The company mainly manufactures and sells inorganic powders, which are upstream intermediate goods. It operates in two segments: Chemicals and Medical. The company’s mainstay products, including titanium dioxide and zinc products as well as barium products, have a wide range of applications (paints, pigments, colorants, cosmetics, electronic materials such as multilayer ceramic capacitors [MLCCs], polyvinyl chloride [PVC] stabilizers, diapers, high-index plastic lenses for eyeglasses, pharmaceuticals, medical devices, others). The company is focusing on ESG management and the SDGs to protect the global environment, including by promoting the switch to lead-free PVC stabilizers, providing microplastic bead substitutes, and reducing industrial waste.
Chemicals
Executive summary
Business overview
Sakai Chemical Industry Co., Ltd. (TSE1: 4078) comprises two segments: Chemicals (90.4% of revenue of JPY84.9bn in FY03/21; operating profit margin of 7.3% [5.0% after deducting head office expenses]) and Medical (9.6% of revenue; OPM of 5.5%). In the Chemicals business, the company mainly manufactures inorganic powders (titanium dioxide, barium salts, others) and sells them for various applications (see below) through consolidated subsidiary Sakai Trading (TSE2: 9967) and other subsidiaries. In the Medical business, the company manufactures and sells X-ray contrast media (barium sulfate), pharmaceuticals, and medical devices, mainly through consolidated subsidiary Kaigen Pharma. The company’s manufacturing facilities in Japan are concentrated in Osaka Prefecture and Iwaki, Fukushima Prefecture. It also has manufacturing bases in ASEAN countries including Vietnam, Thailand, and Indonesia.
The company’s mainstay products are used in a wide range of applications in industrial products (electronic materials, paints and inks, PVC and other plastic additives, plastic lenses, catalysts) and general consumer goods (cosmetics, hygienic products, pharmaceuticals). Domestic customers account for around 80% of revenue. This diversity of applications and heavy weighting toward the domestic market mean that the company’s revenue correlates closely with domestic macroeconomic indicators (such as industrial production index and consumer price index). Around 20% of end customers are in automotive industries (tires, wiring harnesses, paints, electronic components), slightly under 20% are in telecommunications equipment, a little under 20% are in construction, just under 10% are in medical fields, and a little over 30% are in other industries.
In FY03/21, the company’s main business areas were electronic materials (11.4% of totalrevenue), titanium dioxide and zinc products (16.0%), plastic additives (13.6%), hygienic products (10.9%), organic chemicals (8.1%), catalysts (3.8%), contract processing (7.7%), other (18.9%), and medical (9.6%). The mainstay products in electronic materials are barium titanate (dielectrics) and high-purity barium carbonate (dielectric materials). These are the main materials in multilayer ceramic capacitors (MLCCs), which are indispensable components in electronics such as smartphones, telecommunications infrastructure, and electronic components in automobiles. Titanium dioxide is a white pigment characterized by its brightness, the ability to cover up or color surfaces, and chemical stability. It is used in a wide range of industrial applications such as in paints, printing inks, and paper manufacturing. Fine titanium dioxide and zinc oxide are also used in cosmetics as sunscreen agents.
In FY03/21, operating profit margins for the company’s main business areas (after deducting head office expenses) were 21.4% for organic chemicals, 9.6% for contract processing, and 5.5% for medical, with all others below 5%. The top products in terms of market share in Japan are organic chemical β-Mercaptopropionic acid (for high-refractive-index plastic lenses for eyeglasses) at 100% (produced by only two companies worldwide), X-ray contrast media (barium sulfate) in the Medical business at approximately 50% (produced by only three companies in Japan), high-purity barium carbonate for electronic materials (dielectric materials) at over 50%, and PVC stabilizer (a type of plastic additive) at 30–40%.
Sakai Chemical Industry’s inorganic powder technology allows it to synthesize particles of various shapes and sizes. It is thus able to adjust particle sizes and size distributions to maximize the attributes of raw materials based on the performance requirements of specific markets. The company says it mainly procures manufacturing equipment from external suppliers. However, it notes that it has accumulated unique expertise in core technologies such that it would be difficult for competitors to produce products of the same quality given the same equipment. The manufacturing process for the main inorganic products is fully automated and based on continuous production, allowing the company to operate 24 hours a day, 365 days a year (except for during periodic inspections which occupy roughly two weeks of the year). The company’s newest plant, which produces products for electronic materials and cosmetic materials and was constructed as a strategic investment, has not been operating at full capacity due in part to the impact of the COVID-19 pandemic. Annual production volumes of the company’s mainstay products are approximately 24,000 tons of titanium dioxide and 10,000 tons of electronic materials (dielectrics and dielectric materials).
According to the company, its cost structure is characterized by a high variable cost ratio and a marginal profit ratio of 35–40%. The company relies on imports of LNG fuel and key raw materials such as ores and metal materials (ilmenite and titanium slag, the raw materials for titanium dioxide; barite, the raw material for barium salts; zinc metal). These are susceptible to price fluctuations due to the global economic climate and changes in forex rates. In principle, the company tries to pass on changes in raw material and fuel prices to customers by revising selling prices for its products. It also places importance on stable relationships with its customers and negotiates prices carefully. Recently, the price of titanium ore has been trending upward as China started to increase its production of titanium dioxide. In fact, the company, like its competitors, has raised its titanium dioxide prices by several percent. However, it seems that none have been able to keep up with the rising price of titanium ore (source: Nihon Keizai Shimbun and other media reports).
The company’s accident investigation committee and the relevant authorities are looking into the cause of an explosion that occurred on May 11, 2021 at the company’s Yumoto Plant (a zinc powder manufacturing facility completed in May 1969) and formulating measures to prevent a recurrence. The company estimates the impact of the withdrawal from the zinc powder business and costs related to the May 11 accident such as the removal of facilities and equipment, including the impact on sales, to be about JPY300mn on a pre-tax profit basis (downward pressure on revenue and operating profit of JPY1.3bn and JPY200mn, respectively, and extraordinary loss of JPY100mn).
The company’s earnings have trended within a boxed range for the past 30 years (revenue of JPY80.0–90.0bn, operating profit of JPY3.0–7.0bn) and profit margins have been low and flat (GPM: over 20%, OPM: around 5%). The company is an upstream player when considering the economy as a whole, but is positioned within the midstream of upstream industries, and is therefore vulnerable to price competition and increases in inventory costs, which factors into its low profitability. ROE has remained low at around 3% and the three indicators that make up ROE (equity ratio: around 65% [inverse of leverage], total asset turnover: around 70%, and net margin: around 3%) are stable but stagnant.
Earnings trends
In FY03/21, the company posted consolidated revenue of JPY84.9bn (-2.6% YoY), operating profit of JPY4.3bn (+7.2% YoY), recurring profit of JPY4.0bn (-4.7% YoY), and a net loss attributable to owners of the parent of JPY2.8bn (versus a net income of JPY2.5bn in FY03/20). The company made aggressive capital investments in the key areas of electronic materials and cosmetic materials, but revenue in both businesses deviated from assumptions in the capex plan, resulting in the booking of an impairment loss of JPY7.0bn and a net loss for the period.
The company upwardly revised its consolidated FY03/22 forecast when it announced 1H results. The revised forecast calls for revenue of JPY80.0bn (-5.8% YoY), operating profit of JPY7.0bn (+62.6% YoY), recurring profit of JPY7.2bn (+79.5% YoY), and net income attributable to owners of the parent of JPY5.3bn (versus a net loss of JPY2.8bn in FY03/21). This marks the second upward revision of its full-year FY03/22 forecast, including the forecast revision at the time of its Q1 results announcement. Although the company expects revenue to decline due to the application of the Accounting Standard for Revenue Recognition (ASBJ Statement No. 29), it expects this to have only a limited impact on profits.
In April 2019, the company formulated its medium-term management plan, SAKAINNOVATION 2023, covering FY03/19 to FY03/23. Under the plan, the company aims to improve profitability by focusing on six business areas. It targets operating profit of JPY8.0bn or above and ROE of 6% or above (it has not set a revenue target due to the change in revenue recognition standards). The company reduced the total capex of JPY40.0bn initially called for in the plan to JPY31.0bn, postponing its plans for restructuring investments (it has already made strategic investments of JPY19.0bn, including impairment losses, over the past two terms).
Strengths and weaknesses
Shared Research sees the company’s strengths as:
Inorganic fine powder processing technology, which makes it the leader in several niche markets
Product development capabilities and a contract processing system underpinned by extensive manufacturing facilities and expertise
Ability to create environmentally friendly and health-conscious products: technological capabilities that enable the company to develop lead-free products, catalysts that contribute to recycling, and microplastic bead substitutes
We see its weaknesses as:
Delayed shift from commodity products, which limit the company’s ability to add value, to high-value-added functional chemicals
Position as a midstream player in upstream industries and resulting low profitability
A late start in expanding overseas in response to economic development in China and the ASEAN region
Key financial data
Notes: Discrepancies with company materials are due to differences in rounding methods.
The company’s revenue recognition standard will change in FY03/22 (the initial FY03/22 forecast under the previous standard called for JPY90.0bn in revenue, a YoY increase in real terms. The change in standard will have no impact on profits).
FY03/22 forecasts are initial forecasts. On June 11, 2021, the company announced its withdrawal from the zinc powder business. The company estimates the impact of the withdrawal from the business and costs related to the May 11 accident (including compensation and removal of materials), including to sales, to be about JPY300mn on a pre-tax basis (negative impacts on revenue and operating profit of JPY1.3bn and JPY200mn, respectively, and extraordinary loss of JPY100mn).
Capex includes construction in progress and is on a cash basis (as stated in the company’s annual securities report and financial results briefing materials).
Recent updates
1H FY03/22 flash update, revisions to full-year earnings forecast
Confirmed that zinc oxide reduces the infectivity of COVID-19
Sakai Chemical Industry Co., Ltd. announced that it had confirmed that zinc oxide reduces the infectivity of COVID-19.
On the same day, Sakai Chemical Industry and Osaka Medical and Pharmaceutical University were the first worldwide to confirm the effectiveness of zinc oxide in reducing the infectivity of COVID-19. Zinc oxide had been known to have antibacterial and antiviral effects, but the joint announcement was the first to confirm its effectiveness against COVID-19. According to the company’s announcement, the experiment showed that zinc oxide can inactivate or eliminate the COVID-19 virus. Sakai Chemical Industry expects to apply the material to anti-coronavirus products moving forward.
The company’s zinc oxide products belong to the “titanium dioxide and zinc products” category of its mainstay Chemicals business. In FY03/21, revenue of titanium dioxide and zinc oxide products was JPY13.6bn, operating profit was JPY518mn, and OPM was 3.8%. It was the largest in the Chemical business category (excluding “other”), accounting for 15.6% of consolidated revenue of JPY87.1bn in FY03/21. Zinc oxide accounted for about 14% of “titanium dioxide and zinc products” (revenue of about JPY1.9bn).
In its medium-term management plan announced in April 2019 (for the four-year period from FY03/20 to FY03/24), the company identifies cosmetic materials in “titanium dioxide and zinc products” as one of its key investment areas. These are mostly titanium dioxide products. However, demand for cosmetic materials has been sluggish due to the impact of COVID-19, which was an unforeseeable factor when the plan was formulated. The company’s announcement about the effectiveness of zinc oxide in combatting COVID-19 should elevate the value of the zinc oxide business. Shared Research will be watching to see what measures the company takes based on this development, such as revising its key investment areas or spending more heavily on R&D.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Notes: Figures may differ from company materials due to differences in rounding methods.
Operating profit is after deducting head office expenses.
Note: Figures may differ from company materials due to differences in rounding methods.
1H FY03/22 results
Overview
1H results (six-month period of April--September 2021) were as follows.
The previous forecast refers to the company’s upward revision to its initial forecast following its Q1 results announcement on August 6, 2021. The company plans to pay an interim dividend of JPY35.0 per share (previous forecast also called for JPY35.0 per share).
The drop in revenue reflects the change in revenue recognition standards in FY03/22, and the company has not applied the new standards retroactively. Revenue was JPY7.6bn lower in 1H as a result, and while the change affects YoY comparisons for revenue, its impact on operating profit and other profit lines are limited.
As a result of strong results across the board in 1H, including in electronic materials and titanium dioxide and zinc products, operating profit reached a record high in 1H, surpassing the April-September 2007 peak of JPY4.2bn. Shared Research believes the company will disclose details of results by product, such as for revenue and operating profit, at its results briefing scheduled for November 29, 2021.
Q2 results (three-month period of July--September 2021) were as follows.
The pace of earnings recovery in Q1 (April--June 2021) continued into Q2. Quarterly operating profit rose YoY for four straight quarters.
Shared Research plans to update the report with more details following an interview with the company.
Full-year FY03/22 company forecast
Notes: Figures may differ from company materials due to differences in rounding methods.
The company has changed its revenue recognition standard from FY03/22.
Summary of earnings forecast
The company upwardly revised its earnings forecast to reflect 1H results. The revised forecast is as follows.
Projected EPS is JPY314.7. The company plans to pay a year-end dividend of JPY35.0 per share (previous forecast also called for JPY35.0 per share), bringing the annual dividend to JPY70.0 per share (JPY70.0 per share). Based on the company's forecast, the Shared Research estimates a payout ratio of 22.2%.
The company forecasts lower revenue to reflect the change in revenue recognition standards in FY03/22, and it has not applied the new standards retroactively for FY03/21. The impact of this change on operating profit and other profit lines are limited.
This was the company's second consecutive upward revision to its forecast, following the first revision at the time of its Q1 results announcement. The company attributed the upward revision to continued strong results in electronic materials and titanium dioxide and zinc products. For electronic materials, it mainly expects sales to remain strong for dielectrics and dielectric materials for automotive applications and telecommunications equipment-related applications. In addition, for titanium dioxide and zinc products, the company projects continued strong sales of titanium dioxide for gravure ink applications.
The company announced its revised full-year forecast together with its 1H FY03/22 results. The following comments were made prior to the announcement of the revised forecasts, and Shared Research plans to provide an update following an interview with the company. The comments will remain until the update is complete.
The company upwardly revised its previous forecast when announcing Q1 results. The current company forecast for FY03/22 is as follows.
The previous forecast called for revenue of JPY76.3bn, operating profit of JPY4.7bn, recurring profit of JPY5.1bn, net income of JPY4.3bn, and an annual dividend of JPY40.0.
The Chemical business accounts for essentially all of the upward revision, and the company has not changed its outlook for the Medical business. Sakai Chemical Industry does not disclose its revenue forecast by product category, but believes the increase in revenue of electronic materials (Chemicals business) to be the biggest driver in revenue growth. Specifically, sales of dielectrics and dielectric materials for multilayer ceramic capacitors (MLCCs) for automotive and telecommunications equipment applications have remained strong. The company expects increased revenue to boosted profit margins, resulting in a JPY1.3bn increase in operating profit (forecast of JPY4.7bn revised to JPY6.0bn) on a JPY1.0bn increase in revenue (forecast of JPY76.3bn revised to JPY77.3bn). In making the upward revisions, the company also considered the strong revenue of titanium dioxide for gravure ink applications and fiber and film applications for export.
Sakai Chemical Industry expects to be able to absorb the sharp rise in raw material prices by raising prices. Although the cost of supplying titanium dioxide has increased the most severely, the company expects to be able to pass these on in higher prices due to the tight supply situation in Japan. The upwardly revised forecast does not take into account the increase in raw material prices.
The company plans to review the forecast again at the time of the Q2 results announcement. Whether it upwardly revises its forecasts again should warrant attention. However, automakers announced production cuts in Japan after the company announced the upward revision, and the company is closely watching the situation. Shared Research understands that the company’s strong performance in electronic materials has been due to growth in automotive products, and that there is concern about a slowdown in these products in the second half of August through September. At this point, the situation from October onward is somewhat opaque and subject to change, but Shared Research understands that the impact of production adjustments due to semiconductor shortages will inevitably have some impact on the company’s 2H forecast, as the situation is not conducive to early recovery.
The company’s accident investigation committee and the relevant authorities are looking into the cause of an explosion at the company’s Yumoto Plant (a zinc powder manufacturing facility completed in May 1969) that occurred on May 11, 2021 and formulating measures to prevent a recurrence. The company estimates the impact of the withdrawal from the zinc powder business and costs related to the May 11 accident such as the removal of facilities and equipment, including the impact on sales, to be about JPY300mn on a pre-tax profit basis (negative impacts on revenue and operating profit of JPY1.3bn and JPY200mn, respectively, and extraordinary loss of JPY100mn). The company has not revised this estimate.
Notes: Figures may differ from company materials due to differences in rounding methods.
The company’s revenue recognition standard will change in FY03/22 (the initial FY03/22 forecast under the previous standard called for JPY90.0bn in revenue, a YoY increase in real terms. The change in standard will have no impact on profits).
FY03/22 forecasts are initial forecasts. On June 11, 2021, the company announced its withdrawal from the zinc powder business. The company estimates the impact of the withdrawal from the business and costs related to the May 11 accident (including compensation and removal of facilities and equipment), including on sales, to be about JPY300mn on a pre-tax basis (negative impacts on revenue and operating profit of JPY1.3bn and JPY200mn, respectively, and extraordinary loss of JPY100mn).
Notes: Discrepancies with company materials are due to differences in rounding methods.
Operating profit is after deducting head office expenses.
Initial FY03/22 forecasts are based on the previous accounting standard and are given for reference.
FY03/22 forecasts are initial forecasts. On June 11, 2021, the company announced its withdrawal from the zinc powder business. The company estimates the impact of the withdrawal from the business and costs related to the May 11 accident (including compensation and removal of facilities and equipment), including on sales, to be about JPY300mn on a pre-tax basis (negative impacts on revenue and operating profit of JPY1.3bn and JPY200mn, respectively, and extraordinary loss of JPY100mn).
Past differences between initial forecasts and actual results
The company tends to formulate a conservative initial forecast (lower revenue and profits) for the subsequent fiscal year if it fails to meet its initial forecast for two or three consecutive terms. This is because the company’s earnings have trended in a boxed range for the past 30 years (revenue of JPY80.0–90.0bn, operating profit of JPY3.0–7.0bn), and every few years it sets aggressive targets in its medium-term management plan to try to break out of this range.
Note: Figures may differ from company materials due to differences in rounding methods.
Medium-term management plan
Numerical targets and key business areas
In April 2019, Sakai Chemical Industry formulated its medium-term management plan (FY2019–2023), SAKAINNOVATION 2023. Under the plan, the company aims to focus on improving profitability in six business areas. It targets operating profit of JPY8.0bn or above and ROE of 6% or above (it has not set revenue targets due to changes in revenue recognition standards).
Six key business areas (key investment areas)
Notes: Figures may differ from company materials due to differences in rounding methods.
Operating profit is after deducting head office expenses.
Capex plan and key investment areas
SAKAINNOVATION 2023, the company’s medium-term management plan announced in April 2019, calls for total capex of JPY40.0bn (JPY19.0bn in strategic investments to improve profitability, JPY9.0bn in restructuring investments, and JPY12.0bn to update facilities). The strategic investments are mainly in existing businesses such as electronic materials (for MLCCs) and cosmetic materials, and are mainly aimed at achieving numerical targets for the next five years. Restructuring investments include investments to build people-friendly and disaster-resistant factories and offices, and investments to develop infrastructure for future businesses and products. The company has identified the abovementioned six business areas as key areas for strategic investment.
Capex (including construction in progress) in the Chemicals segment hovered around JPY3.0bn from FY03/12 to FY03/18 (except in FY03/16, when it reached JPY7.6bn). However, it rose to much higher levels once the medium-term plan started, reaching JPY7.6bn in FY03/19, JPY8.7bn in FY03/20, and JPY9.5bn in FY03/21. Due to the decline in demand caused by the COVID-19 pandemic, the company recorded an impairment loss of JPY7.0bn (JPY3.6bn for electronic materials, JPY3.1bn for cosmetic materials, JPY302mn for other materials, and JPY38mn for medical-related) in FY03/21, prompting it to reduce the JPY40.0bn of total capex originally called for in the medium-term plan to JPY31.0bn (postponing the restructuring investment plan. The JPY19.0bn [including impairment] in strategic investment has already been executed over the past two years). The impairment loss the company incurred due to the pandemic hit especially hard as the company had just implemented major capex to start up a new plant in line with its medium-term plan. The company plans to taper off its capex over the last three years of the plan, to JPY5.0bn in FY03/22, JPY4.0bn in FY03/23, and JPY3.5bn in FY03/24. Depreciation expenses have also increased in tandem with the higher capex, but the company expects them to fall in FY03/22 as it reduces capex. The R&D expense to revenue ratio in the Chemicals segment has remained constant at around 3.5%.
(1) Electronic materials
Target: Dielectrics (barium titanate), dielectric materials (high-purity barium carbonate)
Market trends: Continued growth in automotive applications due to advances in CASE (connected cars, autonomous/automated driving, sharing/subscription, and electrification). Growth in demand due to the spread of 5G and IoT.
Company strategy: Stabilize quality (improve customer-side yield and reliability), pursue rapid development of new products (micro dielectrics), respond quickly to customer demand (increase production)
Specific measures: Improve profitability of dielectrics by getting the development of high-end fine dielectrics on track. Build a system to increase production of dielectric materials to boost revenue.
Capex: JPY5.7bn (targeting a 90% increase in revenue in FY03/24 versus FY03/19)
(2) Titanium dioxide and zinc products
Target: Cosmetic materials
Market trends: Change in European guidelines to allow use of zinc oxide. Ban on the sale of sunscreens containing certain organic ingredients in Hawaii from 2021. A trend toward regulation of microplastics due to impacts on ecosystems and human health (in the UK, US, and other countries). Expansion of Asian markets, especially China.
Company strategy: Accelerate overseas expansion in line with global regulatory trends. Differentiate through unique products such as heteromorphic zinc oxide and plate-shaped barium sulfate
Specific measures: Increase production capacity in response to strong demand and grow industry presence, leveraging the ability to develop and manufacture a wide range of cosmetic materials.
Capex: JPY5.5bn (targeting a 68% increase in revenue in FY03/24 versus FY03/19)
(3) Plastic additives
Target: PVC stabilizer, hydrotalcite
Market trends: While PVC demand in Japan is expected to remain flat, demand in Southeast Asia is expected to continue to grow due to infrastructure and urban area development. Lead regulations are progressing due to the impact on the environment and human health.
Company strategy: Develop the manufacturing and sales system for PVC stabilizers in Japan, Vietnam, and Thailand to expand sales to Southeast Asian countries and strengthen the customer follow-up system. Capture demand related to the switch from lead to lead-free stabilizers. Improve profitability by leveraging the domestic production system.
Specific measures: Capitalize on the trend toward lead-free products as early as possible. Accelerate overseas expansion by strengthening the supply of raw materials, technical support, and stable production systems in Japan, Vietnam, and Thailand (targeting an overseas ratio of 50% or more).
Capex: JPY600mn (targeting a 26% increase in revenue in FY03/24 versus FY03/19)
(4) Catalysts
Target: Nickel catalysts, PET polymerization catalysts, copper catalysts
Market trends: Expected growth in hygienic products and displays. A trend toward environmental friendliness.
Company strategy: Aim to improve capital efficiency by integrating production bases for nickel catalysts, while simultaneously expanding sales to improve profitability. Contribute to society by strengthening environmentally friendly catalysts, namely PET polymerization catalysts, which are antimony-free catalysts that contribute to production of safer bottles and fibers, and copper catalysts, which will help pave the way for shift to the use of chromium-free catalysts.
Specific measures: Expand nickel catalyst sales and improve production efficiency. Grow environmentally friendly catalysts into a new earnings pillar.
Capex: JPY1.3bn (targeting a 100% increase in revenue in FY03/24 versus FY03/19)
(5) Other
Target: High-refractive-index materials
Market trends: Expected growth in high-refractive-index lenses in the plastic lenses market. Expected growth in large-screen smartphones, which are set to become mainstream in the near future.
Company strategy: Use fine particles to achieve high transparency and a high refractive index. Highlight ease-of-use by offering a broad lineup. Start operation at a new plant. Contribute to earnings with high-value-added products.
Specific measures: Start operation at a new plant to increase production and contribute to earnings, based on the expectation that high-end models with large screens will take the lead in the smartphone market in the future.
Capex: JPY2.1bn (targeting a 267% increase in revenue in FY03/24 versus FY03/19)
(6) Medical business
Target: Medical devices (submucosal injection material, bone void filler), products for aesthetic medical providers
Market trends: Uptrend in the incidence and prevalence of cancer due to the aging of the population. Growing awareness of beauty and health.
Company strategy: Promote new businesses while maintaining existing ones (barium, Alloid G, household drugs, endoscope cleaning and disinfection equipment).
(1) Submucosal injection material: Sales launched in June 2019. Aim to increase revenue by expanding application to different treatment methods.
(2) Products for aesthetic medical providers: Sell exclusively at medical institutions to appeal to buyers with a high awareness of beauty.
(3) ReBOSSIS bone void filler: An artificial bone filler resembling cotton. Contract manufacture for the startup that developed the material. Responding to plans to expand sales in Japan and overseas.
Specific measures: Aggressively grow new businesses, aiming to expand mainly in medical devices (submucosal injection material, bone void filler), products for aesthetic medical providers, and products for cancer screenings.
Capex: JPY1.2bn (targeting a 40% increase in revenue in FY03/24 versus FY03/19)
Changes in the medium-term management plan
In April 1988, the 70th anniversary of Sakai Chemical Industry’s founding, the company announced a three-year medium-term management plan. This was the bubble economy era, and the company moved forward with aggressive investments and its stock price reached a record high. However, the collapse of the bubble economy plunged the company into the red in FY03/92. In response to this crisis, it formulated a three-year action plan, the “SST Plan,” in September 1993. The plan called for “improving and strengthening the earnings base” by promoting rationalization and taking emergency measures to restructure the entire company. Based on the results of those efforts, the company formulated its next plan, Bright Future 21, which it announced in April 1996. After achieving the numerical targets for FY03/00, the company targeted revenue of JPY100.0bn and recurring profit of JPY8.0–10.0bn in a series of new plans drawn up every three to five years, but has to this day been stuck in a box range (with revenue of JPY80.0–90.0bn and recurring profit of JPY3.0–7.0bn) and unable to reach those targets (though it met the recurring profit target in FY03/07 with a recurring profit of JPY8.7bn). The current medium-term management plan covers five years and does not specify a numerical target for revenue due to changes in the accounting standard, having only targets for operating profit and ROE.
Note: Figures may differ from company materials due to differences in rounding methods.
Business
Business model
Overview
The company mainly manufactures and sells inorganic powders, which are upstream intermediate goods. It operates in two segments: Chemicals (90.4% of revenue, OPM of 7.3% [5.0% after deduction of head office expenses] in FY03/21) and Medical (9.6%, 5.5%). The company’s mainstay products, including titanium dioxide and zinc products as well as barium products, have a wide range of applications (paints, pigments, colorants, cosmetics, electronic materials such as multilayer ceramic capacitors [MLCCs], polyvinyl chloride [PVC] stabilizers, diapers, high-index plastic lenses for eyeglasses, pharmaceuticals, medical devices, others). The company is focusing on ESG management and the SDGs to protect the global environment, including by promoting the switch to lead-free PVC stabilizers, providing microplastic bead substitutes, and reducing industrial waste.
Sakai Chemical Industry’s core technologies are in the following three areas: 1) inorganic fine powder processing, 2) organic synthesis, and 3) pharmaceutical manufacturing. The company identifies three main fields of application for these core technologies: electronic devices, medical and healthcare, and lifestyle and environmental infrastructure. Its medium-term management plan (SAKAINNOVATION 2023) indicates the following priority investment areas: 1) electronic materials (dielectrics and dielectric materials for MLCCs), 2) titanium dioxide and zinc products (cosmetic materials), 3) high-refractive-index materials (plastic lenses and film coatings), 4) catalysts (hygiene products, displays, and environmental), 5) medical (beauty, health, and treatment), and 6) plastic additives (PVC, promoting the switch to lead-free stabilizers).
The company’s inorganic powder processing technology allows it to synthesize materials of various shapes and sizes. It is thus able to adjust particle sizes and size distributions to maximize the attributes of raw materials based on the performance requirements of specific markets. In recent years, marine pollution by microplastic beads (MPBs) has become a global issue. MPBs are used in rinseable cosmetics and personal care products as exfoliators and texture enhancers. There is concern that wastewater treatment facilities are unable to remove MPBs that wash down the sink, meaning that they flow into the ocean and affect the ecosystem. The company is able to synthesize materials that can be used in cosmetics (calcium carbonate, barium sulfate, others) with an optimal particle size for texture enhancement (one micron). By making the particle size smaller (ultrafine) and increasing particle uniformity so that there are fewer coarse particles, the company offers spherical particle alternatives to standard MPBs that can be used in a wide range of fields without carrying the same environmental risks.
Mainstay products (based on company materials)
Electronic materials (11.4% of total revenue, OPM 0.2% [after deduction of head office expenses] in FY03/21)
In FY03/21, the mainstay products in electronic materials were dielectric materials (high-purity barium carbonate; 40% of revenue for the category), dielectrics (barium titanate; 25%), and others (35%). Dielectrics and dielectric materials are the main materials in multilayer ceramic capacitors (MLCCs), which are indispensable parts of electronic devices such as smartphones. Dielectrics are characterized by their electricity storage capacity. MLCCs are electronic components made of hundreds of alternating layers of dielectric and nickel sintered together. They are used in different applications, with their dimensions ranging from as small as 0.25mm x 0.125mm to as large as 5.7mm x 5.0mm. The company uses its proprietary method of hydrothermal synthesis to produce an assortment of ultrafine, high-purity, highly crystalline perovskite dielectric powders (fine spherical dielectrics in uniform shape), which contribute to improved performance and miniaturization of capacitors. Spherical amorphous silica is highly rated for its very narrow particle-size distribution and low moisture absorption.
Major MLCC manufacturers (including Murata Manufacturing [TSE1: 6981] and Taiyo Yuden [TSE1: 6976]) manufacture dielectrics in-house, mainly in the volume zone, but the company offers special-grade products, new products, and products with large fluctuations in demand that are difficult for customers to handle. The company is the largest producer of high-purity barium carbonate, a material used in dielectrics, with a share of over 50%. The company’s annual production volume of electronic materials is over 10,000 tons, and has been increasing every year in recent years. The company produces a much greater volume of dielectric materials than it does dielectrics. These dielectric materials have a lower unit price than dielectrics, which have higher value-added. Nevertheless, the company considers dielectric materials to be a value-added product since there are only a few manufacturers capable of producing them in the world (less than five) and quality is constantly improving.
There was a period between FY03/16 and FY03/18 when electronic materials was a seller’s market and OPM trended at or above 10%. However, OPM has fallen to around 1% in recent years (FY03/20 and FY03/21) due to delays in the plans of major clients and an increase in fixed costs caused by a decline in the utilization rate of expanded facilities. The company has been working to improve production efficiency considering the demand for increasingly high performance and quality, in addition to the difficulty it has in passing on costs to clients. However, some customers require the company to hold inventory of raw materials for almost a year.
Titanium dioxide and zinc products (16.0% of total revenue, OPM of 3.8% [after deduction of head office expenses] in FY03/21)
As of FY03/21, titanium dioxide accounted for just under 64% of revenue for the category, zinc products for just under 24% (zinc oxide: 14%, zinc powder*: 10%), and cosmetics for just under 13%. The company’s annual production of titanium dioxide is about 24,000 tons (third largest in Japan after Ishihara Sangyo [TSE1: 4028] and Tayca [TSE1: 4027]). With the entry of Chinese companies into the market, titanium dioxide is undergoing commodification such that there is no benefit in chasing market share. The company is thus reducing production while improving efficiency.
*On June 11, 2021 the company announced its intention to discontinue zinc powders.
Titanium dioxide is formed through a reaction of an ore called ilmenite with sulfuric acid. Titanium dioxide particles have a high refractive index and reflect a wide range of wavelengths, from ultraviolet to infrared, giving them a white appearance. White pigment is not only used to produce whiteness, but also to adjust color, as white pigment is a component of all colors. In addition to its superior whiteness, titanium dioxide is highly chemically stable and has characteristics that make it useful for concealing (such as making pages opaquer in printing applications) or adding coloring. These features have led to it being dubbed the “king of white pigments” and adopted in many fields, including paints, printing inks, papermaking (for its opacity and ability to hide reverse-page text), plastics, synthetic fibers, rubber, borax, white lines on roads (for crosswalks and other indicators). It is also used for its optical properties, including in glass and capacitors. Both titanium dioxide and zinc oxide are also used in sunscreens and foundation, since their high refractive index (when in tiny particles) helps to reflect UV rays. Cosmetic material applications accounted for 13% of the category revenue in FY03/19, just under 17% in FY03/20, and just under 13% in FY03/21.
Zinc oxide was the company’s original product at its founding. In fact, it was Sakai Chemical Industry that promoted production of zinc oxide in Japan as a replacement for lead-containing white powder used by women and theater performers of the time. Today, zinc oxide plays a greater role as a sunscreen to protect the skin from UV rays than it does as a white powder. The finer the particles of zinc oxide, the more evenly it can cover the skin, and the more effective it is as a sunscreen component. In addition, the finer the particles are, the more transparent they become, which prevents leaving a white cast on the wearer’s skin.
Zinc powder (discontinued; see note above) is made by evaporating and cooling metallic zinc, and zinc oxide is made by burning (oxidizing) zinc gas in the air. Zinc powder is mainly used as a corrosion inhibitor in rust-preventive primer paints. Steel frames in buildings under construction are coated with this primer material which is then overlaid with successive layers of paint to increase weatherability. In addition to cosmetic applications, zinc oxide is also used as a vulcanization accelerator for rubber products. In this function, it serves as an additive to harden the liquid extracted from rubber trees and increase its durability. The hardened rubber is then used to make products such as automobile tires.
Plastic additives (13.6% of total revenue, OPM of 3.4% [after deduction of head office expenses] in FY03/21)
Resin materials such as plastics and polyvinyl chloride (PVC) have a tendency to deteriorate and discolor due to exposure to heat, light, and oxygen. Plastic additives are used to control and inhibit this degradation and to enhance functionality by increasing strength and modifying the surface. Plastic additives are used in pipes, fittings, electric wiring, extrusions, agricultural films, flexible wrap films, and wallpaper.
PVC stabilizers are added to improve the processability of and inhibit the deterioration of PVC pipe resins. Currently, the switch to lead-free PVC stabilizers worldwide is accelerating. The company’s Vietnamese subsidiary manufactures lead-free stabilizers and hydrotalcite, a key raw material in their manufacture. Its Thai subsidiary manufactures both lead-containing and lead-free stabilizers. Sales of all these products are growing, mainly in Southeast Asia. The company has the largest share of the PVC stabilizer market in Japan at 30–40%.
The impetus for the development of plastic additives came in 1949, when the company succeeded in synthesizing zinc stearate after having success with the application of zinc oxide and zinc sulfate. As a stabilizer, zinc stearate grew rapidly in the 1950s, riding the wave of the expanding market for agricultural greenhouses.
Hygienic products (10.9% of revenue, OPM of 4.8% [after deduction of head office expenses] in FY03/21)
Demand for hygienic products (diapers and feminine hygiene products) is growing overseas. The company’s Indonesian subsidiary is manufacturing breathable films.
Organic chemicals (8.1% of revenue, OPM of 21.4% [after deduction of head office expenses] in FY03/21)
This category covers organic chemicals—mainly organic compounds containing sulfur and phosphorus (organosulfur and organophosphate compounds)—and contract manufacture of active pharmaceutical ingredients (APIs) and intermediates. These products are used in electronics, plastics, pharmaceuticals and healthcare, lubricants, and water treatment materials. Main applications include thin (high-refractive-index) plastic lenses, concrete, lubricants, and pharmaceuticals. The company provides high-performance, high-quality materials for construction and civil engineering as well as cutting-edge optical and electronic materials. Its business in this area centers on β-Mercaptopropionic acid, a raw material in high-refractive-index plastic lenses. In fact, it is the only manufacturer of the compound in Japan and one of only two in the world.
Organic chemicals are handled by group company SC Organic Chemical Co., Ltd. Organophosphate products leverage the characteristics of phosphorus for applications mainly in the automobile industry (but also in a wide range of other fields). They are used as extreme pressure additives for lubricants, antioxidants for resins, dispersants, and catalysts. Katayama Seiyakusyo Co., Ltd. meanwhile handles the development and production of active pharmaceutical ingredients (APIs) and intermediates. In the contract manufacturing of APIs and intermediates, the company sometimes participates from the development stage. The business can count on stable earnings once a drug is launched on the market. According to Sakai Chemical Industry, it is the exclusive supplier of APIs and intermediates used in a very successful pharmaceutical sold by a certain undisclosed company.
Catalysts (3.8% of revenue, OPM of -2.6% [after deduction of head office expenses] in FY03/21)
De-NOx catalysts and dioxin decomposition catalysts are used in equipment that removes and decomposes nitrogen oxides (NOx) and dioxins generated from thermal power stations and waste incineration plants. De-NOx catalysts are square prisms with 15 to 45 honeycomb-patterned holes on either side. They remove NOx when flue gas passes through them to produce clean air. De-NOx catalysts accounted for 32% of the category revenue in FY03/19, 25% in FY03/20, and 28% in FY03/21.
Hydrogenation catalysts (nickel and copper-based catalysts) are one type of process catalyst that causes fats and oils to react with hydrogen to form solids. They are used to produce raw materials for margarine, shampoo, adhesives, optical films, and other products. Polyester polymerization catalysts are used to produce raw materials for polyester fiber, PET bottles, and PET films. The company aims to expand its nickel catalyst business in tandem with increasing demand for optical films and diaper adhesives.
Contract processing (7.7% of revenue, OPM of 9.6% [after deduction of head office expenses] in FY03/21)
The company conducts contract manufacturing in the field of inorganic and organic chemical products (pigments, colorants, functional inks, catalysts, plastic additives, and others) based on its proprietary inorganic powder processing technology. The company has a variety of manufacturing equipment to meet a wide range of customer needs. Almost all raw materials are supplied by customers, so revenue is a function of the processing fees the company charges.
Other (18.9% of revenue, OPM of 2.8% [after deduction of head office expenses] in FY03/21)
This category includes products handled by Sakai Trading and barium products (excluding those for electronic materials), road marking materials, colored paving and coating materials, and others. Barium carbonate was used as an electromagnetic deflection material in cathode-ray tube televisions. It is now used in modern LCD TVs as a material in anti-reflective films and glass substrates to prevent glare. It is also used as a glazing material to protect and add aesthetic value to ceramics. Ultrafine barium sulfate (under the brand “Barifine”) has the effect of making surfaces shiny and colors brighter. Barium sulfate is also used as a raw material in green-colored fireworks because it produces a green flame when burned.
Medical business (mainly Kaigen Pharma Co., Ltd.) (9.6% of revenue, OPM of 5.5% in FY03/21)
The company has the largest share (approx. 50%) of the Japanese market for X-ray contrast media (barium sulfate) for use in gastrointestinal radiography (there are two other Japanese competitors). Radiography using barium sulfate is commonly used in Japan for regular checkups of the digestive tract, but the company also exports its products overseas. Barium sulfate is a type of barium salt and is known for its application as a white liquid contrast medium used in gastric X-ray examinations. Since Barium sulfate does not easily let X-rays through, it is used to clearly show stomach tissues that are otherwise difficult to see.
The company develops, manufactures, and sells a variety of pharmaceutical products based on its barium sulfate manufacturing technology. One of these is Alloid G, a proprietary peptic ulcer treatment made from sodium alginate. It is effective for hemostasis and mucosal protection in gastric and duodenal ulcers, and for improving subjective symptoms in reflux esophagitis. Another is Etoxisclerol, a drug used for transendoscopic sclerotherapy of esophageal varices. The company is focusing on the development of endoscope cleaning and disinfection equipment to support the shift from barium to gastroscopy screening.
As for over-the-counter (OTC) drugs, the company offers a wide range of products, including Kaigen cold medicine, Kaigen tablets, Kaigen cold capsules, rhinitis treatments, antitussive expectorants, oral medicines, antipyretic analgesics, nourishing tonics, gastrointestinal medicines, laxatives, and ophthalmic medicines. The company has started to sell its products in the Taiwanese market, appealing to perceptions that Japanese-made drugs are of high quality.
Core technologies
Sakai Chemical Industry’s basic R&D policy is to advance its three core technologies: 1) inorganic powder processing, 2) organic synthesis, and 3) pharmaceutical manufacturing. According to the company, it mainly procures manufacturing equipment from external suppliers. However, it says it has accumulated unique expertise in core technologies such that it would be difficult for competitors to produce products of the same quality given the same equipment. The company plans to actively pursue technological tie-ups and M&A to gain access to innovative technologies that it does not currently possess.
(1) Inorganic powder processing technologies
The company is contributing to the miniaturization of multilayer ceramic capacitors with its ultrafine particle processing technology using hydrothermal synthesis. Hydrothermal synthesis refers to using water at high temperatures and high pressures to trigger the synthesis or crystal growth of certain compounds. The high-temperature, high-pressure environment makes it possible for substances that are insoluble in water at normal temperatures and pressures to be easily dissolved, thus making it possible to synthesize or facilitate crystal growth of a broader range of substances. In the field of cosmetics, zinc oxide particles can be made into hexagonal plates, resulting in quality products such as foundations that are easily blended into the skin and have good spreadability. The surface of titanium dioxide particles, which are used as a pigment in paints, is coated with an inorganic substance to enhance the stability of paints. The company also has technology that allows it to achieve purities of 99.9% or higher in the manufacture of inorganic powers. Additionally, it produces a unique stress-stimulated luminescent material (a powder) that emits light when subjected to force.