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

Income statement		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.	Est.
Revenue		171,496	179,598	178,901	168,512	170,157	212,314	207,684	190,067	193,189	200,000
	YoY	10.9%	4.7%	-0.4%	-5.8%	1.0%	24.8%	-2.2%	-8.5%	1.6%	3.5%
Gross profit		18,423	17,966	22,929	22,538	25,060	31,684	32,110	28,754	30,223	-
	YoY	4.7%	-2.5%	27.6%	-1.7%	11.2%	26.4%	1.3%	-10.5%	5.1%	-
	Gross profit margin	10.7%	10.0%	12.8%	13.4%	14.7%	14.9%	15.5%	15.1%	15.6%	-
SG&A expenses		15,604	15,015	16,419	16,526	18,466	21,046	21,436	21,255	21,110	-
	YoY	2.7%	-3.8%	9.4%	0.7%	11.7%	14.0%	1.9%	-0.8%	-0.7%	-
	SG&A ratio	9.1%	8.4%	9.2%	9.8%	10.9%	9.9%	10.3%	11.2%	10.9%	-
Operating profit		2,818	2,951	6,509	6,012	6,593	10,637	10,674	7,498	9,112	9,500
	YoY	17.9%	4.7%	120.6%	-7.6%	9.7%	61.3%	0.3%	-29.8%	21.5%	4.3%
	Operating profit margin	1.6%	1.6%	3.6%	3.6%	3.9%	5.0%	5.1%	3.9%	4.7%	4.8%
Recurring profit		3,146	3,809	8,135	6,880	7,434	11,204	11,224	8,196	9,817	10,000
	YoY	17.4%	21.1%	113.6%	-15.4%	8.1%	50.7%	0.2%	-27.0%	19.8%	1.9%
	Recurring profit margin	1.8%	2.1%	4.5%	4.1%	4.4%	5.3%	5.4%	4.3%	5.1%	5.0%
Net income		1,763	2,461	5,327	4,698	3,906	9,046	7,576	5,901	6,489	6,900
	YoY	-	39.6%	116.5%	-11.8%	-16.9%	131.6%	-16.3%	-22.1%	10.0%	6.3%
	Net margin	1.0%	1.4%	3.0%	2.8%	2.3%	4.3%	3.6%	3.1%	3.4%	3.5%
Per-share data (split-adjusted; JPY)
Shares outstanding (ex. treasury shares; year-end; '000)		69,661	66,661	66,661	66,661	63,661	62,661	60,661	59,661	59,661	-
EPS (JPY)		38.3	38.3	83.8	73.9	63.0	150.0	128.5	103.1	115.1	123.7
EPS (fully diluted; JPY)		26.5	38.3	83.7	73.7	62.8	149.4	127.9	102.6	114.6	-
Dividend per share (JPY)		15.0	20.0	30.0	30.0	35.0	60.0	95.0	80.0	85.0	70.0
Book value per share (JPY)		1,142.7	1,334.7	1,328.6	1,350.1	1,419.8	1,502.5	1,510.6	1,611.8	1,685.2	-
Balance sheet (JPYmn)
	Cash and cash equivalents	27,508	29,267	33,500	41,186	48,065	44,612	47,945	39,086	48,778
Total current assets		115,941	116,224	115,491	114,906	122,901	141,342	130,765	116,054	125,742
Tangible fixed assets		9,878	9,269	8,715	8,849	10,662	14,329	13,957	13,972	13,504
Intangible assets		436	370	533	542	813	688	679	937	1,255
Investments and other assets		43,924	50,517	44,682	42,314	42,636	38,961	35,403	40,348	43,106
Total assets		170,181	176,382	169,423	166,612	177,014	195,321	180,805	171,313	183,609
	Short-term debt	6,648	5,752	5,811	5,812	7,027	7,266	6,869	7,268	8,979
Total current liabilities		78,736	72,106	72,863	68,776	73,787	91,317	79,705	67,882	79,210
	Long-term debt	363	1,084	826	452	6,979	5,500	4,142	3,734	645
Total fixed liabilities		16,526	19,406	12,001	11,875	17,035	14,232	13,735	11,731	10,121
Total liabilities		95,263	91,512	84,865	80,651	90,822	105,549	93,440	79,614	89,331
	Equity capital	74,892	84,806	84,437	85,816	86,012	89,541	87,062	91,417	93,968
Total net assets		74,917	84,869	84,557	85,961	86,191	89,772	87,364	91,699	94,278
Total interest-bearing debt		7,011	6,836	6,637	6,264	14,006	12,766	11,011	11,002	9,624
Cash flow statement(JPYmn)
Cash flows from operating activities		-9,403	-139	5,220	10,845	6,306	6,786	11,940	-483	18,529
Cash flows from investing activities		-3,506	3,440	5,520	-1,644	-2,510	-3,775	-303	-1,423	-3,384
Cash flows from financing activities		-4,152	-2,901	-1,826	-2,458	1,814	-5,215	-8,955	-6,974	-7,518
Financial ratios
ROA (RP-based)		1.9%	2.2%	4.7%	4.1%	4.3%	6.0%	6.0%	4.7%	5.5%
ROE		2.3%	3.1%	6.3%	5.5%	4.5%	10.3%	8.6%	6.6%	7.0%
Equity ratio		44.0%	48.1%	49.8%	51.5%	48.6%	45.8%	48.2%	53.4%	51.2%
R&D expenses		1,171	1,014	1,091	1,084	1,289	1,455	1,438	1,472	-
Capital expenditures		545	395	855	1,015	3,772	6,110	2,197	2,178	-
Depreciation		740	723	723	718	818	1,340	1,643	1,700	-

Source: Shared Research based on company data

Recent updates

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)
Sales: JPY193.2bn (+1.6% YoY, JPY200.0bn)
Gross profit: JPY30.2bn (+5.1% YoY, JPY31.0bn)

GPM: 15.6% (+0.5pp YoY, 15.5%)

Operating profit: JPY9.1bn (+21.5% YoY, JPY9.5bn)
Recurring profit: JPY9.8bn (+19.8% YoY, JPY10.0bn)

RPM: 5.1% (+0.8pp YoY, 5.0%)

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 forecast for 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:

Revenue: JPY220.0bn (FY03/22 forecast: JPY200.0bn)
GPM: 16.5% (15.5%)
Recurring profit: JPY12.0bn (JPY10.0bn)

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%).

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.

Environmental 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.
Environmental Systems
	Orders		28,833	16,623	15,029	16,767	19,610	30,626	24,247	21,705	24,247	28,710
		YoY	N.A.	-42.3%	-9.6%	11.6%	17.0%	56.2%	-20.8%	-10.5%	11.7%	18.4%
	Revenue		19,825	17,145	17,169	17,485	18,734	18,271	19,909	20,471	23,261	23,560
		YoY	-4.3%	-13.5%	0.1%	1.8%	7.1%	-2.5%	9.0%	2.8%	13.6%	1.3%
	Gross profit		N.A.	N.A.	N.A.	N.A.	N.A.	N.A.	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%
	Segment profit		879	689	-23	24	-315	671	575	312	20	20
		YoY	-10.7%	-21.6%	N.A.	N.A.	N.A.	N.A.	-14.3%	-45.7%	-93.6%	0.0%
		Segment profit margin	4.4%	4.0%	-0.1%	0.1%	-1.7%	3.7%	2.9%	1.5%	0.1%