Daiichi Kigenso Kagaku Kogyo 4082
第一稀元素化学工業
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Schneider Electric Osaka Building 9th floor, 4-4-9 Kitahama, Chuo-ku, Osaka 541-0041, Japan
Summary
The company mainly manufactures and sells zirconium compounds, although it also handles cesium, rare-earth, and other inorganic compounds. The value chain starts with the production of iron ore, after which intermediate materials are processed into primary products.
Chemicals
Key dates
2019-05-07
Coverage initiation
Executive summary
Business overview
Integrated production of zirconium compounds: The company mainly manufactures and sells zirconium compounds, although it also handles cesium, rare-earth, and other inorganic compounds. (In FY03/18, sales of zirconium compounds were JPY22.9bn, and sales of other compounds were JPY2.6bn.) The value chain starts with the production of raw zirconium ore, after which intermediate materials are processed into primary products. These are delivered to secondary product manufacturers, which send their products on to companies that assemble them into final consumer products. Daiichi Kigenso and its group companies produce intermediate materials from raw zirconium ore and also manufacture and sell primary products. This level of integration allows the company to offer a full lineup of products tailored to customer requirements.
Product characteristics: Zirconium has extremely diverse properties, the characteristics of which vary depending on its manufacturing method, with which substances it bonds, and changes in its crystal structure. Zirconium compounds exhibit ionic conductivity, strong acidity and chemical resistance, high heat resistance, high strength and ductility, water repellency, a high refractive index, piezoelectricity, and dielectric characteristics.
Applications, customers, and prices: The company delivers products to secondary product manufacturers for use in catalysts (62.2% of consolidated sales in FY03/21), refractories and friction materials (9.7%), fine ceramics (10.5%), and electronic parts and oxygen sensors (10.8%). Catalysts are mainly used to improve performance of the catalytic converters found on gasoline-powered vehicles. (According to Daiichi Kigenso, the majority of all catalysts are used in automobiles, and the company has a global market share of around 40% in this category.) Including friction materials and oxygen sensors, the company relies on the automotive industry for some 80% of consolidated sales. As a result, performance is affected by unit production of automobiles and consumer preferences on fuel consumption (engine size). Having learned from its experience during the rare earth elements crisis from the second half of 2010 through 2012 or so (described later in the report), the company now bases the selling price of its catalysts on the market prices of raw materials. In FY03/21, 47.9% of sales were in Japan, 24.9% in Asia, 13.7% in Europe, and 12.5% in North America. Overseas sales accounted for 52.1% of the total.
Longer term growth drivers: The company sees two long-term growth drivers: the rapid take-up of hybrid vehicles due to tougher environmental regulations and advancements in C.A.S.E. (Connected, Autonomous, Shared & Services, and Electric) mobility; and spread of vehicles without internal combustion engines with large-capacity secondary batteries and a variety of energy sources. Based on forecasts from LMC Automotive, the company estimated that the share of internal combustion vehicles (excluding hybrids) was 88% in 2020, and would decline to 68% in 2025 and 54% in 2030. Meanwhile, hybrid vehicles only accounted for 9% in 2020, but are expected to rise to 23% in 2025 and 30% in 2030. Projections are for vehicles without internal combustion engines to rise from 3% in 2020 to 9% 2025 and 16% in 2030.
Impact of growth in hybrid vehicle market: Growth in hybrid vehicles is positive for the company, with prospects for its sales volume to outpace growth in auto sales volume. This is because hybrids have both internal combustion and electric motors. Hybrid vehicles require high-performance catalysts that work at low temperatures. High-performance catalysts have high barriers to entry due to patent protection. Competition is effectively between two companies, the company and one other, so the company aims at growing market share in catalyst applications. Further, hybrid vehicles use secondary batteries, which should drive growth in demand for secondary battery materials. Demand for electronic materials is likely to increase amid Increasing electrification.
Impact of growth in market for vehicles without internal combustion engines: Vehicles without internal combustion engines are negative for the company, as the need for catalysts to purify exhaust and oxygen sensors will disappear. However, battery electric vehicles (BEVs) with large capacity secondary batteries will drive demand growth for secondary battery materials. Daiichi Kigenso says that, if its products are used in all-solid-state batteries that will likely be installed in BEVs in the future, the volume of those products used per BEV could roughly triple from the volume used currently in vehicles with internal combustion engines. In the case of fuel cell electric vehicles (FCEVs), demand for reforming catalysts and shift catalysts in hydrogen generators used in external equipment as well as materials used in solid oxide electrolyzer cells (SOECs) and solid oxide fuel cells (SOFCs) will increase. The company plans to tap into such demand to offset the decline from catalysts used in purifying exhaust.
Earnings trends
For FY03/21, results were largely on par with the revised forecast as at April 26, 2021. Full-year FY03/21 consolidated sales were JPY23.5bn, down 11.5% YoY. Across all applications, sales volumes were down 11.8% YoY. Sales were also down YoY across all five applications. Sales were severely affected over 1H by the COVID-19 pandemic, particularly sales of automotive products, including the company’s mainstay catalyst support material for purifying automobile exhaust gas. However, sales were better than expected in 2H due to recovery in automotive sales volume and the early receipt of orders ahead of anticipated tight shipping conditions. Operating profit decreased to JPY2.0bn (-35.2% YoY), recurring profit to JPY2.1bn (-31.3% YoY), and net income attributable to owners of the parent to JPY1.2bn (-47.4% YoY) due to sales volumes falling over 1H.
FY03/22 forecast (revised on October 29, 2021):
The company’s revised forecast for full-year FY03/22 calls for sales of JPY29.2bn (unchanged from the previous forecast), operating profit of JPY3.0bn (unchanged), recurring profit of JPY3.8bn (previous forecast: JPY3.1bn), net income attributable to owners of the parent of JPY2.8bn (JPY2.1bn), and EPS of JPY115.33 (JPY86.49). The company expects sales to be in line with its previous forecast, as it anticipates a boost to selling prices from favorable foreign exchange rates and higher raw material prices although it sees sales volume decreasing due to a global decline in automobile production stemming from semiconductor and other supply shortages. On the other hand, the company sees 2H profits falling short of its initial forecast due to lower sales volume and reduced capacity utilization to reduce the inventory buildup seen in 1H. As a consequence, the company projects smaller increases in full-year operating profit, recurring profit, and net income attributable to owners of the parent.
The company’s medium-term business plan (DK-ONE Project) covers the 10-year period from FY03/14 to FY03/23. The main thrust of the plan is to ensure the company remains the leader in zirconium. The plan calls for the Daiichi Kigenso group to double shipment volume (compared with FY03/13 levels), explore new possibilities for zirconium, and increase the sales share of newly developed products to 15% or more. To meet the DK-ONE Project’s targets, the company expects to invest around JPY40.0bn over the five years from FY03/19 to FY03/23. Main areas of spending are (1) JPY20.0bn to increase production and expand the scope of business, (2) JPY10.0bn to secure zirconium materials, (3) JPY6.0bn to develop new applications and materials, and (4) JPY3.0bn to boost productivity. In November 2020, the company revised down the targets in the DK-ONE Project, its medium-term plan through FY03/23. The new targets are sales of JPY33.0bn (JPY42.0bn initially), recurring profit of JPY3.4bn (JPY5.0bn), EBITDA of JPY6.5bn (JPY9.5bn), equity ratio of at least 50% (no change), and ROE of at least 3.5% (at least 5.0%). The company explained that the revisions reflect the impact of COVID-19 and changes to powertrains.
Strengths and weaknesses
Shared Research believes the company has three strengths: 1) an integrated production system from the raw ore stage allows the company to meet diverse customer needs and develop long-term customer relationships; 2) the company’s technological capabilities enable it to commercialize products leveraging zirconium’s diverse properties; and 3) business stability is a competitive advantage, stemming from the ability to produce zirconium oxychloride, an intermediate product, in-house.
We see its three weaknesses as being: 1) catalysts make up a high percentage of sales, but the company may be affected by a falling need for catalysts or technological changes that eliminate them all together; 2) the company’s primary products are niche, and customers’ purchasing policies determine the size of its own sales; and 3) price volatility of rare earth and its structural weakness in dealing with procurement issues.
Key financial data
Recent updates
Revisions to FY03/22 earnings forecast and dividend projection
Daiichi Kigenso Kagaku Kogyo Co., Ltd. announced revisions to its FY03/22 earnings forecast and its dividend forecast.
Earnings forecast revision
Revision to 1H FY03/22 earnings forecast
The company’s revised forecast for 1H FY03/22 calls for sales of JPY14.8bn (previous forecast: JPY14.5bn), operating profit of JPY2.1bn (JPY1.5bn), recurring profit of JPY2.9bn (JPY1.6bn), net income attributable to owners of the parent of JPY2.2bn (JPY1.1bn), and EPS of JPY90.61 (JPY43.25).
Sales are trending broadly in line with plan, with demand from key clients (mostly in the automotive industry) now recovering from a slump caused by the COVID-19 pandemic. The company sees operating profit coming in higher than previously projected, thanks to rebounding prices and an improved sales mix as well as a rise in capacity utilization stemming from efforts to expand overseas sales subsidiaries' inventory by raising production volume in response to COVID-19 disruptions impacting global marine transportation. In addition, it expects sharp increases in recurring profit and net income attributable to owners of the parent thanks to the recording of an unrealized foreign exchange gain arising from foreign-currency borrowings associated with its Vietnamese subsidiary.
Revision to full-year earnings forecast
The company’s revised forecast for full-year FY03/22 calls for sales of JPY29.2bn (unchanged from the previous forecast), operating profit of JPY3.0bn (unchanged), recurring profit of JPY3.8bn (JPY3.1bn), net income attributable to owners of the parent of JPY2.8bn (JPY2.1bn), and EPS of JPY115.33 (JPY86.49).
The company expects sales to be in line with its previous forecast, as it anticipates a boost to selling prices from favorable foreign exchange rates and higher raw material prices although it sees sales volume decreasing due to a global decline in automobile production stemming from semiconductor and other supply shortages. On the other hand, the company sees 2H profits falling short of its previous forecasts due to lower sales volume and reduced capacity utilization to reduce the inventory buildup seen in 1H. As a consequence, the company projects smaller increases in full-year operating profit, recurring profit, and net income attributable to owners of the parent.
Revision to dividend projection
The company revised its FY03/22 interim dividendforecast (record date of September 30, 2021) to JPY13 per share, up from JPY10 per share in the previous forecast. The change reflects the revised earnings forecast for 1H FY03/22.
Trends and outlook
Quarterly trends and results
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures may differ from company materials due to differences in rounding methods.
Changes in selling prices lag changes in raw material prices. However, any impact on operating profit stemming from this delay is typically offset. Performance associated with zirconium oxychloride is on the rise thanks to recovery in demand. Neodymium oxide prices are currently high due primarily to an increase in demand for magnets.
Note: Figures may differ from company materials due to differences in rounding methods.
1H FY03/22 results
Summary
Daiichi Kigenso revised its 1H and full-year forecasts for FY03/22 on October 29, 2021, and 1H results were in line with the revised forecasts.
Sales in 1H FY03/22 amounted to JPY14.8bn (+64.6% YoY), and sales volume for all applications rose by 60.5% YoY. At the same time, sales increased in all five application categories. The US and European markets, which have made progress on economic normalization, drove recovery in demand, and sales of mainstay catalyst support material for purifying automobile exhaust gas, dental materials, industrial structural materials, electronic component materials, and other products were robust. In addition, demand for materials for fuel cells and secondary batteries continued to grow.
Operating profit was JPY2.1bn (versus profit of JPY58mn in 1H FY03/21), recurring profit JPY2.9bn (versus loss of JPY8mn), and net income attributable to owners of the parent JPY2.2bn (versus net loss of JPY82mn). Operating profit increased on greater sales volume and higher capacity utilization due to increased production volume. In addition, recurring profit and net income attributable to owners of the parent were affected by recording of unrealized foreign exchange gains arising from foreign-currency borrowings associated with its Vietnamese subsidiary.
Finished goods totaled JPY5.2bn, up from JPY4.7bn as of end-Q1 FY03/22. Work in process rose from JPY2.0bn as of end-Q1 FY03/22 to JPY2.4bn. Raw materials and supplies came to JPY2.3bn, up from JPY2.2bn as of end-Q1 FY03/22.
In the automotive industry, which is the company's key market, global sales of light vehicles through September 2021 were up 12.1% YoY, but remained below levels seen in 2019, prior to the emergence of COVID-19. However, the global shortage of semiconductors is forcing auto production cuts.
The company made no further changes to its full-year FY03/22 forecast as revised on October 29, 2021. That revised forecast calls for sales of JPY29.2bn (unchanged from the previous forecast), operating profit of JPY3.0bn (unchanged), recurring profit of JPY3.8bn (previous forecast: JPY3.1bn), net income attributable to owners of the parent of JPY2.8bn (JPY2.1bn), and EPS of JPY115.33 (JPY86.49). The company expects sales to be in line with its forecast, as it anticipates a boost to selling prices from favorable foreign exchange rates and higher raw material prices, although it sees sales volume decreasing due to a global decline in auto production stemming from semiconductor and other supply shortages. At the same time, the company sees 2H profits falling short of its initial forecast due to lower sales volume and reduced capacity utilization to reduce the inventory buildup seen in 1H. As a consequence, the company projects smaller increases in full-year operating profit, recurring profit, and net income attributable to owners of the parent. For details on the assumptions underlying the forecast, please refer to the "Full-year company forecast" section hereinafter.
Application-specific circumstances
Catalysts
In 1H FY03/22, sales of products for catalysts rose 76.0% YoY to JPY8.8bn.
The sales volume of catalyst support material for purifying automobile exhaust gas, one of the company’s core product categories, increased substantially on rapid recovery in auto sales volume, which even exceeded pre-pandemic levels. Although auto production has recently been declining due to shortages of semiconductors and other components, the impact of this was not apparent in 1H, as it coincided with a period of inventory buildup in response to increasing demand for parts and materials across the supply chain.
Refractories & Friction Materials
In 1H FY03/22, sales of products for refractories and friction materials rose 57.2% YoY to JPY1.5bn.
Demand for refractory materials has been improving with recovery in crude steel production volume in Japan, but recovery has been slow overseas.
Sales of friction materials exceeded pre-pandemic levels on recovery in auto sales volume.
Fine Ceramics
In 1H FY03/22, sales of products for fine ceramics rose 52.8% YoY to JPY1.8bn.
Sales of fuel cell materials, which the company anticipates will generate strong performance as next-generation products, rose YoY thanks to ongoing market growth primarily due to sustainable energy promotion policies implemented in countries where the company conducts business.
Demand for dental materials and industrial structural materials is on the rise due in part to economic recovery in major developed countries. Demand related to communications and electronic devices is also expanding. Sales of kitchen ceramic materials remained stagnant due to an ongoing decline in demand from inbound tourists.
Electronic Parts & Oxygen Sensors
In 1H FY03/22, sales of products for electronic parts and oxygen sensors increased 40.1% YoY to JPY1.6bn.
In electronic materials, sales of products used in the production of piezoelectric devices and multilayer ceramic capacitors, and for optical applications, grew steadily due to demand for medical devices, household appliances, and communications equipment, which remained robust even during the pandemic, and to recovery in auto sales volume.
Sales of materials for secondary batteries rose YoY, after a YoY drop in 1H FY03/21 caused by diversification in auto batteries, and are getting back on their earlier growth trend.
Sales associated with oxygen sensor applications exceeded pre-pandemic levels due primarily to recovery in auto sales volume.
Other applications
In 1H FY03/22, sales of products for other applications increased 52.7% YoY to JPY1.0bn.
Sales of cesium flux for the brazing of aluminum pipes exceeded pre-pandemic levels thanks primarily to strong performance associated with household appliance-related applications and recovery in automotive demand as auto sales volume recovered. Sales of products other the cesium flux have been recovering after the decline in demand caused by the pandemic. Overall sales for other applications exceeded pre-pandemic levels.
Full-year company forecast
Revisions to earnings forecast and dividend projection (announced on October 29, 2021)
Earnings forecast revision
Revision to 1H FY03/22 earnings forecast
The company’s revised forecast for 1H FY03/22 calls for sales of JPY14.8bn (previous forecast: JPY14.5bn), operating profit of JPY2.1bn (JPY1.5bn), recurring profit of JPY2.9bn (JPY1.6bn), net income attributable to owners of the parent of JPY2.2bn (JPY1.1bn), and EPS of JPY90.61 (JPY43.25).
Sales are trending broadly in line with plan, with demand from key clients (mostly in the automotive industry) now recovering from a slump caused by the COVID-19 pandemic. The company sees operating profit coming in higher than previously projected, thanks to rebounding prices and an improved sales mix as well as a rise in capacity utilization stemming from efforts to expand overseas sales subsidiaries' inventory by raising production volume in response to COVID-19 disruptions impacting global marine transportation. In addition, it expects sharp increases in recurring profit and net income attributable to owners of the parent thanks to the recording of an unrealized foreign exchange gain arising from foreign-currency borrowings associated with its Vietnamese subsidiary.
Revision to full-year earnings forecast
The company’s revised forecast for full-year FY03/22 calls for sales of JPY29.2bn (unchanged from the previous forecast), operating profit of JPY3.0bn (unchanged), recurring profit of JPY3.8bn (JPY3.1bn), net income attributable to owners of the parent of JPY2.8bn (JPY2.1bn), and EPS of JPY115.33 (JPY86.49).
The company expects sales to be in line with its previous forecast, as it anticipates a boost to selling prices from favorable foreign exchange rates and higher raw material prices although it sees sales volume decreasing due to a global decline in automobile production stemming from semiconductor and other supply shortages. On the other hand, the company sees 2H profits falling short of its initial forecast due to lower sales volume and reduced capacity utilization to reduce the inventory buildup seen in 1H. As a consequence, the company projects smaller increases in full-year operating profit, recurring profit, and net income attributable to owners of the parent.
Revision to dividend projection
The company revised its FY03/22 interim dividend forecast (record date of September 30, 2021) to JPY13 per share, up from JPY10 per share. The change reflects the revised earnings forecast for 1H FY03/22.
Supplementary information regarding Q1 financial results (August 10, 2021)
The company has made no changes to either its forecast for 1H FY03/22 or its full-year forecast for FY03/22. At the conclusion of Q1, sales had achieved 25.7% of their corresponding projection in the company’s full-year forecast, while operating profit had reached 35.1%, recurring profit 55.9%, and net income 65.6%. Both recurring profit and net income exceeded the company’s 1H projections in Q1. However, the company continues to face many uncertain factors, including the spread of COVID-19 variants, a decline in automobile production stemming from semiconductor shortages, and disruptions affecting global marine transportation. Additionally, unrealized foreign exchange gains generated through subsidiaries are subject to fluctuation until the end of FY03/22. For these reasons, the company made the decision to leave its forecasts unchanged. It plans to review these forecasts and make any necessary changes when it releases its financial results for Q2.
The number of automakers cutting back on automobile production is increasing due to a shortage of automotive semiconductors. Despite some signs of slowdown in China and Europe, the company maintains that its forecast for overall catalyst demand in FY03/22 had not incurred significant impact at the end of Q1. The company indicated that it avoided impact on its forecast for catalyst demand thanks to automakers who, while expressing that their production cuts were temporary, did not change their annual production plans and (primarily tier 1 and tier 2) suppliers who acted as cushions for demand adjustment.
Conditions associated with the COVID-19 pandemic have worsened in Southeast Asia compared to the beginning of FY03/22. These deteriorating conditions have resulted in a variety of business-related impact, including lockdowns causing the shutdown of automobile part manufacturing plants in Southeast Asia. At the end of Q1, the company had not incurred an impact affecting demand for its products. However, if automobile production in Southeast Asia declines moving forward, the company may face sales impact in Asia.
In Q2 FY03/21, the company’s operating rate declined because it extended operational suspensions it implemented during the summer by one month in response to declining demand caused by the COVID-19 pandemic. The company indicates that, as initially planned, its summer operational suspensions in FY03/22 will cover roughly the same periods as in 2020 and in previous years.
The company acquires less than 10% of the zirconium oxychloride (an intermediate product) that it requires from its subsidiary in Vietnam (more than 90% comes from Chinese companies outside of its corporate umbrella). Thanks in part to the efforts of this Vietnamese subsidiary, production of zirconium oxychloride in Vietnam did not suffer impact in Q1. However, the company may temporarily procure all of its zirconium oxychloride from sources in China if circumstances related to the COVID-19 pandemic require such a move. According to the company, moving its procurement of zirconium oxychloride to China would require some time, but its procurement of this intermediate product would not suffer any impact in terms of volume. The market price for zirconium oxychloride is currently lower than its cost of production at the company’s Vietnamese subsidiary. However, the company indicates that this market price is currently on the rise.
Following the announcement of the company’s FY03/22 forecast, the European Commission proposed a policy that would ban the sale of gasoline-powered vehicles (including hybrid vehicles) in Europe by 2035. Meanwhile, the President of the United States of America has signed an executive order stating that electric vehicles must account for 50% of new vehicle sales in the USA by 2030 (in the case of hybrid vehicles, only plug-in hybrids are included under the category “electric vehicles”). One could reasonably draw the conclusion that the company’s long-term external environment is being characterized by increasingly intense government policies encouraging the shift from gasoline-powered to electric vehicles. However, at the same time, the environment surrounding plug-in hybrid vehicles, many of which utilize the company’s catalysts, has not changed. Moving forward, the company plans to continue conducting research and development aimed at responding to long-term changes affecting vehicle powertrains while responding to growing demand related to hybrid vehicles.
Initial forecasts for FY03/22 (as of May 14, 2021)
The company’s forecast for full-year FY03/22 calls for consolidated sales of JPY29.2bn (+24.4% YoY), operating profit of JPY3.0bn (+48.8% YoY), recurring profit of JPY3.1bn (+45.4% YoY), and net income attributable to owners of the parent of JPY2.1bn (+70.0% YoY). This means the company now expects sales to be about JPY3.0bn and recurring profit about JPY1.0bn above the projections for FY03/22 contained in the medium-term business plan as revised in November 2020, since recovery in auto sales volume and demand for hybrid vehicles (due to acceleration of changes to powertrains) have exceeded the assumptions on which the revision was based at that time. The company’s forecast for 1H FY03/22 calls for consolidated sales of JPY14.5bn (+61.6% YoY), operating profit of JPY1.5bn (versus profit of JPY58mn in 1H FY03/21), recurring profit of JPY1.6bn (loss of JPY8mn), and net income attributable to owners of the parent of JPY1.1bn (loss of JPY82mn). Daiichi Kigenso expects substantial YoY improvement since 1H FY03/21 was negatively impacted by the COVID-19 pandemic.
Uncertainty remains over the outlook, such as regarding a resurgence in COVID-19 cases, a global shortage of semiconductors, and disruption to the supply chain caused by tight shipping conditions, but the company expects the global economy to continue to gradually recover, backed by government support in each country. In the automotive industry—its key market—the company expects sales volume to recover sharply YoY. It expects global auto sales volume in 2021 to grow approximately 11% YoY, and its own sales volume to grow 20.5% YoY. The greater growth in its own sales volume will be driven by increased demand for hybrid vehicles, which require high-performance catalysts, accompanying more rapid changes to powertrains. The company projects an exchange rate of JPY108/USD.
Sales outlook by application
Catalysts
Daiichi Kigenso expects sales to rise 83.3% YoY in 1H and 25.6% YoY for the full year due to robust sales of products used in automotive catalysts, especially in the North American market. However, it expects sales to be at about JPY9.1–9.2bn in both 1H and 2H, which is lower than the JPY9.6bn achieved in 2H FY03/21, when there were customers placing orders ahead of schedule to expand their inventories in response to disruption in marine logistics.
The forecast reflects projections as of March 2021 regarding the shortage in automotive semiconductors, but not additional production cuts by automakers that became apparent from April 2021 onward. At the time it announced the forecast, Daiichi Kigenso had not received any indication from its customers that they would cut back on their orders due to the automotive semiconductor shortage. While it is possible those customers may adjust their inventories hereafter, the timing and scale of such potential adjustments are unclear. Although it did not receive forecast data from customers at the beginning of FY03/21 due to uncertainty regarding the pandemic, the company says it did receive forecast data pertaining to FY03/22, which it took into account when formulating its forecast.
Refractories & Friction Materials
The company expects sales to rise 43.9% YoY in 1H and 23.6% YoY for the full year.
Fine Ceramics
The company expects sales to rise 32.1% YoY in 1H and 26.7% YoY for the full year. It projects that sales of materials for fuel cells will grow at least 50% YoY, with demand increasing in North America and among domestic ceramics manufacturers. It also expects steady recovery in demand for dental materials and materials for kitchen ceramics, both of which were negatively affected by the pandemic.
Electronic Parts & Oxygen Sensors
The company expects sales to rise 32.9% YoY in 1H and 27.6% for the full year, with the expected increase in new customers and robust sales for secondary battery applications (for automotive use), which are currently in the market formation phase. It projects 1H sales of JPY1.5bn, swelling to JPY1.7bn in 2H, when most of the new customers are likely.
Others
It expects sales to rise 27.4% YoY in 1H and 7.0% YoY for the full year.
Initial company forecasts vs results
Note: The company did not disclose an initial forecast for FY03/21 due to the impact caused by the COVID-19 pandemic. As such, the forecast announced in September 2020 is taken to be the company’s initial forecast in the above.
Medium-term business plan
Revised numerical targets (November 2020)
In November 2020, the company revised down the targets in the DK-ONE Project, its medium-term plan through FY03/23. The new targets are sales of JPY33.0bn (JPY42.0bn initially), recurring profit of JPY3.4bn (JPY5.0bn), EBITDA of JPY6.5bn (JPY9.5bn), equity ratio of at least 50% (no change), and ROE of at least 3.5% (at least 5.0%).
Background to revisions
The company explained that the revisions reflect the impact of COVID-19 and changes to powertrains.
It said that COVID-19 meant that automobile sales volume in FY03/23 is highly likely to fall short of initial projections.
Further, based on forecasts from LMC Automotive and others, the company judged that sales of internal combustion vehicles (both including and excluding hybrids) would likely peak several years earlier than previously expected. In November 2020, it was thought that sales of internal combustion vehicles (excluding hybrids) would peak around 2023, and internal combustion vehicles (including hybrids) would peak around 2027. However, while total automobile sales volume is expected to continue growing, sales of internal combustion vehicles (excluding hybrids) have already peaked, and Daiichi Kigenso does not expect sales to recover back to pre-2019 levels.
In December 2020, the Japanese government announced its “Green Growth Strategy Through Achieving Carbon Neutrality in 2050.” The government plans for electric vehicles (includes electric vehicles, fuel cell vehicles, plug-in hybrid vehicles, and hybrid vehicles) to account for all sales of new passenger vehicles by mid-2030 at the latest. As mentioned above, Daiichi Kigenso had already assumed future demand would shift to hybrid vehicles and vehicles without internal combustion engines back in November 2020, and the company’s outlook as at February 2021 has not changed significantly from this.
Longer-term growth drivers
The company sees two long-term growth drivers: the rapid take-up of hybrid vehicles due to tougher environmental regulations and advancements in C.A.S.E.* mobility; and spread of vehicles without internal combustion engines with large-capacity secondary batteries and a variety of energy sources.
Based on forecasts from LMC Automotive, the company estimated that the share of internal combustion vehicles (excluding hybrids) was 88% in 2020, and would decline to 68% in 2025 and 54% in 2030. Meanwhile, hybrid vehicles only accounted for 9% in 2020, but are expected to rise to 23% in 2025 and 30% in 2030. Projections are for vehicles without internal combustion engines to rise from 3% in 2020 to 9% 2025 and 16% in 2030. As at 2021, vehicles without internal combustion engines face a number of issues, including cruising distance and refueling in bad weather. As such, Daiichi Kigenso thinks a full-fledged shift to vehicles without internal combustion engines will only take place after the spread of hybrid vehicles.
Growth in hybrid vehicles is positive for the company, with prospects for its sales volume to outpace growth in auto sales volume. This is because hybrids have both internal combustion and electric motors. Hybrid vehicles require high-performance catalysts that work at low temperatures. High-performance catalysts have high barriers to entry due to patent protection. Competition is effectively between two companies, the company and one other, so the company aims at growing market share in catalyst applications. Further, hybrid vehicles use secondary batteries, which should drive growth in demand for secondary battery materials. Demand for electronic materials is likely to increase amid Increasing electrification.
Cars without internal combustion engines are negative for the company, as the need for catalysts to purify exhaust and oxygen sensors will disappear. However, battery electric vehicles (BEVs) with large capacity secondary batteries will drive demand growth for secondary battery materials. Daiichi Kigenso says that, if its products are used in all-solid-state batteries that will likely be installed in BEVs in the future, the volume of those products used per BEV could roughly triple from the volume used currently in vehicles with internal combustion engines. In the case of fuel cell electric vehicles (FCEVs), demand for reforming catalysts and shift catalysts in hydrogen generators used in external equipment as well as materials used in solid oxide electrolyzer cells (SOECs) and solid oxide fuel cells (SOFCs) will increase. The company plans to tap into such demand to offset the decline from catalysts used in purifying exhaust.
Capex plans
Although the company revised down its targets, it flagged basically unchanged capex forecasts. The main items planned are enhancing wet-method facilities at the Gotsu Factory and expanding facilities for producing zirconium intermediates at its Vietnam subsidiary. The wet-method facilities at the Gotsu Factory are production facilities originally intended for automotive applications such as catalysts, but can be switched to other applications such as materials for secondary batteries without major renovations, so the company is maintaining its investment plans. The company thinks the timing of the major shift in demand from catalyst applications to secondary battery materials applications could differ by a few years depending on the external environment. For this reason, it is securing the flexibility to respond to changes in applications. It also intends to go ahead with expanding zirconium intermediate production facilities in Vietnam as it aims to reduce the share of procurement from China to ensure supply stability over the long term. It expects the scope of capex plans outlined in its medium-term plan running through FY03/23 to allow it to meet demand through 2025 or so.
Strategy
To meet the diverse range of applications for zirconium compounds and the different material properties customers require of them (such as purity, particle size, and specific surface area), high-product-mix, low-volume production is key. Production lines also require sophisticated control technologies and equipment. The company engages in integrated production starting with raw zirconium ore, making it easier to identify all of the substance’s physical characteristics and address any potential problems with turning it into products. Most competitors specialize in specific production methods or applications, whereas Daiichi Kigenso offers a full lineup of products to meet different customer needs. This versatility helps the company build long-term client relationships and maintain a high share of a niche market. The company’s strategy is to strengthen its position by increasing its share of this niche market.
The company’s timeline reflects an understanding of the properties of zirconium compounds and development of applications for them. Initially, because of their water repellency these compounds were used to coat cardboard. Thereafter, applications spread into numerous other industrial fields, including paints, paper, pottery, optical materials, electronic parts and oxygen sensors, and fine ceramics. This history demonstrates the potential for researching and developing new applications, as well as finding new applications for conventional products in response to changes in society’s needs. Expanding new product development is a key strategic theme for Daiichi Kigenso.
Over the long term, the company thinks demand for the catalysts used to purify exhaust from internal combustion will fall off as these vehicles are replaced by electric fuel cell vehicles. Catalysts accounted for 62.2% of the company’s sales in FY03/21. Between now and the time demand for catalysts used to purify to exhaust peaks (which the company thinks will occur sometime around 2027), the company needs to expand uses for its products other than in catalysts (such as in fuel cells and next-generation secondary batteries) to compensate for the forecast drop in sales for use in catalysts.
The three points below outline the company’s strategic direction for new product development.
Medium-term management policy
The company posted net losses for two consecutive years, in FY03/12 and FY03/13, due to sudden changes in raw materials prices during a period now referred to in Japan as the “rare earth elements crisis.” As a result, the company formulated and announced the DK-ONE Project, its medium-term plan for FY03/14 to FY03/23. The main thrust of the plan is to ensure the company remains the leader in zirconium.
Under the DK-ONE Project, the company aims to:
1. The goal of doubling shipment volumes originated with the idea that if the company could approximately double its overall business in the market for zirconium compounds, it could claim to be a top manufacturer of zirconium compounds. Achieving this goal would give the company a share of approximately 25% of the global market for zirconium compounds. In FY03/18, shipment volume had reached 1.5 times FY03/13 level.
2. By increasing the ratio of newly developed products to 15% or more of total sales, the company is targeting high-value-added products rather than low-priced items that fail to boost profits. By “newly developed products,” the company refers to products developed in the last three years for new fields and new applications.
Investment plan
Daiichi Kigenso requires more facilities to achieve two objectives of the DK-ONE Project: doubling group-wide shipments (versus FY03/13 levels) and boosting the ratio of newly developed products to 15% or more of total sales. To this end, the company plans to invest around JPY40.0bn over the five years from FY03/19 to FY03/23. (These five years refer to the decision-making period, rather than the operational period and the timing when assets and expenses will be posted.) The COVID-19 pandemic has caused delays in regard to some investments, but there are no major changes to the overall investment plan. As of May 2021, roughly 60% of planned investment had been completed. The budget for typical R&D expenses is separate.
The planned investment of JPY40.0bn is anticipated to break down approximately as follows:
Major new facilities planned as of May 2021 included spending of JPY6.5bn to enhance wet-method facilities at the Gotsu Factory (raising annual production capacity by2,600t, to be completed by around October to December 2021) and JPY10.0bn to increase facilities for producing zirconium intermediates at a subsidiary in Vietnam (raising annual production capacity by 14,000t; scheduled to be completed in around July 2023). The company generally expects a seven-year return on investment. As margins on zirconium intermediates are low, however, the company expects a 10-year return on this investment.
Responding to production increases, expanding the scope of business (approx. JPY20.0bn)
Objectives
Undertakings
Major investments
Securing zirconium materials (approx. JPY10.0bn)
Objective
Undertakings
Major investment
Developing new applications and materials (approx. JPY6.0bn)
Objectives
Major investments
Boosting productivity (approx. JPY3.0bn)
Objectives
Undertakings
Major investments
M&A policy
In areas that are closely related to its business, the company’s policy is to consider expansion into upstream (raw materials), downstream (processing), and lateral (other elements and catalysts) areas.
R&D expenses policy
In FY03/21, R&D expenses were JPY894mn, or around 3.8% of sales. Previously, R&D expenditures were around 6% of sales, and the company might be planning to strengthen R&D going forward.
Business
Business description
Zirconium
The company mainly manufactures and sells zirconium compounds, although it also handles cesium, rare-earth, and other inorganic compounds. (In FY03/18, sales of zirconium compounds were JPY22.9bn, and sales of other compounds were JPY2.6bn.)
Zirconium is obtained by decomposing and refining zircon sand, a type of ore. Zirconium can also be produced from baddeleyite, which is rare.
Zirconium has diverse properties that vary depending on manufacturing method, with which substances it bonds, and changes in its crystal structure. Zirconium compounds exhibit ionic conductivity (useful in oxygen sensors and catalytic converters), strong acidity and chemical resistance (industrial catalysts), high heat resistance (refractories and catalytic converters), high strength and ductility (fine ceramics), water repellency (waterproofing agents), a high refractive index (optical materials), piezoelectricity (ignition elements, buzzers, and actuators), and dielectric characteristics (ceramic capacitors and radio wave filters).
One of the company’s strengths is its large number of engineers who can develop products that utilize these characteristics. Company policy is to recruit and cultivate post-graduate-level students in science and technology. The R&D department accounts for around 20% of employees.
Business description by application
Leveraging these material characteristics, the company provides secondary product manufacturers with materials for use in such applications as catalysts (62.2% of consolidated sales in FY03/21), refractories & friction materials (9.7%), fine ceramics (10.5%), and electronic parts & oxygen sensors (10.8%). Although the ratio of catalysts is high, energy-related applications such as fuel cell applications, included in fine ceramics, and secondary battery applications, included in electronic parts & oxygen sensors, began to emerge around FY03/19 as new fields.
The company does not use end-product applications as its reporting segments because the materials it supplies for different applications are broadly similar, products for different applications are manufactured at the same plants, and the same chemicals and raw materials are used. Application categories are essentially the same as manufacturing categories. The company uses a dry manufacturing method for refractories and friction materials, while a wet manufacturing method is used for electronic parts and oxygen sensors. Catalysts are composites of zirconium and rare earth elements, while most electronic parts and oxygen sensors are 100% zirconium. Also, in general, products of the same class have similar gross profit margins.
Prices differ due to differences in production method, makeup, and characteristics: products for catalysts sell for USD15–30/kg, refractories and friction materials for around USD5/kg, and ceramics for USD50/kg.
Rare earths constitute a high proportion of catalyst raw materials, so fluctuations in rare earth prices affect catalysts more than other applications. Rapid changes in raw materials costs affect catalyst sales significantly. Accordingly, the company’s sales mix varies substantially. These factors caused the dramatic change in sales composition in FY03/12.
Catalysts
Catalysts are mainly used to improve performance of catalytic converters found on gasoline-powered vehicles. (According to Daiichi Kigenso, most catalysts are used in automobiles, and the company has a global market share of around 40% in this category.) Including friction materials and oxygen sensors, the company relies on the automotive industry for some 80% of consolidated sales. As a result, its performance is affected by unit production of automobiles. (Diesel vehicles also use catalysts.)
Daiichi Kigenso’s automotive catalytic converters are catalytic promoters that are coated onto honeycomb carriers manufactured by NGK Insulators, Ltd. (TSE1: 5333) and employed to reduce the use of the precious metals that actually purify the exhaust gas. Catalytic converter sizes vary by engine output, so the volume of catalysts used depends on consumer preferences on engine size. The transition to hybrid vehicles has meant a reduction in engine sizes, slightly reducing the amount of catalysts required, but the price is actually rising due to the difficulty of producing value-added catalysts that can purify exhaust even at low temperatures. High value-added catalysts are necessary both in response to stronger environmental regulation and for achieving better fuel efficiency. Daiichi Kigenso is one of just a few companies capable of producing such high value-added catalysts. As the demand for these catalysts increases, it is possible Daiichi Kigenso can take over an additional 10–20% share from companies with less technical prowess.
Catalysts were conventionally just required to clean gas emissions, but in recent years they also need to help provide a balance between controlling CO2 emissions and enabling fuel efficiency.
According to the company, its products are characterized by high specific surface areas (SSAs) that facilitate strong dispersion of precious metals; heat-resistance that allows catalytic functions to be maintained even when exposed to high-temperature exhaust gas; oxygen storage capacities that help with the purging of harmful substances; and responsiveness.
In addition, with increased environmental regulation in Asia, sales targeting motorbikes, which did not conventionally use catalysts, are increasing. Catalysts for motorbikes are essentially the same as those for other automobiles.
Four major catalyst manufacturers exist around the world, and Daiichi Kigenso engages in business with all of them. One of the largest is Cataler Corporation, which makes automotive catalysts for the Toyota Group. Cataler had accounted for more than 10% of sales since FY03/13. However, this share decreased to 8.4% in FY03/20 and was also less than 10% in FY03/21. Accordingly, the company no longer discloses information regarding the share of sales for which Cataler accounts. Manufacturers hold competitive pitches to determine which company’s products to use for manufacturing four to five years hence.
Daiichi Kigenso began producing catalysts in 1990s. Since then, the company has generally grown its market share each year by taking business away from competitors. The company thinks it can boost market share from the current 40% to around 50%, but says that much more would be problematic, as customers tend to avoid sourcing too much from any individual company.
Rare earths constitute a high proportion of catalyst raw materials, so rare earth price volatility affects catalysts more than other applications. Cerium is the rare earth used in greatest quantities, with cerium oxide being the general base material. Next greatest in terms of quantity used is neodymium, typically in the form of neodymium oxide.
In terms of applications for catalysts other than purifying exhaust, the company expects demand to grow drastically as the hydrogen economy takes off. Research is currently underway regarding the use of zirconium compounds as reforming catalysts for extracting hydrogen from fuel. Currently, substances other than zirconium compounds are being used.