registered patents for technologies it has developed, and is able to provide its customers with unique technologies and services based on those patents.
Examples of the company’s energy-saving and energy-creating technologies
As it promotes environmental management, the company is focusing in particular on the development of technologies related to energy conservation and energy creation. The following are some examples of the proprietary energy-saving and energy-creating technologies created over the last few years, although this does not represent the full list of such technologies.
Woody biomass gasification plants
This facility uses wood chips as a raw material to achieve gasification and then generates electricity using a gas engine. It also uses wood chips as a fuel source for a steam turbine. The facility has been working since 2017. According to data from the company and the Ministry of Economy, Trade and Industry (METI), the share of renewable energy in Japan’s power supply mix is expected to grow from 11% in FY2013 to 24% in FY2030. Within the renewable energy group, power generated from biomass is expected to almost triple, with the expected expansion second only to that for solar power. The company intends to aggressively market its woody biomass gasification plant moving forward.
Trans-heat containers
Trans-heat containers are used as part of a heat delivery service that stores low-temperature heat in a tank and transports it by vehicle (truck) to the destination. It involves taking waste heat from factories and incineration facilities and storing it using heated latent heat storage materials, and then delivering it via special containers by car (truck) to facilities that need the heat. The offline heat delivery service can deliver heat up to 30 kilometers away, enabling the use of energy that might otherwise be wasted and the reduction of CO2 emissions.
AEROWING
AEROWING products are energy-saving diffusers (devices that turn compressed air into bubbles and send them into the water) with improved oxygen transfer efficiency, and are used in water and sewage systems. The microbubbles reduce air and power consumption, and the product itself has already shown strong level of durability, with a longer service life than conventional products. The company has already introduced the upgraded AEROWING II, offering a favorable contribution to the Environmental Systems business that uses the product.
Periloop
Periloop is an air-conditioning system for large spaces such as factories and gymnasiums. It saves energy by forming temperature stratification layers when cooling during summer. When heating during winter, it suppresses cold air to achieve heating near the ground. It is already being used by major automobile manufacturers. One of the key features is that during cooling operations in summer, only the lower-level space is cooled (the upper space circulates hot air), which can result in energy savings of up to 40%.
SANKI YOU Eco Contribution Point system
Sanki Engineering launched the SANKI YOU Eco Contribution Point system ten years ago to contribute, alongside its customers, to the realization of a sustainable society and the prevention of global warming. Under the system, the company makes energy-saving proposals to its customers using equipment that contributes to reduced CO2 emissions. If those proposals are accepted, the amount of the achieved emissions reduction is converted to Eco Contribution Points (each metric ton (MT) reduction equating to JPY100), which are then committed to activities aimed at preserving the environment. The cumulative amount of CO2 reductions by customers in the SANKI YOU Eco Contribution Point system through the end of FY03/21 was 231,000MT (including a reduction in FY03/21 of about 45,000MT), with the cumulative amount of point donations at that time exceeding JPY20mn and the number of trees planted reaching about 18,000. The SANKI YOU Eco Contribution Point system has become symbolic of the company’s environmental management efforts.
Reducing the environmental impact from business activities
Sanki Engineering calculates and manages CO2 emissions stemming from its business activities, including at the headquarters, offices, and construction sites, as well as in the Real Estate business as part of its effort to reduce those emissions. The company’s medium-term management plan targets non-consolidated emissions reductions of 1% YoY. However, the company’s energy use in FY2019 actually increased 10% YoY on the launch of the new R&D center and an expansion in business. As such, reducing CO2 emissions in line with its stated targets will not be an easily achieved. That said, even under current circumstances the company is working to reduce energy usage through the introduction of several energy-saving systems featuring proprietary technologies. The company is also focused on the comprehensive management of industrial waste, largely generated at construction sites (in particular, sites where the company is the prime contractor) so as to get a better idea of actual conditions. Finally, the company is appropriately treating industrial water and has achieved a stable recycling rate of about 98% (excluding waste treated at final landfill sites).
Establishment of a Sustainability Committee and agreement with the TCFD recommendations
Sanki Engineering in November 2021 announced the establishment of a Sustainability Committee, chaired by the president. The committee is one of the company's new strategic committees charged with accelerating the group's efforts to contribute to the realization of a sustainable society.
In addition to contributing to the realization of a decarbonized society, the new committee will decide on important issues to help the company achieve sustainability management, including in regard to further promoting diversity, respecting human rights, and contributing to the building of resilient cities. The company also aims to actively promote measures aimed at improving corporate value as well as environmental and social value. The company's efforts in energy conservation and energy creation under the theme of decarbonization are tied directly to the core business of the group, which is focused on the development of comprehensive engineering services. Moving forward, the company plans to continue its group-wide promotional activities through the Sustainability Promotion Department, which is composed of key personnel from each division. Finally, with the aim of contributing to a carbon-neutral and sustainable society, the company will promote the disclosure of information and specific initiatives, including in regard to medium- to long-term policies and the identification of materiality.
Acknowledging the importance of addressing climate change, the company has expressed its support for the recommendations put forth by the Task Force on Climate-related Financial Disclosure (TCFD). Management targets the disclosure of information on the four key themes in organizational management recommended by the TCFD, namely governance, strategy, risk management, and metrics and targets, by June 2022.
Business
Business model overview
Summary
Sanki Engineering operates mainly in the field of contracted HVAC (heating, ventilation, and air conditioning) and plumbing construction work for office buildings and manufacturing facilities. The company does not manufacture HVAC equipment; instead, it handles construction process design and manages contracted HVAC construction work. The company was founded in 1925 as a spinoff from former machinery department of Mitsui & Co., Ltd. In FY03/21, the company recorded revenue of JPY190.1bn, with the Facilities Construction business accounting for 81.8% of this. Within the Facilities Construction business, contract work in HVAC and plumbing systems accounted for 62.8% of the segment revenue, with electrical systems (construction and installation of lighting equipment and substation equipment) facility systems (office building integration and relocation design work) together accounting for 19.0%. The Machinery Systems business (manufacture of conveyors and logistics systems) accounted for 4.7% of total revenue, with the Environmental Systems business (development of water and waste treatment equipment and systems) accounting for 12.4%, and the Real Estate business accounting for 1.7%. Of the JPY28.8bn in gross profit reported in FY03/21, the Facilities Construction business accounted for 80.9%, the Machinery Systems business 5.4%, the Environmental Systems business 11.0%, and the Real Estate business 3.4%. The overseas business recorded orders of JPY2.8bn and accounted for less than 2% of total revenue.
Facilities Construction business
Segment profit (profit before consolidated adjustments) is tied to recurring profit on the company’s balance sheet.
Business outline
The Facilities Construction business accounted for 81.8% of total revenue in FY03/21 and includes the HVAC and Plumbing for Buildings business (35.6% of FY03/21 segment revenue), the industrial HVAC business (41.3%), the electrical systems business (16.0%), and the facility systems business (7.1%). The HVAC and Plumbing for Buildings business focuses on office and general-use buildings, while the industrial HVAC business centers on corporate work associated with production, including for manufacturing facilities, laboratories, and cleanrooms. The electrical systems business mainly involves lighting and power supply work for office buildings and factories, while the facility systems business centers mainly on network solutions services as well as office relocation-related project management and consulting services.
FY03/21 revenue and revenue weightings by customer sector
The Facilities Construction business recorded FY03/21 revenue of JPY155.5bn (-9.3% YoY), including JPY137.6bn from the private sector (88.5% of segment revenue), JPY15.2bn from the public sector (9.8%), and JPY2.7bn from others (1.8%). Within the private sector, revenue was JPY69.0bn (44.3% of total revenue) from the manufacturing sector and JPY68.6bn (44.1%) from the non-manufacturing sector. Among manufacturers, the top three client sectors were electrical machinery (17.3% of revenue), automobiles (10.7%), and chemicals (5.3%). Among non-manufacturers, the top three client sectors were finance/insurance (14.4% of revenue), services and others (8.6%), and real estate (6.7%).
In terms of types of buildings and applications, office buildings, manufacturing facilities, and research facilities make up the majority of the company’s work. Of the JPY156.8bn in orders received by the Facilities Construction business in FY03/21, more than two-thirds came from these three sources, including JPY45.6bn for office buildings (29.1% of orders), JPY45.3bn for manufacturing facilities (28.9%), and JPY15.3bn for research facilities (9.8%). Public-sector orders were JPY16.7bn (10.6% of orders).
The orders process: from new orders to the booking of revenue
Orders received in the Facilities Construction business, focused mainly on HVAC and plumbing work, are broken down into two categories, new construction orders (JPY86.0bn in FY03/21, 44.0% of total orders) and renewal construction orders (JPY109.6bn, 56.0%). These ratios have remained generally stable from year to year. New construction orders are secured through a bidding process, with orders acquired through restricted bidding (only companies nominated by the client can participate in the bidding procedure) accounting for about 51.6% and those acquired through open bidding accounting for about 48.4%. Compared to other companies in the sector, Sanki Engineering has a high proportion of orders secured through restricted bidding. In renewal construction orders, which will be discussed later in this report, the company tends to receive more direct orders (direct requests from clients, not through general contractors) than indirect orders (orders received through general contractors).
About 60% of new orders are booked under the percentage-of-completion method, while small-scale maintenance and repair work that does not exceed construction periods and relatively low-value projects (generally around JPY10.0mn) are booked under the completed-contract method. Roughly 40% of orders received have construction periods lasting less than one year (orders and revenue booked in the same fiscal year). While the company does not disclose the ratio of maintenance and repair work to the revenue of Facilities Construction business, Shared Research believes it to be around 10%.
Renewal construction orders
More than half of construction projects delivered by the company lead to subsequent renewal construction orders. In FY03/21, renewal construction orders accounted for about 56% of total orders. The cycle for renewal construction orders is generally ten to 15 years, and for some small-scale projects less than ten years. This reflects the fact that the legal useful lifespan of heating and cooling equipment within buildings is 13 to 15 years. The truth, however, is that the equipment is rarely used beyond its legal useful lifespan, and while the cycle may be more than 10 years, the company can almost certainly expect to receive renewal construction orders within this period.
To add to this, orders for all-encompassing large-scale renewal construction generally come every thirty to forty years. This renewal construction work involves rebuilding from the design stage (referred to as skeleton work), and centers on the physical lifespan of pipes and air ducts that deteriorate over time. It has little to do with the useful lifespan of the buildings and other structures themselves. Including these types of renewal construction orders, the value per construction project ranges from several million yen to several billion yen, though more than a quarter of total orders are for projects of JPY1.0bn or more. While the total amount of orders received varies significantly from year to year, the overall trend is toward larger orders, i.e., those valued at JPY1.0bn or more.
It is extremely rare for renewal construction orders to be placed not with the original company, but with other companies operating in the same business. This is because the job involves far more than the simple replacement of HVAC equipment, as HVAC facilities work involves not only the actual equipment installation, but also plumbing work, and in some cases electrical work. In construction works by other companies, the methods used by the original company, including in design, may in many cases be unclear. New methods may be used in renewal construction projects where the original construction was by a different company, but costs to the client may be higher. For more information on HVAC facilities construction, please see the Market and Value Chain section later in this report.
Cost structure
On a FY03/21 non-consolidated basis, outsourcing costs accounted for 53.4% of completed construction costs, i.e., contractor construction costs, with material costs accounting for 27.0%, and other costs accounting for 19.6% (including personnel costs, which accounted for 8.7%). Material costs include purchased HVAC, machinery, and piping costs. Outsourcing costs, which accounted for the largest share of completed construction costs, include subcontractor order costs (mainly personnel costs ), but also in some cases costs associated with HVAC equipment purchased by subcontractors. The cost structure ratios have not varied significantly and gross profit at the company often fluctuates based on outsourcing costs incurred. In the past, the company was forced to pursue low-priced orders, which led to operating losses in FY03/07–FY03/08, but it now rarely has any unprofitable projects.
The advantage of having an electrical systems business within the Facilities Construction business
The electrical systems business accounted for 16.0% of revenue in the Facilities Construction business in FY03/21 and plays a key role in the company’s HVAC and plumbing-related work. Since the qualifications required for electrical systems work are different from those required for HVAC and plumbing work, so too are the engineers working in these fields. For this and other reasons, some industry peers have elected to outsource electrical systems operations rather than maintaining an in-house business. However, with the growing sophistication of electrical systems, HVAC, plumbing, and electrical systems have become increasingly intertwined and orders encompassing all three are no longer uncommon. This is especially true for industrial HVAC equipment, where electricity usage is indeed substantial, and having an electrical systems business gives the company the advantage of being able to produce synergies with the HVAC and plumbing work. In addition, data center work, where the scale of projects has been increasing, is almost entirely electrical systems work, and having an electrical systems business can often lead to the company also receiving HVAC and plumbing project orders from these same clients. As such, having an electrical systems business can lead to an expansion in business opportunities.
Facility systems business
The facility systems business (7.1% of Facilities Construction business revenue in FY03/21) centers mainly on network solutions services as well as office relocation-related project management and consulting services. There is a growing trend of reexamining ways to improve office productivity, especially with telecommuting becoming increasingly common and the financial and other sectors reducing the number of offices in operation.
For additional information on profitability in the Facilities Construction business, in which the HVAC and plumbing business is a part, please see the Profitability analysis section later in this report.
Machinery Systems business
*Gross profit was disclosed only from FY03/18; there is no available gross profit data before that point.
*Segment profit (profit before consolidated adjustments) is tied to recurring profit on the company’s balance sheet.
Business outline
The Machinery Systems business is focused mainly on the manufacture and sales of systems for conveyance and material handling. The company manufactures and sells a variety of conveyors, though this is the only manufacturing business in its portfolio. Revenue can vary from year to year, but generally remains within the JPY8.0bn–JPY12.0bn range. The business has produced segment losses in six of the last ten years.
Details of the business
The types of products that the company deals with in the business include FA systems, clean conveyance systems, material handling systems, airport baggage and cargo handling systems, and information control systems. FA systems and clean conveyance systems improve the efficiency of manufacturing processes at production sites. In the field of cleanroom conveyance technology, an area of expertise for the company in its HVAC installation operations, the business provides optimal conveyance systems emphasizing improved efficiency and a high level of cleanliness. In material handling systems, the company specializes in publishing-related products, and also boasts a strong brand in computer center-related material handling systems. The company has supplied a number of fast, safe, and reliable airport baggage and cargo handling systems to major airports.
Lightweight conveyors, including curved belt conveyors, are the only products that the company manufactures itself. These products accounted for roughly half of the JPY9.0bn in revenue in the Machinery Systems business in FY03/21, and this ratio has generally remained stable. While conveyors are sold through catalogs, the company is working to strengthen its sales system to promote sales based on the specific needs of the regional markets in which the products are sold. The company launched operations at the new conveyor plant in September 2019, creating a system that not only improves productivity but also reduces costs.
Market environment and outlook
The company does not view the market environment in which the Machinery Systems business operates as difficult, noting in particular an expansion in capital investment in logistics facilities amid the growing need for automation and reduced labor as the working population in Japan declines. With the goal of strengthening the Machinery Systems business moving forward, management is focused on expanding sales and sales channels for its hybrid equipment, which combines purchased robotics with its own conveyors.
With customers being impacted by the COVID-19 pandemic, conveyor sales took a hit in FY03/21, but now appear to be on a recovery track. Moreover, there is a growing need for fully automated systems that go one step beyond systems that merely reduce labor, which appears a promising development for the company. That being said, price competition is getting increasingly severe with each passing year as many manufacturers, including major manufacturers, enter the market. Finally, given the aforementioned cost burden of depreciation and other expenses associated with the launch of the new plant, the company expects that earnings in the business will be somewhat constrained for at least a little while longer.
Environmental Systems business