Chugoku Marine Paints 4617
中国塗料
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Summary
2017 marks 100th anniversary since founding; core competency in marine paints
Chemicals
Key dates
2015-12-24
Coverage initiation
Executive Summary
A marine paints leader: Alongside International Paint (UK; the marine/protective coatings division of Dutch firm AkzoNobel) and Jotun (Norway), Chugoku Marine Paints (CMP) is one of the world’s top three suppliers of marine paints. The company reported FY03/21 sales of JPY82.4bn (-6.0% YoY) and operating profit of JPY6.6bn (+87.5% YoY). Sales in FY03/21 reached JPY68.7bn (-2.3% YoY) in marine paints, JPY11.4bn (-8.0% YoY) in industrial paints, and JPY2.0bn (-57.1% YoY) in container paints.
Marine paints: Marine paints are used primarily (over 95%) for large ships such as tankers, bulk carriers, and container ships, but also for pleasure boats, fishing boats, and fishing nets. Marine paints are considered a niche market, accounting for just 3–4% of the total paints market. CMP in FY03/21 held a 30% share of the global market in anti-fouling paints for new ships, and about 20% of the ship repair paints market. In paints for new ships, it maintains a 60% share in Japan, and shares of about 20% in China and South Korea. With the market for marine paints being dominated by just a few companies, Shared Research understands that this trend is due to the characteristics required for marine paint manufacturers, including: 1) the capacity to offer marine paints with special features such as antifouling agents that dissolve like soap, thereby preventing seaweed, barnacles, and other marine life from becoming attached to the ship’s hull; 2) a global network that allows them to supply the needs of the global ship market; and 3) long-term relationships with client companies.
The new ship paints and ship repair paints business: Generally speaking, it seems that about 1% of a ship’s overall manufacturing cost is earmarked for paint. Because of this, when prices for new ships are depressed, so is the price of the marine paints used on those ships—a situation that makes for a bad orders environment for CMP. Demand for new ship paints is generated at each stage in a ship’s construction. Under current business practices in the industry, the prices of paints ordered for use on new ships are fixed at the time the new ships are ordered, which is usually several years before the paint is delivered. Due to this large time lag between order and delivery, sharp jumps in raw material costs, including naphtha and epoxy resins, are difficult to pass along to customers, making earnings at CMP vulnerable to fluctuating raw material prices in the near term. Turning to paint used in ship repairs, the ship repair cycle is three to five years, and demand itself is heavily influenced by global shipping tonnage. During repairs, anti-fouling paints are completely reapplied. At this time, many customers may specify that the same paint manufacturer as the one used when the ship was built be used in order to ensure coating quality and to prevent new issues from arising. As such, it can reasonably be said that new ship paint orders can contribute, at least to some extent, to an increased market share in paint used during repairs. In the case of orders for new ship paints, sales are generally booked in the country of the shipyard where the ship is built. For ship repair paints, sales are booked in the country where the shipowner is based.
Industrial paints: Construction paints comprise about two-thirds of the company’s industrial paint sales in Japan, making CMP vulnerable to conditions in housing starts. The company maintains a high market share within Japan in anti-fouling paints for power generation and wood floor coatings. CMP holds a 60–70% market share in anti-fouling paints for power generation applications, with the three top companies (including Kansai Paint Co., Ltd. [TSE1:4613]) holding a combined 90% share of the market. The company’s share in wood flooring coating is about 50%. Overseas sales are primarily in heavy anti-corrosion paints and are focused in Southeast Asia.
Container paints: Most container buyers are in China, with sales and production (including paints) conducted mainly in that country. The characteristics of container paints differ in several ways from those of marine paints: 1) Container paints are water-based, hence is simpler than marine paints; 2) container production and demand is centered around China, making the company’s global network less of an advantage; and 3) there is a stronger focus on price compared to marine paints. These are also the reasons behind the company’s struggle with price competition from local manufacturers. Local manufacturers have set off aggressive price competition in this market, and their share has rapidly increased since 2017. Local manufacturers now account for about 50–60% of the overall market. The company is scaling back orders in the container paints market to avoid being drawn into price competition, and its share is around 10%.
Trends and outlook
FY03/21 results: Sales were JPY82.4bn (-6.0%, or -JPY5.3bn YoY). Sales declined for all product categories. Sales of mainstay marine paints were down JPY1.6bn YoY, with sales of new ship paints dropping in Japan and South Korea as a decline in ship completion volume contributed to lower demand for paint. Demand for ship repair paints was robust in Europe. Sales of industrial paints were down JPY984mn YoY. Sales of paints for construction materials plummeted in the domestic market as numerous construction material manufacturers adjusted production in light of the COVID-19 pandemic. Demand for industrial paints waned in Southeast Asia due to the postponement or cancellation of some infrastructure projects. Sales of container paints were down JPY2.7bn YoY. Since Q3, demand for container paints is recovering following the slump triggered by the pandemic, but the company refrained from accepting orders for low-margin projects in line with its ongoing focus on profitability. Operating profit was JPY6.6bn (+87.5% YoY, +JPY3.1bn YoY), recurring profit was JPY6.4bn (+58.2% YoY), and net income attributable to owners of the parent was JPY3.3bn (versus a net loss of JPY71mn in FY03/20). Domestic naphtha prices were down 27% YoY, while epoxy resin prices were up 11% YoY, largely on an uptick in prices in 2H. Profit grew YoY thanks to group-wide cost cutting initiatives, including ongoing efforts to optimize raw material procurement methods amid weakness in key raw material prices, especially in 1H. An improved product mix also contributed to profit growth. Operating profit was boosted JPY1.4bn YoY on higher selling prices and JPY1.6bn on lower raw material costs.
FY03/22 forecast (revised on October 29, 2021): CMP forecasts FY03/22 sales of JPY83.0bn (previous forecast: JPY80.0bn), operating profit of JPY1.5bn (JPY3.0bn), recurring profit of JPY1.7bn (JPY3.3bn), net income attributable to owners of the parent of JPY1.1bn (JPY2.1bn), and EPS of JPY20.70 (JPY39.07). The company revised up its sales forecast, because sales of container paints have been stronger than initially projected. Regarding profits, despite its efforts to revise selling prices and curtail costs, the company believes an improvement in profitability is unlikely for the time being, because the rise in key raw material prices associated with the increase in prices of crude oil and other natural resources looks set to continue longer than expected.
Long-term vision and medium-term management plan (announced in May 2021): Alongside an update to its existing long-term vision, the company announced CMP New Century Plan 2 as its new medium-term management plan for the five years from FY2021 to FY2025 (FY03/22 to FY03/26). In its long-term vision (extending through 2030), CMP aims to become a leading global niche company distinguished by its sustainability and high level of profitability. In FY2025, the final year in the new medium-term management plan, the company targets sales of JPY110.0bn (+33% compared to FY2020 results and including a JPY10.0bn contribution from M&A and alliances), operating profit of JPY8.5bn (+30% compared to FY2020 results and including a JPY500mn contribution from M&A and alliances), net income attributable to owners of the parent of JPY5.2bn (+56% compared to FY2020 results and including a JPY200mn contribution from M&A and alliances), and ROE of at least 8%. The company assumes that major raw material (domestic naphtha and epoxy resin) prices in FY2025 will be about the same as the average for 2016–2020. It forecasts capital investment over five years of JPY17.0bn, including JPY12.0bn to optimize its production systems (renovating or relocating production at the Shiga Factory in Japan and locations in East Asia) and JPY5.0bn for the regular maintenance and upgrading of its facilities.
Strengths and weaknesses
Shared Research sees the following as CMP’s main strengths: 1) its superior core technology in marine paints built up over roughly 100 years in the field, 2) its possession of the type of global sales network needed to sell marine paints, and 3) its brand’s strong image.
We see the following as the company’s main weaknesses: 1) the vulnerability of its profit margins to fluctuations in raw materials prices, particularly in the new ship market, 2) the historical concentration of its overseas production plants in East Asia, where they were built at a time when demand for marine paints in this region was growing rapidly, and 3) the high level of dependence on marine paints resulting in ship-related business environments heavily affecting business performance.
Key financial data
Recent updates
Submission of an application for approval to extend the deadline for Q2 FY03/22 securities report
Chugoku Marine Paints, Ltd. (CMP) announced the submission of an application for approval to extend the deadline for its Q2 FY03/22 securities report. If the application is approved, the submission deadline will be December 28, 2021.
Reasons for extending the submission deadline
It emerged from internal controls at consolidated subsidiary Chugoku Marine Paints (Shanghai), Ltd. (CMP Shanghai) with Ernst & Young Hua Ming LLP that provisions for retirement benefits had not been recorded, including for past amounts.
In response, the company began investigating actuarial assumptions necessary for calculating the retirement benefit obligations that should originally have been reported, and immediately after this investigation decided to appoint an external expert with no interest in the company to calculate the retirement benefit obligations for the previous seven years, including the beginning of the fiscal year in which the corrections are being made. CMP Shanghai's past financial statements will be revised on the basis of the results of those calculations, which will also be reflected in consolidated financial statements. This will involve the preparation of annual and quarterly securities reports from FY03/17 to Q2 FY03/22.
In addition to the necessity to calculate retirement benefit obligations over several years, CMP Shanghai is located in China, where retirement benefit systems are not common. The company therefore expects that the external expert's calculations of the retirement benefit obligations will require a number of days. In light of these circumstances, it is difficult for the accounting auditor to complete its audit of the Q2 FY03/22 securities report and other annual and quarterly securities reports for the previous fiscal years by November 15, 2021, the original deadline for submission. For this reason, the company decided to apply for an extension for the Q2 report submission deadline.
Outlook
The company will make a prompt announcement if the application to extend the submission deadline is approved. CMP Shanghai will also establish an investigation committee including external experts in the near future to proceed with an investigation into details concerning the circumstances and causes of the omission of the provision for retirement benefits.
Impact on earnings
The precise impact will be revealed by the calculations of the retirement benefit obligations but as of November 15, 2021, the company expects the cumulative impact to be no more than JPY1.5bn.
Revisions to FY03/22 forecast
Chugoku Marine Paints, Ltd. (CMP) revised its full-year FY03/22 forecast.
The revised full-year forecast calls for sales of JPY83.0bn (previous forecast: JPY80.0bn), operating profit of JPY1.5bn (JPY3.0bn), recurring profit of JPY1.7bn (JPY3.3bn), net income attributable to owners of the parent of JPY1.1bn (JPY2.1bn), and EPS of JPY20.70 (JPY39.07).
The company revised up its sales forecast, because sales of container paints have been stronger than initially projected.
Regarding profits, despite its efforts to revise selling prices and curtail costs, the company believes an improvement in profitability is unlikely for the time being, because the rise in key raw material prices associated with the increase in prices of crude oil and other natural resources looks set to continue longer than expected.
Trends and outlook
Quarterly trends and results
Results by product category
Results by region
Raw material prices
1H FY03/22 results
Overview
Sales: 1H FY03/22 sales were JPY41.0bn (+2.8%, or +JPY1.1bn YoY). Higher YoY sales of container paints offset the sales decline in marine paints (-JPY754mn YoY). Regarding sales of mainstay marine paints, sales of ship repair paints were solid except in China. Meanwhile, sales of new ship paints were hurt by a steep decline in demand in Japan and China due to the decrease in new shipbuilding volume. Sales of industrial paints were up JPY331mn YoY. While sales of heavy anti-corrosion paints in Southeast Asia were weak, sales of overall industrial paints were robust, supported by recovery in demand for paints for construction materials in Japan and heavy anti-corrosion paints outside Southeast Asia. Sales of container paints were up JPY1.5bn YoY as paint demand picked up in tandem with the global boost in container production. By region, the sales increase in China, Europe, and the US had a positive impact, while lower sales in Japan weakened overall performance. The increase in sales included a JPY1.5bn impact from forex, in the absence of which sales would have fallen.
Profits: In 1H FY03/22, operating profit was JPY1.1bn (-65.8%, or -JPY2.2bn YoY), recurring profit was JPY1.4bn (-60.4% YoY), and net income attributable to owners of the parent was JPY975mn (-54.2% YoY). The surge in key raw material prices, owing to the price increases of crude oil and other natural resources, drove up the company's CoGS ratio. The gross profit margin was down 6.7pp to 25.2% from 31.9% in 1H FY03/21. In particular, profitability of paints for new ships deteriorated owing to difficulty in passing on cost increases in the near term. Although operating profit got a JPY1.3bn boost from raw material cost pass-throughs for paints other than those for new ships, this was not enough to offset a JPY3.7bn drag on profit from this increase in raw material costs. Operating profit in Japan fell JPY1.1bn YoY, weighing heavily on overall results.
Achievement rates: Against the company’s full-year forecast for FY03/22, 1H sales reached 49.4%, operating profit 74.9%, recurring profit 80.5%, and net income attributable to owners of the parent 88.6%.
Results by region: Sales and profit fell in Japan. Sales grew, but profit declined in China, South Korea, and Southeast Asia. China and South Korea were in the red at the operating level. Europe and the US posted higher sales and profit. The impact of soaring raw material prices was prominent in Japan, China, and South Korea, as in these regions the company has a high sales weighting for paints for new ships, for which it is difficult to pass on cost increases in the near term.
Revised FY03/22 forecast: CMP's revised full-year forecast calls for sales of JPY83.0bn (previous forecast: JPY80.0bn), operating profit of JPY1.5bn (JPY3.0bn), recurring profit of JPY1.7bn (JPY3.3bn), net income attributable to owners of the parent of JPY1.1bn (JPY2.1bn), and EPS of JPY20.70 (JPY39.07). The company revised up its sales forecast, because sales of container paints have been stronger than initially projected. Regarding profits, despite its efforts to revise selling prices and curtail costs, the company believes an improvement in profitability is unlikely for the time being, because the rise in key raw material prices associated with the increase in prices of crude oil and other natural resources looks set to continue longer than expected. For further detail on the assumptions underlying the company's earnings forecast, see the FY03/22 company forecast section.
Selected Prime Market for listing: On September 30, 2021, CMP resolved to select the Prime Market as the new market division of the Tokyo Stock Exchange to list its shares. On July 9, 2021, the company had received the initial results of the assessment of its compliance with the listing criteria for the Prime Market, which confirms that it can proceed with the listing application process.
Share buyback status: As of end-October 2021, the company had authorization to buy back JPY1.4bn worth of shares.
Results by category and region
Sales by category
Marine paints
Sales of ship repair paints were solid except in China, thanks in part to demand associated with environmental measures. Meanwhile, sales of new ship paints were hurt by a steep decline in demand in Japan and China due to the decrease in new shipbuilding volume. Also, profitability of paints for new ships deteriorated owing to difficulty of raising selling prices to compensate for rising raw material prices in the near term. This impact was prominent in Japan, China, and South Korea, where sales of paints for new ships account for a high percentage of overall sales.
Industrial paints
While sales of heavy anti-corrosion paints in Southeast Asia were weak, overall sales of industrial paints were robust, supported by recovery in demand for paints for construction materials in Japan and heavy anti-corrosion paints outside Southeast Asia.
Container paints
Sales of container paints recovered as paint demand picked up in tandem with the global boost in container production. Although the company maintains a focus on profitability, its market share recovered from low prior-year levels.
Results by region
Japan
Sales fell YoY. The decline in shipbuilding volume at shipyards in Japan caused sales of new ship paints to drop, but sales of ship repair paints grew. Sales also benefited in the absence of year-earlier postponements of docking amid the spread of COVID-19. In industrial paints, sales of paints for construction materials recovered thanks to improved capacity utilization at construction material manufacturers following a period of pandemic-related production adjustments in 1H FY03/21.
Profit fell YoY as the surge in key raw material prices pushed up procurement costs. In particular, profitability of paints for new ships deteriorated owing to difficulty in passing on cost increases in the near term.
China
Sales were up YoY. In marine paints, sales of new ship paints dropped due to a decline in shipbuilding volume. Sales of ship repair paints were also weak owing to a decline in the number of customers' ships coming into dock. In industrial paints, sales of heavy anti-corrosion paints were brisk. Sales of container paints also grew as paint demand bounced back amid growth in container production, even as the company maintained its focus on profitability.
Profit declined, and the company recorded an operating loss in China. Procurement costs rose due to the spike in key raw material prices. In particular, profitability of paints for new ships deteriorated owing to difficulty in passing on cost increases in the near term. Although container paint profits increased, this was not enough to cover the drain on overall profit from higher costs.
South Korea
Sales rose YoY. In marine paints, sales of new ship paints were robust. Sales were further buoyed by won appreciation against the yen.
Performance at the operating level worsened YoY, and the company posted an operating loss in South Korea. Negative forex impact (as the won rose roughly 7% YoY against the US dollar) and higher procurement costs due to the surge in key raw material prices weighed heavily on earnings. In particular, profitability of paints for new ships deteriorated owing to difficulty in passing on cost increases in the near term.
Southeast Asia
Sales grew YoY. In marine paints, sales of ship repair paints expanded. However, in industrial paints, sales of heavy anti-corrosion paints were weak due to the postponement and cancellation of projects caused by the COVID-19 pandemic.
Profit fell YoY, hurt by an increase in procurement costs resulting from the rise in key raw material prices. However, the company was able to limit the decline in profit by passing on the cost increase via higher selling prices for ship repair paints.
Europe and the US
Sales were up YoY. In marine paints, sales of ship repair paints mainly grew. The company also benefitted from favorable forex rate movement (euro appreciation against the yen).
Profit grew YoY, supported by stronger sales and expanded sales of high-value-added products. Although procurement costs increased due to the rise in key raw material prices, in Europe and the US the company has high sales weightings for ship repair paints, making it easier to pass on increased procurement costs to customers.
Key initiatives in FY03/22
CMP has identified the following as important initiatives in FY03/22, under each of the key themes outlined in its medium-term management plan.
Expand value provided through environmental and social
contributions
Expand lineup of high-performance anti-fouling paints and ramp up promotions
Expand lineup of low-volatile organic compound (VOC) paints and expand their sales
Establish a water-based heavy anti-corrosion coating system
Expand lineup of antibacterial and antiviral products and develop new sales channels
Facilitate the development of solvent-free paints for offshore wind power systems
Improve and stabilize profit structure
Explore methods for hedging against risks associated with raw material prices
Revise selling prices to reflect changes in raw material prices (pass on cost of paints for new ships)
Raise profitability through adjustments to the composition and raw materials of coatings
Reinforce organizational foundations
Pursue optimization of business management functions
Consider adjustments to personnelesources system
Consider implementing measures that promote ownership of CMP shares by employees
Other topics
Impact of future increase in use of ammonia and hydrogen as maritime fuels
From the standpoint of reducing CO2 emissions, a growing number of shipping companies are these days looking at bringing forward the introduction of vessels using ammonia and hydrogen as fuel. The International Energy Agency (IEA) sees ammonia accounting for roughly 46% of shipping energy consumption in 2050, with hydrogen making up around 16%. As fuel oil and LNG accounted for almost 100% of shipping energy consumption in 2020 and that figure is likely to remain above 80% even in 2030, the IEA effectively is forecasting a rapid change in the maritime fuel mix from 2030.
As of November 2021, CMP believes that on the whole it is unlikely to be adversely affected by this change in maritime fuel mix. While such a change would lead to decreased need for CO2 reduction technology, ammonia and hydrogen are more expensive than fuel oil, and CMP thinks this will only heighten the need for paints that contribute to greater fuel efficiency.
Demand for premium anti-fouling paints
According to CMP, demand for its premium range of anti-fouling paints has risen 20% YoY in 2021. As of October 2021, more than 700 ships (both new ships and ships for repair) have been coated with CMP's anti-fouling paints featuring selektope, an anti-fouling agent the company launched in 2015. CMP attributes the increase in demand for premium anti-fouling paints to new International Maritime Organization (IMO) regulations coming into force in January 2023, and environmental initiatives related to guidelines for the control and management of ships' biofouling.
Launch of low-friction anti-fouling coating SEAFLO NEO M1 PLUS
SEAFLO NEO M1 PLUS is a coating that can be applied to the ship's hull at both the building and drydocking stage. It offers outstanding anti-fouling performance utilizing selektope—CMP's patented anti-fouling agent that has been developed to protect against barnacle growth—in addition to the more widely used cuprous oxide. By preventing barnacle fouling on the hull, it is possible to improve ships' fuel efficiency and CO2 emissions. According to CMP, SEAFLO NEO M1 PLUS is a particularly suitable anti-fouling paint for ships that might be required to berth long-term in areas with high seawater temperatures, or for new ships kept under static conditions during outfitting. SEAFLO NEO M1 PLUS has a VOC content that is about 15% less than CMP’s current SEAFLO NEO FLAT Z coating. The intention is that the latter will gradually be replaced with this new product as an environmental protection measure. CMP aims to grow annual sales of this product to JPY500mn by 2024.
Launch of thin-film shop primer CMP CERAZEUS
CMP CERAZEUS is a shop primer that can be applied as a thin film while delivering the same anticorrosion performance as Cerabond 2000. The company expects thinning the film to lead to: a reduction in paint usage and accompanying reduction in thinner usage (about 40% reduction); approximately 30% reduction in VOC emissions; and roughly 86% reduction in welding defects when welding painted steel materials.
Launch of antifungal and antiviral coating HIVIZOL W AVD
HIVIZOL W AVD is a functional coating agent that can be applied to indoor facilities that are already in use as a water-based acrylic resin paint for wooden flooring. Its key features are as follows: antibacterial and antiviral effects last for a long time, as a coating film is formed after application; it is water-based and therefore has excellent safety; it can be walked on around an hour after application; the amount needed is only small, at about 15g per square meter, which is economical; and it has excellent recoatability.
FY03/22 company forecast
Revised earnings forecast (out October 29, 2021)
The revised full-year FY03/22 forecast calls for sales of JPY83.0bn (previous forecast: JPY80.0bn), operating profit of JPY1.5bn (JPY3.0bn), recurring profit of JPY1.7bn (JPY3.3bn), net income attributable to owners of the parent of JPY1.1bn (JPY2.1bn), and EPS of JPY20.70 (JPY39.07).
The company revised up its sales forecast, because sales of container paints have been stronger than initially projected.
By category, CMP revised up its container paint and marine paint sales forecasts by JPY2.7bn and JPY650mn, respectively, while lowering its industrial paint sales forecast by JPY290mn. By region, the company raised its sales forecasts by JPY1.4bn for Japan, JPY1.5bn for China, and JPY820mn for Europe and the US, lowering the forecast for Southeast Asia by JPY670mn. Although CMP revised up its overall sales forecast for China (including container paints), it lowered the forecast for marine paints in the country.
Regarding profits, despite its efforts to revise selling prices and curtail costs, the company believes an improvement in profitability is unlikely for the time being, because the rise in key raw material prices associated with the increase in prices of crude oil and other natural resources set to continue longer than expected. The company assumes a Q3 domestic naphtha prices of JPY61,500/kl (JPY53,500/kl in Q2), and expects raw material prices to remain similarly high in Q4. In October 2021, epoxy resin prices averaged USD4,856/MT, slightly higher than USD4,645/MT in July–September 2021.
In 2020, work in hand for shipbuilding in Japan was below what is considered to be an appropriate level of two years’ worth (below this level, factories are idle at times), but order backlogs are building up in 2021, according to press reports. Shipping company earnings are turning up as shipping prices improve, and orders for new ships are increasing after a lull across Japan, China, and South Korea. The company said that its orders for paints used in new ships are also increasing. These generally flow through to the company’s earnings two to three years later, so recent trends are positive for earnings from FY03/24 onward.
Supplementary commentary on Q1 results (July 30, 2021)
The company maintained its initial forecast. Progress versus its full-year FY03/22 forecast was sales 24.4%, operating profit 27.7%, recurring profit 32.8%, and net income attributable to owners of the parent 39.8%.
The company said that raw materials prices were tracking largely in line with its expectations at the time of its Q1 results announcement and have plateaued overall. The company assumes Q2 (July–September 2021) domestic naphtha prices of about JPY54,000/kl (JPY47,700/kl in April–June 2021). In July 2021, epoxy resin prices averaged USD4,463/MT, down slightly from USD4,926/MT in April–June 2021. The company said that product price revisions announced in April 2021 had been accepted in line with its expectations, primarily in paints for ship repair.
Progress in China was 19.4% of the full-year sales forecast, lower than in other regions (roughly 24–27%). However, the company said that there were no particular factors that negatively affected earnings and it thought 1H progress would be largely as forecast. In Southeast Asia, the spread of the pandemic is worse than CMP initially expected. This may be a negative factor for sales of heavy anti-corrosion industrial paints in 2H as projects are delayed.
In 2020, work in hand for shipbuilding in Japan was below what is considered to be an appropriate level of two years’ worth (below this level, factories are idle at times), but order backlogs are building up in 2021, according to press reports. Shipping company earnings are turning up as shipping prices improve, and orders for new ships are increasing after a lull. The company said that its orders for paints used in new ships are also increasing. These generally flow through to the company’s earnings two to three years later, so recent trends are positive for earnings from FY03/24 onward.
Initial forecast (out May 11, 2021)
CMP forecasts FY03/22 sales of JPY80.0bn (-3.0% YoY), operating profit of JPY3.0bn (-54.3% YoY), recurring profit of JPY3.3bn (-48.7% YoY), net income attributable to owners of the parent of JPY2.1bn (-36.9% YoY), and EPS of JPY38.43. The company targets a dividend per share of JPY35 (versus JPY34 in FY03/21).
Sales forecast by product category
Marine paints
Despite a recovery in new ship orders, the company expects marine paint demand to narrow as the low level of orders through 2020 points to a decline in ship completion volume, particularly at shipyards in Japan. On the other hand, the company anticipates firm sales in ship repair paints, due largely to growing demand for environmentally friendly ships. The company expects marine paint sales on an overall basis to decline YoY.
The company’s view on the external environment for ship repair paints is as follows. The Ballast Water Management Convention that came into effect in 2017 includes preferential measures, and ships for which retrofitting work (the installation of treatment systems) has been delayed must do so by September 2022. For this reason, the company expects a significant number of ships to be in drydock in 2021–2022 (about the same level as in FY03/21). In regard to the SOx regulations that came into effect in January 2020, the company said that although there was a high demand for scrubber retrofitting work in 2019 and the first half of 2020, the price difference between regular fuel with high sulfur content and low-sulfur fuel has rapidly narrowed, resulting in a halt to retrofitting work (which requires a significant amount of investment) and a number of ships opting instead to switch to low-sulfur fuel.
Industrial paints
The company expects a recovery in industrial paint sales on a gradual rebound in demand for paints for construction materials and heavy anti-corrosion paints, where demand previously declined due to the spread of COVID-19.
Container paints
The company expects the expanded production of containers to contribute to strong demand for container paints. While it is continuing to focus on profitable orders, the company looks for sales to turn higher in reaction to the sharp drop seen in FY03/21.
Sales forecast by region
The company expects sales growth outside of Japan.
Costs
The company believes a decline in profitability to be all but inevitable given the across-the-board rise in raw material prices. For epoxy resins in particular, supply has become tighter as a result of a series of accidents and production issues at manufacturers around the world. This has contributed to epoxy resin prices as of April 2021 more than doubling YoY to about USD5,000/MT, and the company believes that if the current situation persists for some time, earnings are more than likely to be significantly impacted. CMP looks for epoxy resin prices to continue to spike through the summer of 2021, but thereafter begin to settle. The company assumes Q1 domestic naphtha prices of JPY48,000/kl (the January–March 2021 price was JPY38,800/kl).
On a related note, CMP announced its policy on price revisions in April 2021. The company cited in particular the recent combination of cost increases, including those stemming from sustained price hikes in epoxy resins from the end of 2020, the ongoing rise in paint raw materials such as solvents (where prices are linked to the price of crude oil), the high price of cuprous oxide, which recently hit a 10-year high and the company expects it to remain at a high level for some time, and the ongoing surge in land and maritime transport costs. The company’s policy is to revise product prices on a gradual basis, with the effects from these revisions reflected in its earnings forecast. However, under current business practices, the selling price for new ship paints is determined at the time the order is placed (often several years in advance). This makes it difficult for the company to pass costs on to customers for new ship paints to be sold in FY03/22, making the passing on of these higher costs in new ship paint sales a medium-term prospect.
Comparison of company estimates and historical results
Long-term vision and medium-term management plan (out May 2021)
Alongside an update to its existing long-term vision, the company announced CMP New Century Plan 2 as its new medium-term management plan for the five years from FY2021 to FY2025 (FY03/22 to FY03/26).
Management philosophy
In line with the formulation of the new medium-term management plan, the company has redefined its management philosophy. In particular, the company clarified that it aims to contribute to the achievement of a sustainable society through its business activities and enhance the prosperity of all its stakeholders.
Ensure customer trust and satisfaction with the highest possible quality
Strive from a global perspective to continuously achieve technological innovation and develop new products
Secure ongoing existence and profits through scientific management
Pledge just and upright conduct based on guiding principles of honesty and a respect for general harmony
Contribute to the achievement of a sustainable society through business activities and enhance the prosperity of all stakeholders
Long-term vision (through 2030)
The company aims to become a leading global niche company distinguished by sustainability and high profitability. While the basic concept is unchanged, the company clarified its stance to emphasize the importance of sustainability. Specific goals include:
Obtain a top share in the global marine paints market (improve global market share 10pp compared to FY2020)
Become the world’s leading paint manufacturer through efforts aimed at achieving a sustainable society by providing anti-fouling paints that help reduce greenhouse gases emitted by ships
Improve its presence though a focus on environmental and social contributions through its industrial paints, container paints, and paints for offshore structures
Establish a sustainable and strong management base
Achieve a stable and high-profit structure, with ROE of at least 10%
Key themes
Expand value provided through environmental and social contributions
The company aims to reduce greenhouse gas (CO2) emissions through an expanded supply of anti-fouling paints by 1.30mn tons in FY2025 (+17% compared to reductions in FY2020).
The company aims to reduce volatile organic compound (VOC) emissions through an expanded supply of low-VOC coatings by 5,100 tons in FY2025 (+120% compared to reductions in FY2020).
Improve and stabilize the profit structure
The company aims to limit profit fluctuations brought on by changes in the operating environment by increasing its share in the ship repair paints business, shifting toward high-value-added products, minimizing the impact of raw material price fluctuations, and optimizing a wide range of costs.
M&A (alliances)
The company has noted that it will actively pursue M&A and alliances and not limit its considerations to a particular field. When engaging in M&A, the company will consider using a different source of funds than the JPY17.0bn allotted in its current capex plan, including the use of treasury stock holdings.
Earnings targets for FY2025, the final year in the medium-term management plan
CMP targets FY2025 sales of JPY110.0bn (+33% compared to FY2020 results and including a JPY10.0bn contribution from M&A and alliances), operating profit of JPY8.5bn (+30% compared to FY2020 results and including a JPY500mn contribution from M&A and alliances), net income attributable to owners of the parent of JPY5.2bn (+56% compared to FY2020 results and including a JPY200mn contribution from M&A and alliances), and ROE of at least 8%. The company assumes that major raw material (domestic naphtha and epoxy resin) prices in FY2025 will be about the same as the average for 2016–2020. The company does not expect the sharp rise in material prices as of May 2021 to last through the final year in the plan. It forecasts capital investment over five years of JPY17.0bn, including JPY12.0bn to optimize its production systems (renovating or relocating production at the Shiga Factory in Japan and locations in East Asia) and JPY5.0bn for the regular maintenance and upgrading of its facilities.
Earnings targets by business (FY2025), strategies and initiatives
Marine paints
The company targets FY2025 marine paint sales of JPY75.0bn (+9% compared to sales in FY2020). CMP expects that demand will continue to be sluggish for the foreseeable future due to a decrease in new vessels constructed, but anticipates a recovery during the second half of the medium-term management plan. In ship repair paints, the company forecasts favorable demand as companies respond to greenhouse gas (GHG) emissions controls and other ship-related environmental regulations. It also aims to strengthen its recurring revenue model by expanding the range of data solutions it provides.
While it expects the scale of the marine paints market in FY2025 to be about the same as in FY2020, the company aims to increase share through its market share expansion. It targets a global market share in new ship paints of 30% (28% in FY2020) and in ship repair paints of 22% (19%). By region, the company targets a market share in new ship paints of 65% in Japan (63% in FY2020), 25% in China (21%), and 20% in South Korea (18%). The company’s market share targets are based on the assumption that Japan’s share of the global new ship market in FY2025 will be slighter smaller than it was in FY2020.
Industrial paints (including for offshore resource development projects)
The company targets sales of JPY15.0bn (+32% compared to FY2020). It aims to expand sales by capturing infrastructure-related demand with environmentally friendly coatings and moving forward with full-scale expansion of overseas supply of various UV coatings. Despite expectations for the generation of a certain level of demand for coatings used in offshore wind power facilities in line with the Japanese government’s policies in the field, the company expects only limited sales in this area during the period covered by the medium-term plan.
Container paints
The company targets sales of JPY10.0bn (+390% compared to FY2020). CMP believes that this is an achievable target over the long term, as it was the level achieved in FY03/19. However, given the high level of volatility in container demand, the timing for achieving this target could vary based on cycles of demand for containers.
Shareholder returns policy
Placing the highest priority of growth investment, the company aims to actively return surplus funds to shareholders and maintain appropriate control over shareholders’ equity.
Standard for shareholder returns: The company targets average total return on consolidated shareholders’ equity (D&BOE) over the period covered by the medium-term plan of at least 5%.
Dividend: The company targets a consolidated dividend payout ratio of at least 40%, with a minimum annual dividend per share of JPY35.
Share buybacks: The company aims for the flexible repurchasing of treasury stock based on the D&BOE standard while taking into account the balance between growth investment and dividends.
Financial policy
The medium-term management plan targets an equity ratio of 50–55% (55.3% at end-FY2020), a D/E ratio of 35–50% (32.9%), and cash and deposits (measured in monthly sales) of 3–4 months (3.6 months).
Business, market, and value chain
Business expansion
History
2017 marked 100th anniversary. Leading global market share in marine paints, the mainstay and core technology since foundation
The company was founded in Hiroshima in 1917 as Chugoku Chemical Industry. The founder, a former technical officer at the Kure Naval Arsenal, saw that while Japan's shipping industry was making unprecedented progress, most anti-fouling paints, for both public and private vessels, were imported. He launched the company following research aimed at producing such paints in Japan. In its first year, the company acquired patents in Japan, the UK, and the US, and its paints were registered as navy approved in 1926. The company also obtained patents for oxygen-generating agents and synthetic resins in addition to anti-fouling paints. This focus on research and prioritizing technology has been passed on in the company’s DNA.