OKM 6229
オーケーエム
Recent Updates
Get in touch
Summary
OKUMURA ENGINEERING Corp. (“OKM”) was founded in 1902 as a manufacturer of saw blades. During Japan’s period of rapid economic growth that started in the 1950s, it transformed into a specialized manufacturer of valves used in a wide range of industries, including construction, electric power, ships, and various industrial plants.
Machinery
Key dates
2022-02-02
Coverage initiation
Executive summary
Business overview
OKUMURA ENGINEERING Corp. (“OKM”) was founded in 1902 as a manufacturer of saw blades. During Japan’s period of rapid economic growth that started in the 1950s, it transformed into a specialized manufacturer of valves used in a wide range of industries, including construction, electric power, ships, and various industrial plants. Valves are mechanical parts with mechanisms that open and close channels (usually pipes) to control the movement of fluids (gases or liquids). In FY03/21, OKM recorded revenue of JPY8.8bn (-1.0% YoY), operating profit of JPY1.0bn (+13.0% YoY), and an OPM of 11.5% (+1.4pp YoY).
As a latecomer to the industrial butterfly valve market in the late 1970s, OKM focused on the manufacture and sale of complex and labor-intensive valves. This helped it to avoid competition as the other participants were reluctant to accept these kinds of orders. The company has maintained this strategy such that custom manufacturing today accounts for 80% of its revenue. OKM processes orders made to various specifications in terms of shape, size, material, and fluid control method in response to customer needs. By adjusting these variables, it can manufacture over 100,000 permutations of custom valves.
The company manufactures three types of valves: butterfly valves, which are small, light, thin, and highly versatile; knife gate valves, which enable fluid control of solid matter—a difficult task for other valves; and pinch valves, which are highly hygienic by virtue of not coming into direct contact with the fluids they control. Butterfly valves accounted for 84% of revenue in FY03/21. Overseas revenue accounted for 27% of revenue in the same period, with 13.4% coming from South Korea and 9.4% from China.
OKM reports in a single segment: Valve Manufacturing and Sales. In FY03/21, the company’s consolidated revenue composition by market was 52% for marine applications and 48% for terrestrial applications. On a parent basis, this breakdown was 54% for marine applications and 46% for terrestrial applications (7% for construction equipment, 5% for petrochemicals, 3% for electric power and gas, 3% for pulp and paper, and 29% for others).
Prices of the company’s butterfly valves range from JPY10,000–8mn, and the time from order to delivery ranges from two days to around one year (the average is approximately three months). The company has a total of four factories: two in Japan, one in Malaysia, and one in China. Since the company imports semi-finished goods and parts from its Malaysian and Chinese factories to its Japanese factories, its profits are affected by the Chinese yuan (the US dollar has virtually no impact). One yen of depreciation against the Chinese yuan negatively affects operating profit to the tune of approximately JPY50mn. OKM almost exclusively sells through trading companies; Hyundai Heavy Industries Co. is the only customer to whom it sells directly.
The company has received a certification for marine exhaust valves from MAN Energy Solutions SE, a German company with a 70%–80% share of the global market for marine engine designs, and one from Winterthur Gas & Diesel Ltd. (WinGD), a Swiss company with the second largest global share. The certification permits the company’s valves to be installed in exhaust gas treatment systems on ships equipped with engines designed by MAN Energy Solutions and WinGD. As of December 2021, OKM was one of only five valve manufacturers worldwide to have obtained this certification, and the only Japanese company to have done so. In FY03/21, the company had a 50% share of the global market for marine exhaust valves, and these products accounted for roughly 60% of its marine valves revenue.
Due to the tightening of environmental regulations by the International Maritime Organization (IMO), all new ships sailing in waters designated by the IMO must comply with IMO environmental standards. Further, older ships will no longer be allowed to operate in these waters after a certain period has elapsed. As a result, shipbuilding orders in Japan, South Korea, and China are on an uptrend, which is boosting demand for the company’s marine exhaust gas control valves (“marine exhaust valves”).
OKM has several facilities for testing products under realistic environmental conditions. It uses these to collect and analyze data on durability and other physical characteristics. Tests include high-temperature fluid tests, fire-safe tests, cavitation tests, and low-temperature fluid tests. Shared Research understands that competitors do not have their own testing facilities and often conduct testing at external industrial testing facilities. To obtain the crucial certification from MAN Energy Solutions, OKM was required to possess high-temperature testing facilities and have its valves pass more than 3,000 hours of onboard testing on ships.
Industry peers include KITZ Corporation (TSE1: 6498), Nakakita Seisakusho Co., Ltd. (TSE2: 6496), and Tomoe Valve Co., Ltd. (unlisted). KITZ generates nearly 15x the revenue of OKM, while Nakakita Seisakusho takes in roughly double OKM’s revenue. However, OKM’s OPM is higher, averaging 10.3% over the past five years compared to 6.9% for KITZ and 6.2% for Nakakita Seisakusho. The gap is mostly explained by OKM’s pursuit of high-mix, low-volume manufacturing with a focus on custom valves, in contrast with its competitors’ focus on mass-production of general-purpose valves and sales of peripheral equipment such as remote controls and automatic control valves.
The company’s OPM in FY03/21 was 11.5%, higher than KITZ’s 4.5% (FY12/20) and Nakakita Seisakusho’s 4.5% (FY05/21). Shared Research understands that this is due to the company’s focus on customization, where there is less competition, as well as the growth of marine exhaust valves in the revenue mix, where competition is low since participation is limited to licensees.
Earnings trends
FY03/22 results: Revenue of JPY8.5bn (-3.5% YoY), operating profit of JPY663mn (-34.4% YoY), recurring profit of JPY725mn (-29.3% YoY), and net income attributable to owners of the parent of JPY850mn (+13.4% YoY). Revenue from terrestrial valves was up 1.9% YoY, while revenue from marine valves was down 8.4% YoY. This was caused by lower shipbuilding orders and a decline in unit prices for marine exhaust valves. OPM fell 3.7pp to 7.8% on the decline in sales and unit prices for marine exhaust valves.
FY03/23 company forecast: Revenue of JPY9.5bn (+12.3% YoY), operating profit of JPY630mn (-4.9% YoY), recurring profit of JPY635mn (-12.4% YoY), and net income attributable to owners of the parent of JPY430mn (-49.4% YoY). The market environment for orders of both terrestrial and marine valves is showing signs of recovery, and the company expects revenue growth in both areas. On the profit front, the company has factored in the risk of soaring raw material prices and logistics disruptions.
Medium-term outlook: As of December 2021, the company had not disclosed a medium-term management plan. It plans to announce a three-year medium-term management plan in May 2022.
Strengths and weaknesses
Shared Research sees the company’s strengths as: (1) high profit margins due to a focus on custom valves, where there is less competition; (2) its 50% share of the global market for marine exhaust valves, made possible by obtaining a manufacturing license held by only five companies worldwide; and (3) the facilities and know-how to implement in-house product testing, which has led to increased confidence in its products and improved customer perceptions of its technological capabilities.
We see its weaknesses as: (1) low efficiency resulting from high-mix, low-volume manufacturing makes it difficult to pursue rapid earnings growth; (2) an earnings structure prone to short-term profit fluctuations (due to relatively long lag times between changes in raw material prices and product prices, because of the nature of annual contracts); and (3) longer lead times and longer days sales of inventory than peers (see Strengths and weaknesses section below).
Key financial data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company provides consolidated financial statements from FY03/19 onwards. It gives parent figures for previous periods. YoY comparisons for FY03/19 are shown as “not available (NA).”
Since the company has not disclosed parent financial data for FY03/15, YoY comparisons for FY03/16 are shown as “not available (NA).”
The company conducted a 10-for-1 stock split on August 4, 2020. Per-share indicators have been retroactively adjusted.
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.
Full-year FY03/22 results (out May 13, 2022)
Earnings summary
Attainment of earnings targets
At the end of FY03/22, cumulative revenue had achieved 98.3% of its corresponding projection in the company’s full-year forecast, while operating profit had reached 87.2%, recurring profit 95.4%, and net income attributable to owners of the parent 97.7%.
Results summary
Orders
Orders increased 9.3% YoY. Affected by the pandemic economy, orders were sluggish until end-1H FY03/22, but have since recovered. Orders for terrestrial valves grew 12.4%, driven in part by growth in construction equipment-related demand for these valves that occurred in connection with investment targeting increased production at semiconductor plants in Japan. Additionally, the company noted an upturn in demand for these valves for CO2 capture and biomass power generation facilities. Orders for marine valves were up 6.4% YoY. Demand for LNG carriers is expanding, and orders for LNG valves increased.
When combined, the shipbuilding markets in China, South Korea, and Japan account for about 90% of the global shipbuilding market, and orders placed within these markets grew significantly in 2021. According to the China Association of the National Shipbuilding Industry, in 2021, the tonnage associated with new shipbuilding contracts in China increased by about 130% YoY, rising to 67.1mn tons. Meanwhile, South Korea’s Ministry of Trade, Industry and Energy indicated that the value of new shipbuilding contracts in South Korea rose to USD43.9bn, up about 130% YoY. Additionally, the Japan Ship Exporters’ Association reported that the tonnage associated with new shipbuilding contracts in Japan grew about 110% YoY to 15.2mn tons.
Revenue
Revenue decreased 3.5% YoY as the COVID-19 pandemic forced customers to cut back on capital investment and caused construction delays.
Revenue from terrestrial valves amounted to JPY4.3bn (+1.9% YoY). The pandemic caused cancellations of construction plans and forced postponements of deliveries. Although revenue remained lower YoY through 1H, the company observed an increase in construction equipment-related demand for terrestrial valves that occurred in connection with investment targeting increased production at semiconductor plants in Japan. Additionally, the company noted growth in demand for CO2 capture facilities and others related to the decarbonization of society. As a result, revenue grew for the full-year.
Revenue from marine valves amounted to JPY4.2bn (-8.4% YoY), declining in part because domestic shipyards responded to a downturn in orders for new vessels by standardizing their operating hours. Also contributing to the decrease in revenue was a decline in the total number of vessels built due to shipyard consolidation. Performance from marine exhaust valves suffered downward impact from a reduction in selling price per unit, but the volume of marine exhaust valves sold expanded due to an increase in the ratio of ships built in compliance with environmental regulations.
Profit
Operating profit came to JPY663mn (-34.4% YoY), declining due to a decrease in revenue and a lower GPM.
Gross profit amounted to JPY3.1bn (-11.7% YoY), and the GPM was 36.4% (-3.3pp YoY). The decline in gross profit was due to a decrease in revenue stemming from economic slowdown caused by the COVID-19 pandemic, the decline in unit prices for marine exhaust valves owing to the entry of competitors, and the downturn in GPM, which was driven by growth in manufacturing costs. SG&A expenses fell 2.4% YoY to JPY2.4bn due to efforts to reduce costs.
Recurring profit fell to JPY725mn (-29.3% YoY). The company recorded JPY30mn in non-operating income from surrender value of insurance policies, JPY69mn from forex gains, and JPY51mn from subsidy income, but this upward impact was offset in part by JPY69mn in non-operating expenses related to a special investigation conducted regarding inadequate sales management systems at a subsidiary in China.
Net income attributable to owners of the parent was JPY850mn (+13.4% YoY), rising thanks in part to JPY598mn in subsidy income. The company was able to record this extraordinary income because a local government in China requested that Suzhou Okumura Valve Co., Ltd. (a Chinese subsidiary) relocate to free up space for urban redevelopment and provided subsidies to facilitate this relocation.
FY03/23 company forecast
Note: Figures may differ from company materials due to differences in rounding methods.
Earnings forecast
Assumptions
On the profit front, the company expects operating profit to decrease by 24.7% YoY. It expects the decrease in gross profit to exceed the decrease in SG&A expenses.
Medium- to long-term outlook
As of December 2021, the company had not disclosed a medium-term management plan. It plans to announce a three-year medium-term management plan in May 2022.
Earnings growth from FY03/16 to FY03/21
Production value of the valve market from FY03/16 to FY03/21 grew at a CAGR of 2.2%. Over the same period, OKM’s revenue grew at a CAGR of 8.9% and its operating profit at a CAGR of 33.0%.
In 2016, the company obtained a manufacturing certification license for marine exhaust valves from MAN Energy Solutions. Since obtaining the certification, its marine exhaust valve revenue has grown, driving overall revenue growth. On the profit front, in addition to the effect of revenue growth, higher margins resulted in profit growth outstripping revenue growth. Profit margins increased overall due to a decrease in the fixed cost ratio owed to revenue growth, in addition to an increase in the share of marine exhaust valves, which have relatively high margins, in the revenue mix.
At the 1H FY03/22 results briefing held in November 2021, the company explained that it plans to announce a three-year medium-term management plan in May 2022. It also noted that the basic policy of the plan is to “develop new products and establish a sales structure capable of responding to demands of growth markets, including the clean energy market for decarbonization.”
As of December 2021, the specifics of the medium-term plan were not clear, but Shared Research believes that marine exhaust valves will continue to drive the company’s earnings growth. We expect new products such as cryogenic valves and hull-mounted drainage valves for SOx scrubbers to contribute to the company’s growth in the medium term.
Growth potential for marine exhaust valves
According to OKM, in FY03/21, marine exhaust valves accounted for roughly 60% of marine valve revenue of JPY4.6bn.
Based on MAN Energy Solutions’ forecast, the number of two-stroke engines (one engine = one ship) requiring marine NOx treatment is expected to increase from 920 units in 2020 to 1,500 units in 2028 (CAGR of 6.3%; see Marine exhaust valve demand forecast in the Market and value chain section).
New product initiatives
In addition to the above-mentioned marine exhaust valves, the company has been working on new environmentally friendly products such as cryogenic valves, liquid hydrogen valves, and hull-mounted drainage valves for SOx scrubbers.
Development of cryogenic valves
Cryogenic valves are designed to be used in extremely cold applications, especially for use in piping used to transport LPG (-80℃) and LNG (-163℃). As of December 2021, the company had completed the development of a line of cryogenic valves and had begun accepting orders for them.
Large-diameter butterfly valve for stable containment of liquid hydrogen
Demand for hydrogen is growing, and with it, demand for liquid hydrogen valves that can service an international supply chain involving mass production, transportation, and storage. Simply making conventional liquid hydrogen valves larger is not a cost-effective way to meet customers’ needs. In response, OKM is striving to develop a butterfly valve that is lightweight, compact, and cost-effective, and is working on technology to reliably contain liquid hydrogen (-253℃).
As mentioned above, the company has developed and manufactures cryogenic butterfly valves (see image above) for LPG and LNG, and will utilize this expertise in the development of large-diameter butterfly valves for the stable containment of liquid hydrogen.
Hull-mounted drainage valve for SOx scrubber
The International Maritime Organization (IMO) tightened regulations on sulfur oxide (SOx) emissions, reducing the maximum concentration of sulfur in bunker fuel in all maritime areas from 3.5% or less to 0.5% or less starting January 2020. The most common responses to this regulation are to use bunker fuel with a sulfur content of 0.5% or below, or to install SOx scrubbers (exhaust gas cleaning systems) that remove SOx from ship engines (as is done in NOx processing). These scrubbers require drainage valves, and the company has begun to produce compatible hull-mounted drainage valves in response to this demand.
Business overview
OKM is a unique player in the valve manufacturing market that has built a business around custom valves. Founded in 1902 as a manufacturer of saw blades, it reestablished itself as a specialized valve manufacturer in the 1950s and 1960s. OKM was a latecomer to the industrial butterfly valve market in the late 1970s, and so focused on manufacturing and selling complex, labor-intensive valves that competitors were reluctant to produce. As of December 2021, it had built a system capable of manufacturing over 100,000 permutations of custom valves. The company’s strength lies in the development of valves for environmentally friendly facilities and equipment. Notably, it enjoys a 50% share of the global market for marine exhaust valves used in emissions reduction equipment.
Its main products are butterfly valves, knife gate valves, and pinch valves. According to the Japan Valve Manufacturers’ Association’s “Valve Handbook,” a valve is “a generic term for a device with a movable mechanism that can open and close a channel in order to control the movement of a fluid.” Although the term “fluid” commonly refers to liquids or gases, it also includes mixtures of liquids and gases, mixtures of aggregates and water (such as concrete), and powders.
Products
The following is an overview of the valves that OKM produces. The company handles three main types of valves: butterfly valves, knife gate valves, and pinch valves (for other types of valves and their applications, see “Market overview” under Market and value chain). OKM produces the materials for its valves, and handles processing, assembly, inspection, sales, and maintenance.
Overall trends in the valve industry include the shift from manual to automatic control valves and the shift from pneumatic to electronic control methods in response to industrial development and structural changes. OKM has product lineups that respond to these trends and a valve production factory that is mainly dedicated to precision processing valves to embed electronic control devices.
Butterfly valves
Turning the handle rotates the valve plug (the disc inside the ring attached to the end of the valve shaft) 90 degrees to open and close. Butterfly valves offer excellent flow control because the position of the valve plug can be adjusted by rotating the plug (disc) a quarter turn to obtain the desired flow level. Butterfly valves with electronic controls receive signals from a computer to make these adjustments. This type of valve is also compact, and can be installed in tight spaces without taking up much space.
Knife gate valves
Knife gate valves are opened and closed by turning a handle to rotate a valve shaft to raise or lower a sharp-edged plate. These valves are capable of stopping fluids that ordinary valves cannot handle, such as various slurries (mixtures of denser solids such as sludges or minerals suspended in liquid), powders, granules, solids, pulp stock, and others.
Pinch valves
Pinch valves open and close flow paths by using a valve shaft to pinch a rubber tube. They can shut off flows completely even when solids are mixed in, have long life, and are easy to maintain.
OKM can produce these three main types of valves with an inner diameter ranging from 25mm to 3,000mm. Parts include various discs, shafts, seat rings, and gaskets. A wide range of materials are available, including ductile iron, cast steel, stainless steel, resins, and rubbers. Further, the company’s customers can choose from valve control methods such as lever, gear, cylinder, and electric. OKM can produce custom valves to meet its customers’ needs in more than 100,000 permutations. Many of the company’s valves are made-to-order, and may be developed jointly with the customer depending on the application. For example, OKM developed its mainstay marine exhaust valves jointly with MAN Energy Solutions, which has the global top share of the marine engine design market.
The company does not disclose revenue by valve type. However, it disclosed that in FY03/21, butterfly valves accounted for 84% of total revenue, and knife gate valves and pinch valves together accounted for 16%.
The company has also revealed that in FY03/21, custom valves accounted for approximately 80% of revenue, while general-purpose valves accounted for approximately 20%. OKM’s ratio of general-purpose valves is low compared to competitors.
Marine exhaust valves drive growth
OKM’s marine exhaust valves, launched around 2018, comply with the International Maritime Organization (IMO)’s environmental regulations. The company says it has roughly a 50% share of the global market and roughly a 90% share of the domestic market for this type of valve. Marine exhaust valves are special valves used in Selective Catalytic Reduction (SCR) systems, which are installed in marine engines to remove NOx and other air pollutants from the exhaust gas of ships. Shared Research believes that marine exhaust valves are a key growth driver for the company for the following reasons.
Manufacture of marine exhaust valves requires a manufacturing and marketing certification license
OKM is one of only five companies in the world that produces marine exhaust valves. It is the only such company in Japan. The company began joint development of marine exhaust valves in 2013 with MAN Energy Solutions, a licensor with more than 80% of the global market share for marine two-stroke engine designs. In 2016, the company became the first company in the world to obtain a certification license from MAN Energy Solutions to manufacture marine exhaust valves. The product has earned OKM a 50% share of the worldwide market and a 90% share of the Japanese market for marine exhaust valves sold to marine engine manufacturers compliant with IMO environmental regulations.
OKM was able to obtain the certification license for marine exhaust valves due to the infrastructure it had built to provide custom valves to meet customer needs. The company had designed and built its own high-temperature fluid testing facilities for manufacturing custom valves for its customers, an asset that competitors lacked owing to their focus on general-purpose valves. OKM used these facilities to test the marine exhaust valves required by MAN Energy Solutions for use in SCRs under conditions similar to those in which they would be actually used. OKM provided the resulting test data to MAN Energy Solutions, which helped persuade the latter to grant the company a license.
Demand for marine exhaust valves is expected to increase as the IMO tightens environmental regulations
The IMO’s NOx regulations currently apply only to new ships passing through designated maritime emission control areas. However, as these areas expand, older ships unable to comply with the regulations will be restricted to a more limited area in which they are permitted to sail.
Under the first two tiers of IMO regulations, it was possible to cope with these regulations by improving marine fuels, introducing fuel injection timing retardation, and tuning scavenging and exhaust systems, combustion chambers, and fuel injection valves. However, the only way to comply with the Tier III regulations as they stand in December 2021 is to install selective catalytic reduction (SCR) and exhaust gas recirculation (EGR) systems in the engine. The IMO’s Tier III regulations have thus created growing demand for marine exhaust valves (see Market and value chain for details on the IMO’s environmental regulations).
Received self-inspection system certification from Lloyd’s Register
As mentioned above, OKM obtained a manufacturing certification license from MAN Energy Solutions for marine exhaust valves for installation in SCR systems. In August 2021, the company also received a self-inspection system certification from Lloyd’s Register for its marine butterfly valves.
Shipping companies must build ships that comply with Lloyd’s Register regulations and have them inspected by Lloyd’s Register inspectors to ensure that the ships they build meet standards for safety, stability, and environmental impact. These inspections also determine whether ships are built using materials approved by the association.
In the past, when shipping Llyod’s Register-certified marine butterfly valves, it was necessary for Llyod’s Register inspectors to visit the factory and conduct on-site inspections of some products that required inspection. OKM said it had been undergoing about 50 inspections a year by Llyod’s Register inspectors for about 300 valves. Now that the company has obtained the self-inspection system certification from the ship classification society, it is able to inspect and ship marine butterfly valves on its own, resulting in improved operational efficiency and shortened delivery times. OKM is the second valve manufacturer in Japan after Nakakita Seisakusho (TSE2: 6496) to obtain the certification.
In February 2021, the company became the first valve manufacturer in Japan to obtain self-inspection system certification for marine butterfly valves from the American Bureau of Shipping (ABS). The company has been undergoing about 70 inspections a year by ABS inspectors for about 400 valves. It is now able to conduct inspections on its own, which it says should lead to improved operational efficiency and shortened delivery times.
Major customers
As mentioned above, OKM is capable of manufacturing over 100,000 unique valves to meet the specifications of customers in various industries. The company’s valves are used in a wide range of industries in both the private and public sectors including shipbuilding, water treatment, air conditioning, chemicals, steel, electricity and gas, semiconductors, oil complexes, food manufacturing facilities, and public facilities such as train stations and airports.
Metal One Corporation, Yuasa Trading Co., Ltd. (TSE1: 8074), and Hyundai Heavy Industries (South Korea) are the company’s three main customers, accounting for more than 10% of revenue in FY03/21. Metal One is a steel trading company in which Mitsubishi Corporation (TSE1: 8058) and Sojitz Corporation (TSE1: 2768) hold a 60% and 40% stake, respectively. Yuasa Trading is a trading company that deals in products used in factories, infrastructure and construction, and housing and environmental fields. Hyundai Heavy Industries is a South Korean general heavy industries company and the world’s largest shipbuilding company.
Revenue from Metal One has grown conspicuously in recent years—by 54.0% YoY in FY03/20 and by 15.3% YoY in FY03/21—due to its handling of marine exhaust valves.
Major end customers by industry are as follows. End customers comprise major domestic and overseas companies.
Group companies
As of the end-December 2021, the company’s corporate group consisted of the parent and three consolidated subsidiaries.
The company has two consolidated subsidiaries in China, Suzhou Okumura Valve Co., Ltd. in Suzhou and Okumura Valve (Jiangsu) Co., Ltd. in Changshu. The company established the latter in FY03/19 after it was decided that the former would be relocated due to urban redevelopment plans in Suzhou, China. OKM established a new factory at Okumura Valve (Jiangsu) in Changshu and brought it online in January 2021. According to the company, the new factory is more efficient than the former one in Suzhou. Suzhou Okumura Valve ceased business activities in December 2020, and its registration is slated to be canceled in July 2022.
The main role of OKM’s overseas subsidiaries is to produce and sell valves to local customers and to supply finished and processed valves to the parent. The company sources valve materials from other sources as well, but about 60% of the valves it produces domestically come from parts supplied by China-based Okumura Valve (Jiangsu) or OKM Valve Malaysia Sdn. A high percentage of the revenue of OKM’s overseas subsidiaries is accounted for by sales to the parent (68% of Okumura [Jiangsu] revenue and 75% of OKM Valve Malaysia revenue).
All finished marine exhaust valves are shipped from the parent in Japan.
Manufacturing system
Factories
The company has four factories: two in Japan (Hino and Higashiomi), one in Malaysia, and one in China.
The company has four factories: two in Japan (Hino and Higashiomi), one in Malaysia, and one in China. Note: Book value and number of employees are as of March 2021
Hino factory (Hino-cho, Gamo-gun, Shiga Prefecture)
The company’s original factory, completed in June 1969, the Hino factory employs roughly 70 people to manufacture valves. The factory engages in both planned production, where products are stocked for immediate delivery, and made-to-order production, where it manufactures custom products. In the latter, orders are classified into one of two categories: valves customized to standard specifications to meet the customer’s requirements and specially customized valves that the company designs after receiving the order.
The Hino factory produces all three main types of valves for its customers: butterfly valves, knife gate valves, and pinch valves. Marine exhaust valves, however, are produced at the Higashiomi factory. Production capacity varies depending on the type of valve, material, and application, but the Hino factory can ship an average of around 10,000 units per month.
Higashiomi factory (Higashiomi, Shiga Prefecture)
Completed in April 2019, the Higashiomi factory specializes in marine exhaust valves. Valves for marine exhaust gas were manufactured at the Hino factory until the Higashiomi factory was completed. As of December 2021, the factory had 11 employees. OKM procures most of the processed parts needed to assemble marine exhaust valves from China. The company noted that there is room to expand the assembly line for marine exhaust valves at the factory. It also said that it should be able to meet shipbuilding demand by increasing the number of machine tools used to process marine exhaust valve parts.
China factory (Okumura [Jiangsu] Co., Ltd.)
Suzhou Okumura Valve Co., Ltd. ceased business activities due to an urban redevelopment project sponsored by Suzhou City. Its company registration is slated to be canceled in July 2022. In response to these developments, OKM established Okumura Valve (Jiangsu) Co., Ltd. in Changshu in March 2019 and started operations at the new factory in January 2021. According to the company, the factory of Suzhou Okumura Valve (the first subsidiary it established in China) had been inefficient because the company had expanded production capacity by adding production lines. The new Okumura Valve (Jiangsu) factory is 40% more efficient than the old Suzhou Okumura factory. The new factory is also located in an excellent location near a port.
Okumura Valve (Jiangsu)’s factory produces finished butterfly valves and knife gate valves mainly for the Chinese market, as well as processed parts for valve manufacture in Japan. The machined parts are made of aluminum, cast iron, or stainless steel and are used to assemble marine exhaust valves and other valve products. The subsidiary also produces finished valves and assembly parts for the Malaysian market. Sales to the parent (Japan market) account for 68% of Okumura Valve (Jiangsu)’s revenue. Its factory has a monthly production capacity of 10,000 units (in terms of finished goods).
Malaysia factory (OKM Valve Malaysia Sdn. Bhd.)
The company completed construction of the Malaysian factory in October 1990. It mainly manufactures butterfly valves for the Malaysian and Vietnamese markets. Sales to the parent account for 75% of OKM Valve Malaysia’s revenue. The factory’s monthly production capacity in terms of valve products is 2,300 units. It also supplies exhaust valves for marine generators to Yanmar Holdings in Japan. Annual revenue is approximately several hundred million yen.
Capex
OKM has kept capex above depreciation over the three-year period FY03/19–FY03/21. Main capex included the construction of the Higashiomi factory in Shiga Prefecture (dedicated to marine exhaust valves) in FY03/19. It also included investment in a new head office and R&D center in Yasu, Shiga Prefecture, and a new factory at Okumura Valve (Jiangsu) Co., Ltd. (as a replacement for Suzhou factory, which closed due to urban redevelopment) in FY03/21. The company used the JPY1.3bn it raised through its listing on the Second Section of the Tokyo Stock Exchange in December 2020 to cover these expenditures.
Sales structure and methods
Sales and support bases
The company has built a sales structure in Japan comprising five sales bases (Tokyo, Osaka, Nagoya, Hiroshima, and Fukuoka) that also provide customers with after-sales services. The company also has two overseas offices: one in South Korea and another in Vietnam. The South Korean office provides support to engine manufacturers in South Korea and conducts marketing activities for business expansion, while the Vietnam (Ho Chi Minh) office conducts marketing activities mainly in the water supply and industrial fields in Vietnam.
Sales methods and delivery times
OKM basically sells its products through domestic and overseas trading companies and sales agents. It only sells directly to a single major customer, Hyundai Heavy Industries, due to Hyundai Heavy Industries’ policy of dealing directly with manufacturers for parts for which detailed specifications need to be discussed. That said, the company’s sales staff also approach customers directly. Through this sales approach, the company is able to gather information on customer valve needs despite its reliance on external sales networks, as about 80% of the company’s revenue is from made-to-order products.
In the OKM’s made-to-order manufacturing, lead times from receipt of an order to delivery can be as short as one month to several months, and as long as one year. The company’s average lead time has lengthened since around 2017 when it started taking orders for marine exhaust valves. The longer lead times mean that the OKM’s profit margins are more vulnerable to material prices and forex fluctuations.
Fulfilling an order involves receiving the manufacturing instructions, procuring the parts, processing, plating, assembly, inspection, and shipping. Assuming the necessary parts are on hand, the entire process takes an average of 40 to 45 days for marine exhaust valves (high degree of processing), 15 to 30 days for made-to-order butterfly valves (moderate processing), and 10 to 15 days for general-purpose butterfly valves (no processing).
R&D
As mentioned above, OKM completed construction of a new R&D center in Yasu, Shiga Prefecture in October 2020 to bolster R&D. The total investment amounted to JPY1.4bn. The R&D center will mainly focus on evaluating materials, understanding physical properties, and improving and refining the company’s sealing (containment) technologies. The company relocated its head office to the same site the following year, in February 2021.
The company can conduct the following four advanced tests at its facilities.
High-temperature fluid test: Evaluating performance by subjecting valves to air heated up to 700℃ (i.e., blowing heated air into the valves).
Fire-safe test: Testing whether valves can maintain a certain level of performance even when damaged by fire. This test assumes that the valves will be used in pipes that carry flammable fluids.
Cavitation test: Evaluating valve performance and characteristics when cavitation (the appearance and disappearance of air bubbles in a liquid, which can cause pipe erosion, noise, vibration, and other effects) occurs.
Low-temperature fluid test: Injecting liquid nitrogen to evaluate valve performance and characteristics under low temperatures (-196℃).
Testing the performance of its valves in various environments similar to or harsher than those in which they will actually be used has value in part because it allows OKM to share the test data with its customers, thereby improving their confidence in the quality of its products and their evaluation of its technical capabilities. The R&D center also plays a role in marketing whereby it helps to ensure that the company reflects customer needs in its products.
In 2016, OKM became the first company in the world to obtain a license from MAN Energy Solutions to manufacture and sell marine exhaust valves. This achievement was due in large part to the high-temperature fluid testing facility that it had owned prior to establishing the R&D center. The facility, which creates an ultra-high temperature environment, enabled the company to conduct tests under the same conditions as those in which marine exhaust valves are actually used. This allowed OKM to provide MAN Energy Solutions with data proving the high quality of its marine exhaust valves. In order to obtain the license, the company was required to have a high-temperature testing facility and to pass an onboard test of more than 3,000 hours. These requirements form a high barrier to entry for competitors in Japan that do not have similar facilities.
As of December 2021, the R&D center was focusing on the following two research topics. These are aimed at developing valves that can be used with next-generation ships using alternative fuels and infrastructure that supports an environmentally friendly society based on hydrogen.
Developing valves with innovative seat structures that reliably contain cryogenic fluids
Developing large-diameter butterfly valves with a sealing structure that can stably contain liquid hydrogen
In June 2021, the Ministry of Economy, Trade and Industry (METI) selected the company’s pursuit of R&D concerning large-diameter butterfly valves for liquid hydrogen as a “Supporting Industry” project (a project to support the advancement of strategic fundamental technologies).
Note: The company provides consolidated financial statements from FY03/19 onward. YoY comparisons for FY03/19 are shown as “not available (NA).”
Earnings structure
Revenue
Revenue by application category
OKM operates in a single segment, Valve Manufacturing and Sales. The company therefore discloses revenue based on two market divisions “terrestrial applications,” which centers on valves for construction, electric power, and industrial plants; and “marine applications,” which comprises valves for ships. In FY03/21, 48% of revenue was from terrestrial applications and 52% was from marine applications.
The company began disclosing consolidated results in FY03/19, accompanying its listing on the Second Section of the Tokyo Stock Exchange in December 2020. Marine application revenue exceeded that of terrestrial application revenue for the first time in FY03/21 due to increased demand for marine exhaust valves as the result of stricter International Maritime Organization (IMO) regulations on marine exhaust gases. Meanwhile, demand for terrestrial valves declined due to the impact of the COVID-19 pandemic, which caused customers to postpone their capex plans, delay construction, and postpone maintenance work for buildings and industrial plants.
According to OKM, in FY03/21, marine exhaust valves accounted for approximately 60% of total marine application revenue of JPY4.6bn.
Note: The company provides consolidated financial statements from FY03/19 onward. YoY comparisons for FY03/19 are shown as “not available (NA).”
Orders by application
OKM had previously disclosed data on orders and the order backlog for butterfly valves and knife gate valves. However, in FY03/21 it began disclosing orders by application (terrestrial or marine) instead, and stopped disclosing order backlogs. The company noted that it plans to consider how to disclose order data from FY03/22 onward.
Revenue by region
In FY03/21, 72.6% of total revenue was from Japan and 27.3% from overseas. Sales to South Korea and China—mainly of marine exhaust valves used in shipbuilding—accounted for 13.4% and 9.4% of total revenue, respectively.
Notes: The company began providing consolidated financial statements from FY03/19. YoY comparisons for FY03/19 are shown as “not available (NA).”
Revenue composition ratios are based on revenue figures rounded to the nearest million yen.
Expenses
Cost of revenue
OKM’s average consolidated to parent ratios over the past three years were 1.14x for revenue, 1.15x for cost of revenue, and 1.16x for operating profit. In other words, there is only a small difference between consolidated and parent results. Therefore, looking at the company’s parent cost of revenue data is sufficient to obtain a basic understanding of its overall cost of revenue.
Material costs are the main item in cost of revenue. Shared Research understands that material costs are affected by supply and demand based on international market conditions and forex fluctuations. A significant percentage of OKM’s revenue is from made-to-order products, and the selling price is determined at the time the order is made. Therefore, if material prices rise after the order is received, the company is unable to pass these price increases on to the customer, resulting in a lower margin. Conversely, when material prices decline, the company often gets to enjoy higher margins.
The company’s main materials are metals such as copper, aluminum, stainless steel, and iron. Its material import costs exceed export revenue, so a weaker yen weighs on profits. According to OKM, a one-yen depreciation in the yen relative to the US dollar translates to a decrease in profit to the tune of several million yen. Meanwhile, one-yen depreciation in the yen relative to the Chinese yuan translates to a decrease of roughly JPY50mn in profit.
SG&A expenses
The following table shows the items that OKM has disclosed for the past three fiscal years in its annual securities reports and listing prospectus.
The main items in SG&A expenses are personnel expenses such as salaries and allowances, executive compensation, and provision for bonuses. These three are not directly linked to changes in revenue. In contrast, Shared Research understands that packing and freight expenses for the transportation of valves trend in line with revenue.
Note: The company began disclosing consolidated financial statements from FY03/19.
Operating profit
The company’s OPM is higher than those of its peers KITZ and Nakakita Seisakusho (see Market and value chain). We believe this is due to OKM’s focus on customization and the growth of marine exhaust valves to account for a greater percentage of revenue.
As a latecomer to the valve manufacturing industry, OKM has focused on custom valves. This has included working on developing valves jointly with customers, building a detailed understanding of customer needs, and responding to such needs. The company’s pursuit of customized manufacturing has resulted in it being able to produce more than 100,000 unique valves to meet the needs of its customers. According to OKM, custom valves account for about 80% of its revenue, while general-purpose valves account for about 20%. By contrast, general-purpose valve revenue at competitors often accounts for over 40% of revenue.
Custom valves are made-to-order, and thus require longer delivery times and a wider variety of materials and more extensive processing than general-purpose valves. Unit prices for custom valves are high, and there tends to be little price competition. Shared Research understands that OKM is able to earn more than enough revenue to cover the extra costs of customization, partly because only the company can provide regular maintenance for its custom-made valves..
We also understand that the growing size of marine exhaust valves in the revenue mix is behind OKM’s high profit margins. As mentioned above, only five companies in the world and one in Japan (OKM) are certified by MAN Energy Solutions to manufacture and sell marine exhaust valves, limiting price competition for these products relative to other valve types.
In FY03/21, despite a 1.0% YoY decline in revenue, operating profit rose by 13.0% YoY, and the OPM increased by 1.4pp YoY. Marine application revenue was up 7.8% YoY and terrestrial application revenue was down 9.2% YoY. The OPM for marine valves, which are mainly marine exhaust valves, is relatively high, and Shared Research understands that the OPM rose as these products became more heavily represented in the revenue mix.
Strengths and weaknesses
Strengths
High profit margins due to a focus on custom valves, where there is less competition
As a latecomer in the field of industrial butterfly valves, OKM’s strategy was to target the market for complex, labor-intensive valves that competitors were reluctant to produce, rather than focusing on the relatively saturated market for general-purpose valves. The company has maintained this strategy such that custom valves now account for 80% of its revenue.
Custom valves are made-to-order, and thus require longer delivery times and involve a wider variety of materials and more extensive processing than general-purpose valves. Unit prices for custom valves are high, and there tends to be little price competition. Shared Research believes this is one of the reasons behind OKM’s higher profit margins vis-à-vis competitors. The company’s OPM was 11.5% in FY03/21, significantly higher than KITZ’s 4.5% (FY12/20) and Nakakita Seisakusho’s 4.5% (FY05/21).
The company’s 50% share of the global market for marine exhaust valves, made possible by obtaining a manufacturing license held by only five companies worldwide
OKM is one of only five companies in the world that manufactures marine exhaust valves, and the only such company in Japan. The company began joint development of marine exhaust valves in 2013 with MAN Energy Solutions, a licensor with more than 80% of the global market share for marine two-stroke engine designs. In 2016, it became the first company in the world to obtain a certification license from MAN Energy Solutions to manufacture marine exhaust valves. This license has helped OKM to gain a 50% share of the worldwide market and a 90% share of the Japanese market for marine exhaust valves sold to ship engine manufacturers compliant with IMO environmental regulations.
Marine exhaust valves are the company’s mainstay product, accounting for around 30% of FY03/21 revenue. They are also the main driver of revenue growth. Shared Research believes that the company has been able to achieve relatively high profit margins on marine exhaust valves due to limited price competition owed to the small number of market participants.
The facilities and know-how to implement in-house product testing, which has led to increased confidence in its products and improved customer perceptions of its technological capabilities
OKM, unlike its competitors, has the facilities and know-how to test product quality, durability, and various physical characteristics in-house. This enables it to work with customers to design test environments based on real-world applications and share the resulting data. Shared Research believes that this enhances confidence in the company’s products and raises customer assessments of its technological capabilities.
OKM’s access to in-house high-temperature fluid testing facilities allowed it to conduct the tests required by MAN Energy Solutions and prove through experimental data that its valves can operate in high-temperature environments. This was crucial in MAN Energy Solutions’ decision to grant it a license for marine exhaust valves. Shared Research understands that competitors generate a high percentage of their revenue on the sale of general-purpose valves and lack the comprehensive advanced testing facilities of OKM.
Weaknesses
Low efficiency resulting from high-mix, low-volume manufacturing makes it difficult to pursue rapid earnings growth
The company focuses on custom products and can manufacture a wide variety of small-lot products in various materials, bore sizes, and shapes to meet customer specifications. Unlike its competitors, who mass produce general-purpose valves, OKM’s small-lot manufacturing tends to make managing inventories of materials and parts a complicated affair. Shared Research understands that the company’s work efficiency is lower than that of its competitors due to the time required to change jigs and other equipment when valve types or processing specs change. As mentioned above, the company’s focus on custom valves is a factor in its relatively high profit margins, but Shared Research believes that the resulting low work efficiency has reduced its ability to pursue rapid earnings growth.
An earnings structure prone to short-term profit fluctuations due to relatively long lag times between changes in raw material prices and product prices due to the nature of annual contracts
Since custom products account for 80% of the company’s revenue, OKM enters into annual contracts with its major customers to determine annual production and sales volumes in advance. This helps to reduce short-term fluctuations in revenue and level out operations. These annual contracts account for roughly half of revenue.
Although raw material prices fluctuate daily, selling prices are based on annual contracts, making it difficult to reflect these fluctuations in product prices during the year-long contract period. Shared Research understands that while it is possible for OKM to adjust product prices over the medium term to reflect changes in raw material prices, the company’s earnings structure is such that it is susceptible to significant fluctuations in profits in the short term.
Longer lead times and longer days sales of inventory than peers
OKM’s competitive edge lies in its ability to customize its products to meet customer needs. However, this means that its lead times tend to be long. While the company’s average delivery time is three months, some projects can take up to a year. This tends to result in a longer days sales of inventory versus competitors, who mainly sell general-purpose valves. The company’s average inventory turnover over the past five years has been 129.1 days, compared to 91.6 days for KITZ and 87.4 days for Nakakita Seisakusho.
Market and value chain
Market overview
What is a valve?
A valve is a device with a movable mechanism that can open and close a channel in order to control the movement of a fluid (gas or liquid). There are few industries that do not use valves at all. Valves are also common features of everyday life. For example, they are used in the water faucets in our homes. In industrial applications, they are most notably used in piping for electric power, water, gas, construction equipment, industrial equipment, machinery, and transportation. Valve technology develops in response to developments in their applications (the systems in which they are components).
There are several ways to classify valves, such as by structure (form), material, valve operation, industrial application, and functional characteristics. Many valve manufacturers adopt a structure-based classification system for product management. The seven most common types of valves by structure are globe valves, gate valves, check valves, butterfly valves, ball valves, diaphragm valves, and pinch valves.
The Ministry of Economy, Trade and Industry (METI)’s Industrial Statistics Survey classifies valves into four categories: general valves and faucets, high-temperature and high-pressure valves, automatic control valves, and plumbing valves, and keeps statistics on the subclassifications of each.
General valves and faucets: Stainless steel valves, cast and forged steel valves, cast iron valves, bronze and brass valves
Automatic control valves: safety valves, steam traps, other automatic control valves, solenoid control valves, other motor-driven control valves
Plumbing valves: plumbing pipes and water-absorbing devices, plumbing shut-off valves, corporation cocks
High-temperature and high-pressure valves: No subclassifications
Market size
According to the Japan Valve Manufacturers’ Association’s Valve Industry Survey, the production value of valves in FY2020 (April 2020–March 2021) was JPY461.3bn (+0.5% YoY), the production weight was 140,985 tons (-7.8% YoY), and the production volume was 100mn units (-5.4% YoY). The latter two metrics decreased YoY, affected by weak capex in most industries due to the COVID-19 pandemic. However, production value increased YoY. There was an increase in demand for high performance valves with relatively high unit prices, mainly in the Tokyo Metropolitan Area related to Olympic facilities, skyscraper construction due to large-scale redevelopment, and hotel construction. There was also increased demand for high-performance valves for complying with environment regulations, such as OKM’s marine exhaust valves.
For the 10-year period from FY2010 to FY2020, valve production value grew at a CAGR of 0.5%, production weight fell at a compound rate of 1.0% per annum, and production volume grew at a CAGR of 0.0%. The production value per valve (unit) and per ton of valves increased.
Trends by demand category
The Japan Valve Manufacturers’ Association’s Valve Industry Survey shows data on shipment value by demand category based on interviews with its members. Because the survey only targeted members, total shipment values by demand category do not match those in the Ministry of Economy, Trade and Industry (METI)’s statistics on metal products. Although the number of valve manufacturers surveyed and the demand categories differ depending on the year, the data provide us with a useful overview of the demand trends by industry.
Note: The Japan Valve Manufacturers Association changed the scope of its survey in FY2019. The survey was based on production value through FY2018, but has been based on shipment value since FY2019.
According to the FY2020 Valve Industry Survey, the shipment value of valves for building equipment was the largest, accounting for 56.5% of total shipment value. Next was valves for water supply and sewerage, accounting for 12.2%. In other words, these two fields, which have topped the list for many years, accounted for two-thirds of the total shipment value.
According to the survey, shipment value for marine applications peaked in FY2018 at JPY25.6bn, and then declined continuously, to JPY14.4bn in FY2019 (-44.3% YoY) and JPY13.5bn in FY2020 (-14.3% YoY). Despite this overall decline, the company’s marine division revenue increased over the same period, growing from JPY3.7bn in FY03/19 to JPY4.2bn in FY03/20 (+15.6% YoY), and JPY4.6bn in FY03/21 (+7.8% YoY). This was due to an increase in demand for marine exhaust valves as a result of stricter IMO regulations on marine exhaust gases.
IMO’s stricter environmental regulations are a tailwind for OKM
Stricter International Maritime Organization (IMO) environmental regulations in the shipping and shipbuilding industries translate to increased demand for OKM’s valves for environmental protection equipment applications, including marine exhaust valves. The IMO’s tightening of regulations on ships includes reductions in acceptable amounts of air and marine emissions of nitrogen oxides (NOx) and sulfur oxides (SOx). These come in tandem with the strengthening of other regulations, such as those calling for reduced CO2 emissions from ships.
The IMO’s environmental regulations for ships
Tier I NOx regulations came into effect in January 2000. Tier II regulations, which call for 15–22% NOx reductions versus levels mandated by Tier I regulations, came into effect in all maritime areas in 2011. Tier III regulations, which mandate NOx reductions of 80% versus Tier I levels, came into effect in 2016. Tier III regulations apply to ships constructed in or after 2016 sailing in Emission Control Areas (ECAs; within 200 nautical miles of the coast of North America, and the Caribbean Sea). The North Sea and Baltic Sea will enter the extension of ECAs for ships built during or after January 2021.
The IMO regulations started in 2000, but ship engines and the equipment used to remove components from exhaust gas coming from them have since grown in size. The difficulty and cost of installing large removal equipment in a conventional ship’s engine room delayed NOx removal equipment installations. Until the Tier II regulations came into effect, it was possible to deal with the problem by tuning engines to meet regulations such as through fuel injection timing retardation, the use of scavenging and exhaust systems, and the optimization of combustion chambers and fuel injection valves. Another option was to use fuels low in nitrogen compounds.
In order to comply with the Tier III regulations, it is necessary to install selective catalytic reduction (SCR) systems, which remove NOx from exhaust gas, or exhaust gas recirculation (EGR) systems, which feed some of the exhaust gas back into the ship’s engine to suppress the temperature of the combustion gas and reduce NOx generation.
The IMO has tightened regulations on sulfur oxide (SOx) emissions, reducing the allowable concentration of sulfur in bunker fuel in all maritime areas from 3.5% to 0.5% in January 2020. The most common responses to this regulation have been to reduce the sulfur content of bunker fuel to 0.5% and to install SOx scrubber drainage valves in ship engines, which remove SOx from exhaust gas. OKM has started to manufacture and sell hull-mounted SOx scrubber drainage valves in response to the demand to lower SOx emissions.
Joint development with the world’s largest ship engine licensor
MAN Energy Solutions (Germany) and WinGD (Switzerland) account for approximately 90% of the world’s marine engine design market, with MAN Energy Solutions accounting for 70% to 80%.
In 2013, OKM, MAN Energy Solutions, and Hitachi Zosen (a licensee certified by MAN Energy Solutions to manufacture marine engines) began a joint development project to reduce NOx emissions by more than 80% by equipping marine engines with selective catalytic reduction (SCR) systems. OKM was responsible for the development of a marine exhaust valve for the SCR system. One result of this joint development project was that OKM received certification from MAN Energy Solutions in 2016, allowing the company to manufacture and sell marine exhaust valves. As of December 2021, five valve manufacturers worldwide had received this certification, with OKM being the only Japanese company among them. The company also received certification from WinGD.
Demand forecast for marine exhaust valves
The following table, based on MAN Energy Solutions’ forecast data for the two-stroke engine market, shows OKM’s forecasts for the number of engines with SCR and EGR systems. Shared Research believes that there is a strong possibility that the company will push back its forecasts due to delays in the completion of ships in 2021 and later caused by the COVID-19 pandemic.
In addition to marine exhaust valves for removing NOx, the company also manufactures and sells drainage valves for SOx scrubbers.
Large ships take in ballast water for balance when sailing. When they eventually discharge this ballast water into different waters (i.e., different regions than where the ballast water was taken in), the marine organisms contained in them are also released. This risks disruption of the ecosystem since the organisms may be invasive species not normally found in those waters, and the IMO has therefore mandated that ballast water treatment systems be installed on ships. OKM supplies valves for these treatment systems.
The number of LNG-, hydrogen-, and ammonia-fueled ships, which emit no exhaust gas, will increase starting in 2025. OKM has already begun joint development with shipbuilders of valves for new environmentally friendly ships that use such new fuels.
Competitors
Overview of the valve manufacturing industry
Valves come in many types based on shape, material, size, structure, and fluid control method due to the wide range of industries in which they are used. Since each company in each industry requires valves compatible with the specific equipment they manufacture, there are many different types of valves and many valve manufacturers. There are seven main types of valves in terms of structure: globe valves, gate valves, check valves, butterfly valves, ball valves, diaphragm valves, and pinch valves. However, there is not a single company that manufactures and sells all seven of these types of valves.
In the Japan Valve Manufacturers’ Association’s Valve Industry Survey (August 2021), the distribution of valve manufacturing companies by scale of production (in terms of shipment value) shows that of the 81 companies surveyed, six (7.4%) had a shipment value of JPY10.0bn or more, and 11 (13.6%) had a shipment value between JPY5.0bn and JPY10.0bn. These 17 companies with shipment value over JPY5.0bn represented 21% of the total. Nine companies had a shipment value between JPY3.0bn and JPY5.0bn (11.1%), 18 had a shipment value between JPY1.0bn and JPY3.0bn (22.2%), 15 had a shipment value between JPY500mn and JPY1.0bn (18.5%), and 22 had a shipment value of JPY500mn or less (27.2%). A total of 37 companies had a shipment value of less than JPY1.0bn, accounting for 46% of the total.
Including valve manufacturers that are not members of the Japan Valve Manufacturers’ Association, there were 407 companies manufacturing valves as of 2019 according to the industrial statistics of the Ministry of Economy, Trade and Industry (METI). Of these, 123 had four to nine employees and 107 had 10 to 19 employees, indicating a large number of small and medium-sized companies. The number of companies has decreased from 487 in 2010.
Competitors
The company’s competitors include KITZ Corporation (TSE1: 6498), Nakakita Seisakusho (TSE2: 6496), and Tomoe Valve (unlisted). KITZ’s revenue is about 15 times that of OKM’s, while Nakakita Seisakusho’s is about twice as large as OKM’s. However, OKM outperforms the other two in OPM, with an average OPM over the past five years of 10.3%, versus 6.9% for KITZ and 6.2% for Nakakita Seisakusho. This is due to OKM’s focus on custom products resulting in high-mix, low-volume manufacturing compared to its competitors, who focus on mass-production of general-purpose products and also sell peripheral equipment such as remote controls and automatic control valves.
KITZ Corporation
KITZ was established in 1951 and is a comprehensive manufacturer of fluid control equipment centered on valves. In the Valve Manufacturing Business, KITZ has the highest revenue in Japan and one of the top 10 in the world. Its FY12/20 revenue amounted to JPY84.2bn, or over JPY100.0bn in 12-month terms (FY12/20 was a nine-month period due to the company changing its fiscal year-end from March to December).
KITZ recorded Valve Manufacturing Business revenue of JPY70.1bn (83% of total revenue). It recorded revenue of JPY13.0bn (15% of total revenue) in the Brass Bar Manufacturing Business, which manufactures brass bar and processed brass products for use in faucets, gas appliances, home appliances, and automotive parts. Valve types that KITZ handles include butterfly valves, ball valves, gate valves, globe valves, and check valves.
Many of its valves are used in construction facilities, water supply and sewage systems, water treatment plants, and semiconductor factories. In addition to domestic production bases, KITZ has factories in eight countries around the world, enabling it to respond to global demand.
Shared Research understands that KITZ has lower revenue from butterfly marine valves than does OKM, Nakakita Seisakusho, and Tomoe Valve. KITZ does not handle butterfly valves for marine exhaust gas applications.
Note: Turnover for FY12/20 is calculated on a 12-month basis.
Nakakita Seisakusho Co., Ltd.
Nakakita Seisakusho was established in 1937. In FY05/21, it posted revenue of JPY17.6bn. By application, 69% of revenue was from marine applications and 31% from terrestrial applications. Automatic control valves accounted for 45.6% of revenue, butterfly valves for 28.4%, and remote controls 26.0%.
Nakakita Seisakusho’s marine application revenue includes remote-controlled valves, butterfly valves, and automatic control valves. Its ability to deliver these products as a one-stop fluid control system provider has gained it favorable reputation in Japan’s shipbuilding industry. Nakakita Seisakusho’s butterfly valve revenue amount to roughly JPY5.0bn, less than OKM’s butterfly valve revenue of roughly JPY7.4bn.
Tomoe Valve Co., Ltd.
Tomoe Valve was established in 1953. It was the first manufacturer to develop butterfly valves in Japan. In terms of industrial applications, the company sells butterfly valves for use in oil, gas, and other energy-related plants, seawater desalination plants, water purification and other water treatment facilities related to IT, construction facilities, ships, and the petrochemical and steel industries. In addition to its presence in Japan, Tomoe Valve has established a global sales network with factories in the UK, Indonesia, and China.
According to OKM, Tomoe Valve’s revenue in FY12/19 was approximately JPY8.0bn, of which approximately JPY7.2bn was from butterfly valves. The company sells butterfly valves for use in ships, but does not sell butterfly valves for marine exhaust gas applications.
Comparison of financial indicators
Since Tomoe Valve is not a listed company, it is not possible to obtain financial indicators to compare the company with all three competitors listed above. However, below we compare OKM’s financial indicators with those of KITZ and Nakakita Seisakusho.
KITZ is the largest company in terms of revenue. It handles more types of valves than the other three, and conducts integrated production, handling processes from the material and processed parts stages. KITZ has production facilities in eight countries around the world in addition to its production bases in Japan. Shared Research believes that its global sales structure among other factors are behind its higher revenue relative to competitors.
Although smaller than KITZ in terms of revenue, Nakakita Seisakusho is larger than OKM. As mentioned above, this is largely due to the inclusion of revenue from remote-controlled valves and automatic control valves.
A high percentage of OKM’s revenue—around 80%—is generated by custom valves. According to OKM, when comparing only valves (excluding control devices), its three competitors have a lower percentage of revenue from custom valves.
OKM’s operating and recurring profit margins are about twice as high as those of KITZ and Nakakita Seisakusho. Similarly, the company’s ROA and ROE are higher than those of its competitors. Shared Research believes this is due to the company’s focus on valve customization.
Shared Research understands that OKM’s business model of providing custom valves that meet the specifications required by customers is the reason for the difference in operating profit margin between the company and its competitors.
As a latecomer to the valve manufacturing industry, OKM has focused on custom valves. This has included working on developing valves jointly with customers, building a detailed understanding of customer needs, and responding to such needs. The company’s pursuit of customized manufacturing has resulted in it being able to produce more than 100,000 unique valves to meet the needs of its customers and has helped it earn enough revenue to cover the costs of customization. Custom valves account for about 80% of OKM’s revenue, while general-purpose valves account for about 20%. By contrast, according to the company, general-purpose valve revenue at competitors often accounts for over 40% of revenue. The high profit margins are a result of the unit prices of custom valves being higher than those of general-purpose valves and the market being less prone to price competition.
Notes: Revenue per employee for Tomoe Valve has been calculated by dividing FY12/19 revenue by the number of employees as of January 2022.
Figures may differ from company materials due to differences in rounding methods
KITZ changed its fiscal year-end in FY12/20, making FY12/20 a nine-month accounting period. ROA and ROE have been calculated based on annualized profit.
Performance comparison versus competitors
Comparing FY03/16–FY03/21 results, OKM’s revenue growth outpaced that of KITZ and Nakakita Seisakusho. In 2016, OKM acquired a manufacturing certification license for marine exhaust valves from MAN Energy Solutions, and revenue from this product category has since grown significantly.
OKM’s operating profit in FY03/21 was 4x the FY03/16 figure. Meanwhile, both KITZ and Nakakita Seisakusho recorded lower operating profit in FY03/21 than in FY03/16. OKM’s OPM rose from 4.5% to 11.5% over the same period, while OPMs declined at KITZ and Nakakita Seisakusho.
OKM’s OPM rose on an increase in the revenue mix of relatively high-margin marine exhaust valves and due to a decline in the fixed cost ratio as a result of revenue growth.
Note: KITZ had a March fiscal year-end through FY03/20 before switching to a December fiscal year-end in FY12/20. The above figures have been converted to a 12-month accounting period from the resulting nine-month accounting period of FY12/20. Nakakita Seisakusho’s fiscal year ends in May.
Note: KITZ had a March fiscal year-end through FY03/20 before switching to a December fiscal year-end in FY12/20. The above figures have been converted to a 12-month accounting period from the resulting nine-month accounting period of FY12/20. Nakakita Seisakusho’s fiscal year ends in May.
Note: KITZ had a March fiscal year-end through FY03/20 before switching to a December fiscal year-end in FY12/20. Nakakita Seisakusho’s fiscal year ends in May.
Historical results and financial statements
Q3 FY03/22 results (out February 14, 2022)
Earnings summary
Progress versus company forecast (Q3 FY03/22)
At the end of Q3, cumulative revenue had achieved 71.3% of its corresponding projection in the company’s full-year forecast, while operating profit had reached 59.5%, recurring profit 53.2%, and net income attributable to owners of the parent 73.9%. In comparison, at the close of Q3 FY03/21, cumulative revenue had reached 74.0% of the full-year result, while operating profit had achieved 90.6%, recurring profit 85.9%, and net income attributable to owners of the parent 81.8%.
Results summary
Orders
Orders increased 4.1% YoY. Orders for terrestrial valves grew 6.8%, driven in part by growth in construction equipment-related demand for these valves that occurred in connection with investment targeting increased production at semiconductor plants in Japan. Additionally, the company noted an upturn in demand for these valves within the US. Orders for marine valves rose modestly, increasing 1.7% YoY. Despite this modest recovery, the company believes that orders for these valves will grow in the future because orders for the construction of new vessels are on the rise within the shipbuilding industry.
When combined, the shipbuilding markets in China, South Korea, and Japan account for about 90% of the global shipbuilding market, and orders placed within these markets grew significantly in 2021. According to the China Association of the National Shipbuilding Industry, in 2021, the tonnage associated with new shipbuilding contracts in China increased by about 130% YoY, rising to 67.1mn tons. Meanwhile, South Korea’s Ministry of Trade, Industry and Energy indicated that the value of new shipbuilding contracts in South Korea rose to USD43.9bn, up about 130% YoY. Additionally, the Japan Ship Exporters’ Association reported that the tonnage associated with new shipbuilding contracts in Japan grew about 110% YoY to 15.2mn tons.
Revenue
Revenue decreased 5.4% YoY as the COVID-19 pandemic forced customers to cut back on capital investment and caused construction delays.
Revenue from terrestrial valves amounted to JPY3.1bn (+2.0% YoY). The pandemic caused cancellations of construction plans and forced postponements of deliveries. Although revenue remained lower YoY throughout 1H, the company observed an increase in construction equipment-related demand for terrestrial valves that occurred in connection with investment targeting increased production at semiconductor plants in Japan. Additionally, the company noted growth in demand for CO2 capture equipment and other hardware related to the decarbonization of society.
Revenue from marine valves amounted to JPY3.0bn (-12.0% YoY), declining in part because domestic shipyards responded to a downturn in orders for new vessels by standardizing their operating hours. Also contributing to the decrease in revenue was a decline in the total number of vessels built due to shipyard consolidation. Performance from marine exhaust valves suffered downward impact from a reduction in selling price per unit, but the volume of marine exhaust valves sold expanded due to an increase in the ratio of ships built in compliance with environmental regulations.
Profit
Operating profit came to JPY452mn (-50.6% YoY), declining due to a decrease in revenue and a lower GPM.
Gross profit amounted to JPY2.2bn (-17.7% YoY), and the GPM was 36.6% (-5.5pp YoY). The decline in gross profit was due to a decrease in revenue stemming from economic slowdown caused by the COVID-19 pandemic and the downturn in GPM, which was driven by growth in manufacturing costs. SG&A expenses were JPY1.8bn (-1.2% YoY).
Recurring profit fell to JPY405mn (-54.1% YoY) due to the decline in operating profit and the posting of non-operating loss. The company recorded JPY30mn in non-operating income under surrender value of insurance policies, but this upward impact was offset in part by JPY70mn in non-operating expenses related to a special investigation conducted regarding inadequate sales management systems at a subsidiary in China.
Net income attributable to owners of the parent was JPY643mn (+4.9% YoY), rising thanks in part to JPY589mn in subsidy income. The company was able to record this extraordinary income because a local government in China requested that Suzhou Okumura Valve Co., Ltd. (a Chinese subsidiary) relocate to free up space for urban redevelopment and provided subsidies to facilitate this relocation.
1H FY03/22 results (out November 2, 2021)
Earnings summary
Progress versus company forecast (1H FY03/22)
In 1H FY03/22, the company achieved 97.7% of its revenue target for 1H, 110.3% of its operating profit target, 105.7% of its recurring profit target, and 104.1% of its net income target. In August 2021, the company downwardly revised its 1H FY03/22 forecasts for revenue, operating profit, and recurring profit, to account for the impact of postponed delivery dates for terrestrial valves due to the COVID-19 pandemic. On the other hand, the company upwardly revised its 1H net income forecast. This was due to the posting of an extraordinary gain of JPY584mn in subsidy income for the eviction of subsidiary Suzhou Okumura Valve Co., Ltd. 1H results were in line with the revised company forecast.
Progress of 1H results versus the company’s full-year forecast was 44.9% for revenue (50.7% in 1H FY03/21 versus FY03/21 results), 32.7% for operating profit (71.6%), 27.8% for recurring profit (71.6%), and 58.6% for net income attributable to owners of the parent (70.2%).
Results summary
Revenue
Revenue was down 13.1% YoY owing to the impact of the COVID-19 pandemic, which delayed construction and caused customers to cut back on capex.
Revenue from terrestrial valves was JPY1.9bn (-9.3% YoY). The pandemic caused the cancellation of construction plans and postponement of deliveries. However, demand increased for construction equipment in conjunction with the redevelopment of large properties in the Tokyo Metropolitan Area, and there were moves suggesting expanded demand for semiconductor and electric power applications.
Revenue from marine valves was JPY2.0bn (-16.4% YoY). Revenue declined due to the impact of the implementation of uniform operating hours at domestic shipyards as a result of a decrease in orders for new ship construction, and a decrease in the total number of ships built due to the consolidation of shipyards. Although sales of marine exhaust valves were affected by a reduction in unit prices, volume expanded steadily due to an increase in the percentage of ships built to comply with environmental regulations.
Profit
Operating profit was JPY248mn (-65.6% YoY). The decline in revenue, lower GPM, and higher SG&A expenses resulted in lower profit.
Gross profit was JPY1.4bn (-23.9% YoY) and the GPM was 37.1% (-5.2pp YoY). Lower revenue and profit margins resulted in lower profit. The decline in revenue was accompanied by a decrease in merchandise procurement and material costs, but labor costs and depreciation increased due to the establishment of new bases in Japan and overseas.
SG&A expenses were JPY1.2bn (+2.2% YoY). Salaries and allowances and depreciation increased.
Recurring profit was JPY211mn (-71.2% YoY). In addition to the decline in operating profit, the balance between non-operating income and expenses was negative. While the company recorded a JPY30mn insurance cancellation refund in non-operating income, it booked JPY70mn in non-operating expenses related to a special investigation into deficiencies in the sales management system at a Chinese subsidiary.
Net income attributable to owners of the parent was JPY510mn (-3.0% YoY). The company booked JPY584mn in subsidy income as an extraordinary gain. This was for complying with a request by the Chinese local government for subsidiary Suzhou Okumura Valve Co., Ltd. to vacate its property to make room for an urban redevelopment project.
FY03/21 full-year results
Earnings summary
Revenue
Revenue in marine valves was JPY4.6bn (+7.8% YoY) and in terrestrial valves was JPY4.2bn (-9.1% YoY). There was a slowdown in new orders for general marine valves due to the impact of the COVID-19 pandemic and slower construction of vessels at customers’ shipyards (longer construction periods than originally planned) to ensure uniform operating hours. Meanwhile, unexpected orders for marine exhaust valves contributed to revenue.
Revenue from terrestrial valves was affected by the postponement of capex plans and construction delays in some orders related to construction and factories in Japan, a decrease in new construction of district heating and cooling plants in the Tokyo Metropolitan Area, and the postponement of building maintenance owing to the COVID-19 pandemic.
By region, the company recorded revenue of JPY8.8bn (-1.0% YoY) in Japan, JPY1.2bn (-4.4% YoY) in South Korea, JPY819mn (+11.3% YoY) in China, and JPY156mn (-44.3% YoY) in Malaysia. In South Korea, the company was under pressure to lower prices due to the rise of competition in the marine exhaust valve market. In Malaysia, revenue was affected by delays in the progress of orders due to lockdowns and other factors.
Profit
In terms of profits, gross profit was JPY3.5bn (+3.4% YoY), and the GPM was 39.7% (+1.6pp YoY). The increase in the GPM resulted in higher profits despite the decline in revenue. The increase in the GPM was due to the higher representation of products with relatively high GPMs, such as marine exhaust valves, in the product mix.
SG&A expenses were JPY2.5bn (-0.1% YoY). While depreciation and R&D expenses increased, the company was able to decrease SG&A expenses mainly through efforts to reduce costs such as the implementation of telework and use of web conferencing.
Operating profit was JPY1.0bn (+13.0% YoY) due to an increase in gross profit and a decrease in SG&A expenses.
Net income increased 30.8% YoY due to a gain on the sale of the Suzhou factory in China, which closed due to urban redevelopment, and a gain on the sale of securities held (of listed companies) in connection with the listing of the company.
Income statement
Note: Figures may differ from company materials due to differences in rounding methods.
Results from FY03/19 to FY03/21 represent consolidated figures, while those from FY03/16 to FY03/18 are of parent figures.
YoY comparisons for FY03/16 and FY03/19 are shown as “not available (NA)” due to the unavailability of respective previous year figures.
Balance sheet