Hakuto 7433
伯東
Recent Updates
2021-10-29
2021-09-03
Get in touch
Summary
Hakuto is a unique mini-conglomerate. It is both an electronics trading company and industrial chemical manufacturer. The origin of the company’s electronics trading business is a trading company founded in 1953 to import raw quartz for use in electronic devices. The industrial chemical manufacturing business started in 1960 as a new unit aimed at diversifying the company’s operations and enhancing stability. At present, Hakuto is a conglomerate centered on these two main businesses. Its operations focus on Japan and the Asia region.
Electronic Equipment, Instruments & Components
Key dates
2014-08-18
Coverage initiation
Executive summary
Multi-business firm: from electronics trading to chemical manufacturing
Hakuto Co., Ltd. is a unique mini-conglomerate. It is both an electronics trading company and industrial chemical manufacturer. The origin of the company’s electronics trading business is a trading company founded in 1953 to import raw quartz for use in electronic devices. The industrial chemical manufacturing business started in 1960 as a new unit aimed at diversifying the company’s operations and enhancing stability. At present, Hakuto is a conglomerate centered on these two main businesses.
Given its manufacturing DNA, Hakuto is a technology-driven company and even its electronics trading business has an engineering division. The trading business provides equipment installation and maintenance services, and employs field application engineers (FAEs) with a high level of technical expertise. Shared Research believes that this focus on technology and synergies between the two seemingly different businesses are sources of Hakuto’s strength. While firms operating in the semiconductor space tend to have large fluctuations in earnings performance, the company’s earnings are relatively stable. In terms of relative size among semiconductor trading companies, Hakuto is medium size but its profit margins match those of the industry leaders.
Trends and outlook
In FY03/21, sales were JPY165.4bn (+8.0% YoY), operating profit was JPY3.8bn (+57.7% YoY), recurring profit was JPY3.6bn (+ 68.4% YoY), and net income attributable to owners of the parent was JPY3.1bn (+112.9% YoY). In Electronic Devices and Components, in addition to growth in general electronic parts such as ICs and connectors for PCs/tablets, sales were also boosted by new business channels for automotive-use ICs. In Electronic and Electric Equipment, high-margin vacuum devices and PCB manufacturing equipment performed well. However, in Industrial Chemicals, sales declined due to sluggishness in the petroleum and petrochemicals-related industries. In terms of profits, the mainstay Electronic Devices and Components and Electronic and Electric Equipment were the main drivers, resulting in significant growth.
The company upwardly revised its full-year forecast at the time of 1H results announcement (October 29, 2021). The revised forecast calls for sales of JPY185.0bn (+11.8% YoY), operating profit of JPY6.5bn (+70.8% YoY), recurring profit of JPY6.3bn (+74.9% YoY), and net income attributable to owners of the parent of JPY4.4bn (+43.6% YoY). Hakuto credited the upward revision to several factors. In Electronic Devices and Components, it sees ongoing growth in demand for semiconductors primarily for use in automobiles, industrial equipment, and telecommunications equipment. Also, in Electronic and Electric Equipment, demand continues to be strong thanks to active capital expenditures tied to semiconductor manufacturing. On the profit front, the company projects a 70.8% YoY growth in operating profit due to sales increases expected in all segments and profitability improvement in Electronic Devices and Components.
Hakuto announced its medium-term management plan “Change & Co-Create 2024” on April 30, 2021. The company aims to become a distinguished technology trading company and chemical manufacturer to achieve sustainable growth and increase enterprise value over the medium to long term. In Electronic Devices and Components, it will streamline business operations, expand the solutions business, and strengthen its marketing capabilities, including in overseas markets. In Electronic and Electric Equipment, it will increase the sales share of new products and in-house products, as well as move into new business areas such as healthcare, environment, and energy. In Industrial Chemicals, the company will strengthen its base materials for cosmetics business and create new businesses. Its operating targets are consolidated operating profit of JPY5.0bn or higher, operating profit margin of 3.0% or higher, and ROE of 6.0% or higher in the final year of this plan, FY03/25.
Strengths and weaknesses
Shared Research views the company’s strengths as having a product lineup with varying business cycles, its status as an independent trading company, and the fact that many employees are science and engineering graduates. Weaknesses include Hakuto’s high dependence on semiconductor devices, challenges maintaining its current pace of growth, and a hollowing out of the domestic business.
Key financial data
Note: Figures may differ from company materials due to differences in rounding methods
Recent updates
Revisions to its earnings forecast and dividend forecast
Hakuto Co., Ltd. announced earnings results for 1H FY03/22; see the results section for details.
Hakuto Co., Ltd. announced revisions to its earnings forrecast and dividend forecast.
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
1H FY03/22 results (out October 29, 2021)
1H FY03/22 results (April–September 2021)
Gross profit: JPY11.7bn (+34.7% YoY)
SG&A expenses: JPY7.5bn (+7.0% YoY)
Operating profit: JPY4.2bn (+152.3% YoY)
Recurring profit: JPY4.2bn (+173.2% YoY)
Net income*: JPY2.8bn (+181.0% YoY)
*Net income attributable to owners of the parent
Electronics industry trends
Demand for electronics products increased, reflecting the growing trend of teleworking and people sheltering at home that have continued since FY03/21. However, the global shortage of semiconductors and other electronic components has intensified. Further, the COVID-19 pandemic disrupted the supply chains in some areas of Southeast Asia, and certain sectors such as the automobile industry were forced to cut back production as a result.
Company performance
The Electronic Devices and Components segment logged firm sales of semiconductor devices and general components for use in automotive and consumer/industrial equipment fields. In addition to steady increases in corporate production and capital expenditure, the sales growth was alsofueled by the inventory-building efforts of customer companies and the selling price hikes at the suppliers, implemented in response to the semiconductor shortage. In the Electronic and Electric Equipment segment, sales of printed circuit board (PCB) manufacturing equipment and vacuum equipment increased on the back of high levels of capital investment in the semiconductor industry. The Industrial Chemicals segment saw YoY top-line growth thanks to the recovery of operations at customer plants, where production had previously been reduced due to the pandemic in FY03/21, and increased sales of cosmetics-related products.
Electronic Devices and Components segment
Segment trends
Keeping the momentum from FY03/21, 1H sales of general electronic components such as ICs and connectors for PCs/tablets were up YoY, aided by expanded demand generated by people working from home and sheltering in the home during the pandemic. Sales of ICs for automotive use also grew YoY owing to the recovery in car production and inventory buildup at customer companies, in contrast to a one-off sales dip a year ago due to car production adjustments. On the profit front, segment profit margin rose 284.2% YoY, driven by higher sales and a favorable forex impact on foreign-currency-denominated exports.
Electronic and Electric Equipment segment
Segment trends
Sales of PCB manufacturing equipment and vacuum equipment increased, reflecting higher capital investment related to semiconductors. Segment profit was up 110.8% YoY on the sales growth of high-margin own-brand PCB manufacturing equipment.
Industrial Chemicals segment
Segment trends
Segment sales grew YoY owing to the recovery in operational activities at customer plants that had to cut production in FY03/21 due to the pandemic, and higher sales of cosmetics-related products. Segment profit was up 96.6% YoY thanks to an increase in the sales of high-margin cosmetics-related products.
Other business segment
Company forecast
Note: Figures may differ from company materials due to differences in rounding methods.
Company forecast for FY03/22 (Revised October 29, 2021)
*Net income attributable to owners of the parent
Full-year forecast revised upward
Hakuto upwardly revised its 1H forecast on July 30, 2021, but had left its full-year forecast unchanged. Then, at the time of its 1H results announcement (October 29, 2021), it revised up the forecast for the full year. The company credited the upward revision to several factors. In Electronic Devices and Components, it sees ongoing growth in demand for semiconductors primarily for use in automobiles, industrial equipment, and telecommunications equipment. Also in Electronic and Electric Equipment, demand continues to be strong thanks to active capital expenditures tied to semiconductor manufacturing. On the earnings front, the company revised up all profit lines on the outlook of higher sales expected in all segments and profitability improvement in Electronic Devices and Components. While the company has concerns over the potential rebound in COVID-19 cases and the prevailing semiconductor shortage, it revised up the full-year projections based on the current business environment.
Historical earnings forecast accuracy
Note: Figures may differ from company materials due to differences in rounding methods.
Company forecast tendencies
The company focuses on profitability, and eschews unreasonable orders. It also tends to give conservative forecasts. Consequently, judging from past estimates and actual results, its earnings tend to be generally stable, other than in unusual circumstances such as are described below, and regularly surpass the initial targets.
Difference between results and initial company forecasts
In FY03/13, profit undershot the initial forecast at all levels from the operating line down, because the recurrence of debt crises in Europe in 1H and economic slowdown in China caused a deceleration in capex. In FY03/16, sales and profits missed initial forecasts due to the negative impact on gross profit of a major customer’s withdrawal from the LED business and provision for inventory that accrued because of a slump in sales of smartphone and tablet components in the Chinese market. In FY03/17, profit undershot the initial forecast. The company revised down its full-year forecast, because steep forex rate fluctuations in Q1 (April–June 2016) eroded profits. Profits recovered somewhat in 2H, but not enough to attain initial forecasts.
Sales and profits exceeded the initial forecast in FY03/18, which the company described as conservative. Earnings made strong progress from Q1 onward, with brisk PCB and FPD manufacturing equipment compensating for delays in booking sales from high-margin projection stepper systems and absorbing sharp yen appreciation in Q4 (January–March 2018) as well. In FY03/20, sales and profits fell short of the initial forecast. Earnings were largely on track until Q3 (October–December 2019), but profits in particular ended far below the initial forecast, because the company wrote down the book value of inventory to reflect lower profitability in view of the expected impact of the spread of COVID-19 pandemic in Q4.
The company did not announce a full-year forecast for FY03/21, but posted sales and profit growth on the back of increased demand for parts and components for electronics.
Long-term outlook
New medium-term management plan “Change & Co-Create 2024” (out April 30, 2021)
Hakuto announced its medium-term management plan, “Change & Co-Create 2024,” on April 30, 2021. The company aims to become a distinguished technology trading company and chemical manufacturer to achieve sustainable growth and increase enterprise value over the medium to long term. In Electronic Devices and Components, it will streamline business operations, expand the solutions business and strengthen its marketing capabilities, including in overseas markets. In Electronic and Electric Equipment, it will increase the sales share of new products and in-house products, as well as move into new business areas such as healthcare, environment, and energy. In Industrial Chemicals, the company will strengthen its base materials for cosmetics businesses and develop new business areas.
Quantitative targets
The quantitative targets of the new medium-term plan are consolidated operating profit of JPY5.0bn or higher, operating profit margin of 3.0% or higher, and ROE of 6.0% or higher in FY03/25, the final year of this plan. Target sales based on these figures are estimated at JPY167.0bn, which is roughly the same as the company’s FY03/22 sales forecast. The FY03/25 OPM target of 3.0% is 0.6pp higher than the company’s FY03/22 forecast of 2.4% (estimate by Shared Research from disclosed data). The CAGR of consolidated operating profit from FY03/22 to the final year of the medium-term plan (FY03/25) is 7.7%.
Business structural reforms
The new medium-term plan calls for business structural reforms, with streamlining low-margin businesses and expanding high-margin businesses as a pillar. Reflecting on earnings performance through FY03/21, the company is aware that although sales have grown, operating profit has been weak. By business category, profitability has declined for semiconductor devices due to an increased number of product items and volume undermining efficiency amid the overall trend of universal and diversified products. Further, although components, equipment, and chemicals are profitable, business expansion has been hampered by insufficient use of outside resources and investment. In conclusion, Hakuto has identified the four main points for the medium-term plan.
Invest resources in high-margin businesses
Hakuto plans to focus on selected businesses from a profitability perspective, actively investing in profitable businesses while streamlining less profitable businesses through systematization. In addition to organic growth, the company plans to further accelerate business expansion by directing resources to profitable businesses through collaboration and M&A. Profitable businesses selected by the company are components, equipment, and chemicals. In components, Hakuto plans to strengthen marketing to expand new businesses. For equipment, the company will build a structure that helps customers add value by harnessing one-of-a-kind technologies. For chemicals, the company will provide solutions that leverage its core technologies and trading company function. The less profitable businesses that require efficiency improvements are semiconductor devices and businesses handled by overseas subsidiaries. The company aims to add more value to its services by honing its technical and consulting capabilities in semiconductor devices, while it is strengthening area-specific strategies (for Greater China and ASEAN) in the overseas business.
Create value by sharing information and technologies across business divisions
Hakuto’s business can be broadly categorized into semiconductor devices, components, equipment, and chemicals. However, real demand often overlaps multiple categories. The company therefore aims to promote communication and business collaboration between business divisions to strengthen the sharing of information and technologies across the four divisions. Examples are business proposals from one department in the electronics division to another, or a proposal by the chemicals division to the electronics division, which will help to make joint projects profitable. The company’s objective is to create a fifth earnings driver by launching new cross-organizational projects.
Collaborate with outside resources (M&A, open innovation)
The company has expressed its intention to bring in outside capabilities by promoting M&A and open innovation to strengthen its core technologies further and expand its business portfolio. Specifically, this entails an exchange of knowledge and information with external organizations such as universities and research institutes, upstream and downstream companies in commercial distribution, and overseas semiconductor trading companies, signifying a shift in approach from proprietary businesses to bringing in from outside the means to create new technologies. By adopting these methods, Hakuto plans to strengthen its ability to deliver solutions as a technology trading company that its competitors cannot provide.
DX strategy that speeds up business reforms
The company sees DX in two stages—back-end DX and front-end DX. Back-end DX is a major overhaul and streamlining of business processes across all businesses using marketing automation (MA) tools and robotic process automation (RPA). For front-end DX, the company aims for creating a new business model able to provide new value added that leverages its relationships with customers.
Reference: Medium-term management plan “E&C+2020” (out April 28, 2016)
Along with FY03/16 results, Hakuto announced a new medium-term management plan, E&C + 2020, which covered a period through FY03/21. The plan’s vision was to realize sustainable growth and to improve Hakuto’s corporate value by pursuing synergies between electronics and chemicals, and mixing new elements into the company’s technological strength and its unique high value-added business models. The plan had four basic policies: strengthening the profit base, actively cultivating new markets and businesses, strengthening the overseas businesses, and building a management system that drives growth. Numerical targets for FY03/21, the final year in the plan, were sales of JPY180.0bn, operating profit of JPY7.0bn, and ROE of 8% or higher.
Electronics
This is the main area of Hakuto’s operations and one in which the company can showcase its engineer-based technical support and its ability to respond to needs in areas from planning and design to production. The Electronic Devices and Components segment accounts for the largest portion of sales and while sales in recent years have expanded, segment profit has continued to decline. Amid such an environment, the company is expanding its lineup of ADAS (advanced driver assistance system) products in the automotive field and focusing its attentions on products with high added value, including RFID systems that improve logistics management through the use of wireless technology and module solutions that combine a number of electronic components. The company is also working to entrench digitization and systemization in order to reduce costs.
With the general nature of its products contributing to sluggish sales in the Electronic and Electric Equipment segment, the company aims to accelerate product development and the company’s expansion into new markets. More specifically, the company intends to expand its lineup of leading products, including the FINLASE laser processing system that can be used for the precision processing of automotive and industrial equipment components, and expand its lineup of medical devices after obtaining the necessary permits and licenses.
Chemicals
In the Industrial Chemicals segment, the company aims promote solutions-based sales and develop its customer base not only in the domestic petroleum, petrochemical, and paper and pulp markets where it already operates, but also in overseas markets with the strong potential for growth. Management is also focused on expanding the scale of its business by improving its product development capabilities.
Overseas business
Sales are expanding to Japanese and local businesses in the ASEAN community and the company also targets ADAS-related growth in Europe and the US. Management aims to expand its business by responding appropriately to changes in global supply chains brought on by the COVID-19 pandemic.
The business environment changed dramatically after the plan was formulated due to the global COVID-19 pandemic. In regard to progress toward achieving the targets of this medium-term plan, while the COVID-19 pandemic has contributed to changes in the operating environment, the company stated that, in addition to the aforementioned strategies, it was committed to following policies that are mindful of profitability, capital efficiency, and capital costs.
Business
Business description
Multi-business firm: from electronics trading to chemical manufacturing
Hakuto is a unique mini-conglomerate. It is both an electronics trading company and an industrial chemical manufacturer. The company’s electronics trading business started as a trading company founded in 1953 to import raw quartz for use in electronic devices. The industrial chemical manufacturing business started in 1960 to diversify the company’s operations and enhance stability.
What sets Hakuto apart is its technology-oriented structure, its three distinct business segments that provide a stable business foundation, and its diverse product offerings in growth markets. Although at heart an electronics trading company, Hakuto has an engineering division in each of its business areas. That allows the company to provide its customers with comprehensive technical services, including technical support from the planning, development, and design stages through the equipment installation, calibration, and maintenance stages. It also boasts of a strong cohort of field application engineers (FAEs) with technical expertise. Consequently, while firms operating in the electronics-related space tend to have large fluctuations in earnings performance, since Hakuto operates as more than just a trading company, the company’s earnings are relatively stable. In terms of sales, Hakuto is medium sized compared to other semiconductor trading companies, but its profit margins match those of the sector leaders (see the Profitability snapshot, financial ratios section).
Business model
Manufactures own brand and other products for sale
Hakuto is a trading company, but also a manufacturer in the Industrial Chemicals business. It sells own brand products in the Electronic and Electric Equipment business, which makes it unique among electronics trading companies.
Sales channel by product category
In the Electronic Devices and Components business, in addition to sales by the parent, sales are handled by consolidated subsidiaries Hakuto Enterprises Ltd. (Hong Kong), Hakuto Enterprises (Shanghai) Ltd., Hakuto (Thailand) Ltd., Hakuto Singapore Pte. Ltd., Hakuto Taiwan Ltd., Hakuto Trading (Shenzhen) Ltd., Hakuto America, Inc., and Hakuto Czech s.r.o.
In the Electronic and Electric Equipment business, in addition to sales by the parent, sales are handled by consolidated subsidiaries Hakuto Enterprises Ltd. (Hong Kong), Hakuto Enterprises (Shanghai) Ltd., Hakuto (Thailand) Ltd., and Hakuto Taiwan Ltd. Some electronic and electric equipment is bought from affiliate San Ei Giken Inc.
In the Industrial Chemicals business, in addition to sales of in-house manufactured products, the company also sells products manufactured by other companies. In other businesses, the company operates power generation system and consolidated subsidiary Hakuto A&L Co., Ltd. undertakes subcontracted operations on behalf of other group companies.
Unique sales system
Hakuto’s electronics trading business has a unique sales structure, which is a source of the company’s strengths. The two main features of the sales structure are as follows.
Organizational structure that helps to improve relationships with customers
First, Hakuto stands apart from other electronics trading companies in having a “vertical” system of teams that work with each supplier. At other trading companies, the norm is for marketers (who know products well and purchase them from suppliers) and salespeople (who find out customers’ needs and sell products to them) to work separately. At Hakuto, the same account managers fulfill both purchasing and sales roles, making it easier for them to keep track of market trends, the competitive environment, and customer needs, ensuring that orders placed with suppliers are highly in line with customer expectation.
Since each person is responsible for a particular product, a customer may have to deal with multiple salespeople. However, the company believes that this arrangement offers advantages overall, because it deepens relationships with customers. Hakuto does business with top-class companies as a result of this structure, which produces close relationships with both suppliers and customers. This is one of the company’s strengths, especially in the Electronic Devices and Components segment.
In addition, one of the initiatives of Hakuto’s medium-term plan aims to develop a flexible organizational structure that also incorporates a “horizontal” system of teams to strengthen marketing and streamline operations. Going forward, the company plans to utilize sales promotion tools and IT to improve profitability.
Hakuto performs profit management by division. Each division consists of multiple groups, with a structure that aims to increase profit as well as aggressively foster new businesses by combining groups that handle new products at the startup stage with those that handle products at the profit-generating stage.
Maintenance and service structure
Second, Hakuto’s maintenance and service structure is highly regarded. Starting with measuring instruments immediately after its founding, the company handles a diverse range of equipment. Customers feel confident sourcing equipment from Hakuto, which sets up and maintains its products (with a few exceptions). Many of the products sold by Hakuto are niche and specialized equipment. The company’s knowledge of the technologies used in such equipment is a point of difference for the company, boosting customer confidence and helping to raise profitability.
To ensure differentiated technologies are passed down to the next generation, Hakuto has an ongoing program of recruiting science graduates. The company also has a Technical Center in Isehara, Kanagawa Prefecture to hone its maintenance technologies. This is difficult for rivals to emulate, because acquiring expertise takes time. Engaging in unique sales methods while remaining mindful of profitability is one of Hakuto’s strengths in our view.
Risk management for purchased products
Hakuto has an internal rule regarding slow-moving inventory: Product inventory that is two years old must be fully written off. In FY03/20, the company applied this rule early to purchased inventory in anticipation of the risk of inventory moving slowly due to the COVID-19 pandemic putting the brakes on sales activities and socioeconomic activity in general. Consequently, Hakuto booked a loss on write-off, which made a substantial impact on the company’s profit. We note that the allowance will be reversed if the slow-moving inventory were to be sold.
Involvement in new fields to expand business
To maintain sustainable growth, the company continuously reviews and updates its product lineup. The company also collaborates with, and makes investments in, partner companies in fields with strong growth potential. Since FY03/13, the company has established alliances and capital tie-ups with the following partners:
Suppliers and customers
Hakuto has around 660 suppliers and 4,500 customers in Japan and overseas (company data). The number has remained stable over the years.
Recognizing the risk of overdependence on specific suppliers or customers whether in Japan or abroad, Hakuto does business with many companies. Its group companies around the world allow it to seamlessly market its products to customers both at home and abroad. The main customers are the group companies of Denso Corporation (TSE1: 6902), Panasonic Corporation (TSE1: 6752), Fujitsu Ltd. (TSE1: 6702), and Aisin Corporation (TSE1:7259). Denso is a major customer that accounts for more than 10% of Hakuto’s total sales.
Hakuto emphasizes profitability over the level of sales. Before commencing sales of a major new product, the company performs a review to examine profitability and identify risk factors before making the final decision. Hakuto sets its own credit parameters for each customer, and conducts business based on those parameters.
Thanks to this systematic approach, the level of doubtful receivables is low, not exceeding several million yen annually. The company says that this level remained relatively stable even during the 2008 global financial crisis.
Business segments
Electronics trading accounts for 90% of total sales; industrial chemicals manufacturing accounts for 10% of total sales
In FY03/21, the electronics trading business accounted for more than 90% of sales. Less than 10% were from industrial chemicals. The electronics trading business is comprised of two segments—Electronic Devices and Components, and Electronic and Electric Equipment. Within the Electronic Devices and Components segment are three divisions based on sales—semiconductor devices, general electronic components, and optical components. The Industrial Chemicals segment (the only segment categorized as the industrial chemical manufacturing business) comprises petroleum refinery and petrochemical, paper and pulp, and cosmetics base materials and other products.
Note: Percentages for sales, operating profit, and sales by region are calculated based on simple sums of the respective components.
Note: Figures may differ from company materials due to differences in rounding methods.
Note: Figures are before elimination of intersegment transactions.
Electronics trading
This is the company’s main profit driver. The company handles a range of products serving electronics manufacturers, from semiconductors and electronic components to manufacturing equipment. Electronic products are characterized by short development and life cycles, with manufacturers having diverse procurement needs for advanced components. Hakuto employs a sales team who possess technical knowledge, allowing it to precisely identify customer needs and then procure and supply high value-added products from around the world. The company’s solutions often include a design component. It acts as a development partner, linking its customers to suppliers and contributing to the development of state-of-the-art products matching customers’ individual needs.
Hakuto operates as more than just an import/export agent and marketer on commission. It is also a “technology trading company” that provides its customers with development support and equipment maintenance. Although at heart a trading company, its staff have technical expertise in several areas, allowing the company to provide its customers with comprehensive support. Other trading companies specializing in electronics tend to strengthen their technical support as part of their strategy to boost value-added. However, Hakuto’s key customers include major manufacturers, government agencies, and research institutes, and hence it has adopted this uncompromising approach to technical expertise as its business philosophy since its founding in 1953.
The following are overviews for each segment.
Electronic Devices and Components
This is Hakuto’s core business. In FY03/21, sales for the segment reached JPY135.4bn (81.5% of total sales) and segment profit came to JPY1.1bn (29.5%). However, with an operating profit margin of 0.8%, profitability was low compared to the other segments. Within the segment are the semiconductor devices, general electronic components, and optical components divisions. Of segment sales, semiconductor devices accounted for 74.6%, general electronic components for 19.1%, and optical components for 6.3%. The company does not disclose a breakdown of operating profit by division, but Shared Research believes that the profitability is strong in the general electronic components and optical components divisions.
Main customers are in the electronics, automotive, and infrastructure sectors. Applications cover a broad spectrum, ranging from consumer products to R&D and production. In semiconductor devices, the company supplies these customers with state-of-the-art semiconductors. The Electronic Devices division procures and supplies these customers with advanced semiconductor equipment, while the Electronic Components division does the same for high quality, high function mechanical components and modular products.
Just over 10% of the segment’s workforce is made up of field application engineers (FAEs), who not only provide technical support for the semiconductors handled but are also involved in design-related activities, such as proposing specific semiconductors to match a customer’s product development needs.
Electronic Devices
The main products handled are microprocessors, graphics semiconductors, microcontrollers, sound generator semiconductors, quartz devices, and other semiconductor devices. Main customer sectors include automotive, manufacturers of consumer equipment and manufacturers of telecom equipment.
The Electronic Devices division has the largest sales share of the Electronic Devices and Components segment. It handles devices for such applications as automobiles, consumer electronics, motors for consumer equipment and tablets. Because of the great number of products involved and large customer transactions, its contribution to sales is large, but price competition in the segment is also fierce. As a result, the profit margin is low compared to other segments. Nevertheless, at present sales are robust, especially for automobiles where the introduction of smart controls is proceeding at a torrid pace.
Major suppliers include such domestic and overseas semiconductor manufacturers as Asahi Kasei Electronics Co., Ltd. (wholly owned subsidiary of Asahi Kasei Corporation [TSE1: 3407]), Yamaha Corp (TSE1: 7951), STMicroelectronics NV (NYSE: STM), Cypress Semiconductor Corporation, which was acquired by Infineon Technologies (IFX, FWB), SP Media-Tec Co., Ltd. (TPE: 2454), Marvell Technology Group Ltd (NASDAQ: MRVL), and Seiko Epson Corp (TSE1: 6724). Hakuto has recently increased the commercial rights it holds for foreign-branded semiconductors. From FY03/20 onward, sales of Cypress Semiconductor products for automobile use have been increasing. Hakuto’s strategy appears to be that by expanding its product lineup it can achieve an optimal business balance while more dynamically responding to market needs. Consequently, in cultivating new products to sell, Hakuto actively seeks out products from major manufacturers while also working to increase sales of products from many small-scale manufacturers that have original technology and products.
Electronic Components
Main products include various kinds of connectors, LCD panels, RFID-related products, web meeting systems, photovoltaic panels, electrical components and materials, products to prevent electromagnetic interference (EMI), heat sinks, and optical components.
The Electronic Components division within the Electronic Devices and Components segment handles products covering a range of fields, from in-car devices to PCs, telecommunication, industrial, and office automation equipment. The company offers a broad product lineup and thus can cater to a wide range of electronics-related customer needs. Although the company does not disclose the division’s profit margins, Shared Research believes them to be higher than in electronic devices.
According to the company, it expects rapid growth for the optical components business, as a result of the technological innovations now occurring in growth fields like 5G and IoT. Since it has already been involved in these areas for around a decade, the company claims to have a leg up on other trading companies. Moreover, since the LCD panel business has been adversely impacted by the drying up of growth previously seen in the OA equipment market, Hakuto has shifted its focus to growth markets, such as the automobile sector, cultivating new markets such as the radio-frequency identification (RFID) business, and getting involved in new sectors.
Main suppliers of general electronic components are Foxconn Technology Group (TPE: 2354), Amphenol Corp. (NYSE: APH), Samtec, Inc. (unlisted), Innolux Display Corporation (TPE: 3481), and Impinj Inc. (NASDAQ: PI). Main suppliers of optical components are Viavi Solutions Inc. (NASDAQ: VIAV) and Lumentum Holdings (NASDAQ: LITE). Viavi and Lumentum were founded in August 2015 after the split of JDS Uniphase Corporation.
Electronic and Electric Equipment
Main products handled are PCB/IC package manufacturing equipment, vacuum devices and components, physics and water equipment, analytical instruments, and laser processing systems.
In this segment, Hakuto proactively works to acquire distribution agency rights from domestic and overseas manufacturers of equipment and analysis apparatus related to state-of-the-art technologies, while at the same time it deploys a sales team with technical expertise that provides support to meet the varying needs of customers concerning technological trends or R&D. In FY03/21, segment sales reached JPY19.0bn (+4.1% YoY) while segment profit came to JPY1.8bn (+96.7% YoY) with an operating profit margin of 9.3%.
Although the operating profit margin is high compared to the Electronic Devices and Components business, Shared Research thinks that is due to the value added for the technical services required to handle changes in specifications for calibrating and customizing equipment delivered to customers. Roughly 40% of the company’s staff working in this segment are technical service staff who offer total customer support for everything from defining the specifications to providing after-service.
The company develops and manufactures its own brand of products including IC package manufacturing equipment. The company’s Isehara Technical Center in Kanagawa Prefecture provides maintenance services and offers product demonstrations.
Industrial Chemicals
Main products handled are as follows:
Petroleum refinery and petrochemical: corrosion inhibitor, desalting agent, antifoulant, fluid catalytic cracking (FCC) catalyst
Pulp and paper: anti-foaming agent, deposit control agent, felt conditioner, pulp cleansing aid
Automotive: paint overspray detackifier
Water treatment and boiler: water treatment additives, ion exchange resin
Cosmetics: cosmetics base material (Alcasealan®), commissioned cosmetics development
In this segment, the Hakuto group acts both as a manufacturer of original products and a distributor for a number of domestic and overseas manufacturers. Hakuto also provides specialized cleaning services for petroleum and petrochemical plants and a process fluid recycling service, offering customers a package of solutions combined with product sales.
In FY03/21, segment sales were JPY11.0bn (-1.8% YoY), segment profit was JPY890mn (+6.2% YoY), and the operating profit margin was 8.1%.
The specialty factor for the products the company handles translates into a profit margin for this area above the company’s average. In its specialty chemicals manufacturer capacity, the company aims to help customers enhance productivity as well as improve environmental performance in such fields as petroleum refining, petrochemicals, pulp and paper, and automotive. Hakuto also uses microbial polysaccharide technology to manufacture and supply materials for cosmetics manufacturers on an OEM basis. Product development is carried out at Hakuto’s plant and research laboratory in Yokkaichi, Mie Prefecture. In January 2021, the company announced an absorption-type merger with Hakuto Life Science Co., Ltd., a wholly owned subsidiary that sells cosmetics and cosmetics raw materials, bringing Hakuto Life Science under direct management to expand its business and improve efficiency.
Sales by region
Hakuto is expanding overseas operations in conjunction with that of its domestic customers. Overseas sales are increasing. Since 1973, the company has established offices in Hong Kong, Taiwan and Singapore, and has developed independent businesses to match the needs of local markets. According to the company, around 50% of sales of these overseas operations are from local business, and profit margins are higher than in Japan. There are also many products for which Hakuto’s commercial rights are only valid for overseas offices. In the future, cultivating overseas markets will be a key management priority.
Impact of exchange rates
To hedge forex risks, the company uses forward exchange contracts and other instruments. Basically, the company hedges for both purchases and sales by using forward exchange contracts (for both purchases and sales of foreign currency) to lock in a fixed rate on the settlement dates. In its currency management, the company has adopted an in-company policy of avoiding trying to time the currency market, and instead hedges in order to ensure profits from its product sales transactions. It therefore enters into foreign exchange contracts with the aim of avoiding forex market fluctuations.
As shown in the table below, within the parent’s results—which constitute a major portion of the group’s results—purchases from overseas account for almost half of all purchases. The company has 11 overseas subsidiaries in Asia. Financial statements for each region are prepared in local currency and subsequently converted to yen for the preparation of consolidated statements. Consequently, the exchange rate used at the time of conversion has an impact on the subsequent consolidated statements.
Main group companies
The Hakuto group comprises the parent and group companies (12 subsidiaries and two affiliates). The group spans Japan and the Asia region (China, Taiwan, Singapore, and Thailand).
The company’s major consolidated subsidiaries, as of FY03/21, are as follows.
Profitability snapshot, financial ratios
*Established after merger of MACNICA, Inc. and Fuji Electronics Co., LTD, in April 2015. Prior figures are for MACNICA.
**Established after merger of UKC Holdings Corporation and Vitec Holdings Co., Ltd. in April 2019. Prior figures are for UKC Holdings Corporation.
Maintaining stable profit levels in the semiconductor and electronics fields since 2008
In the 2000s, the semiconductor industry saw brisk performance amid fast-growing demand. However, the operating environment changed in fall of 2008 with the onset of the global financial crisis. In 2H 2009, sales across many sectors—including PCs, mobile phones, and automotive—turned stagnant, and the operating performance of semiconductor-related companies deteriorated rapidly. Although there were signs of a recovery in 2011, the impact of sluggish European economies and other factors meant a full recovery did not ensue.
Given these market conditions, the performance of semiconductor-related companies has fluctuated greatly, and industry realignment and consolidation has been an ongoing feature across the globe. In the electronics trading sector, rapid changes in customer performance in the consumer electronics and mobile phone industries has led to large performance fluctuations, and some trading companies have seen performance slide, forcing many companies to restructure.
In this environment, Hakuto has maintained relatively stable profits compared with the industry. Hakuto’s sales are in the mid-range of the top 30 electronics trading companies in Japan. However, operating profit on an absolute basis compares favorably with other companies in the top 10. In terms of OPM, Hakuto consistently ranks high.
Shared Research believes that the stability of Hakuto’s revenues can be attributed to two factors. It has a balanced business model not limited to one particular business. In addition, it employs many technical staff, and can provide technical services that differentiate it from competitors (see Strategy section).
Market and value chain
The semiconductor device business is at the core of Hakuto’s operations. Sales by this business account for around half of overall sales. As such, semiconductor market trends are an important factor to consider when looking at Hakuto’s earnings.
World Semiconductor Trade Statistics (WSTS) was unable to have a spring forecast meeting in 2021 due to the COVID-19 situation (spring and fall 2020 meetings were also canceled). WSTS market forecasts to date have been based on member company forecasts that reference WSTS semiconductor market statistics, while also taking into account trends at the macroeconomic level and among mainstay electronic products. However, once again the current forecast forgoes this process and is instead based on the average of the growth forecasts made by the member companies.
World semiconductor market trends
On a calendar-year basis, the global semiconductor market grew 6.8% YoY in 2020. Several positive factors for the semiconductor market canceled out the impact of the slowdown in the global economy amid the COVID-19 pandemic. Demand for PCs and tablets increased during the pandemic, because people spent more time at home, and the share of 5G smartphones also increased. As a knock-on effect, data transmission volume on the Internet increased sharply, which led to greater demand for capital expenditure for cloud services and other infrastructure.
The WSTS estimates that the market will grow 19.7% YoY in 2021. Economic activity began to recover slowly in the latter half of 2020 and semiconductor demand has been expanding across a broad range of applications, especially automotive. There are also expectations of economic activity returning to normal as countries make progress with their vaccination programs. The WSTS forecasts double-digit market growth in 2021 for the first time since 2018, because global economic activity is returning to pre-pandemic normal levels albeit slowly and the factors driving the semiconductor market in 2020 still remain. The WSTS estimates that the market will continue to grow by 8.8% YoY in 2022, because there are no factors likely to cause a sharp slowdown of the currently robust semiconductor demand and a downturn following strong market conditions in 2021 seems unlikely.
The WSTS forecast for 2021 estimates the discrete semiconductor market at USD28.2bn (+18.3% YoY), the optoelectronics market at USD44.4bn (+9.8% YoY), the sensors market at USD18.3bn (+22.4% YoY), and the IC market as a whole at USD436.4bn (+20.8% YoY). Within the IC market, the WSTS forecast estimates gains of 31.7% YoY in the memory market, 17.0% YoY in the logic market, 8.1% YoY in the micro market, and 21.7% in the analog market. For 2022, the WSTS forecast estimates the discrete semiconductor market at USD29.2bn (+3.8% YoY), the optoelectronics market at USD46.7bn (+5.2% YoY), the sensors market at USD19.3bn (+5.4% YoY), and the IC market as a whole at USD478.2bn (+9.6% YoY). Within the IC market, the WSTS forecast estimates gains of 17.4% YoY in the memory market, 6.2% YoY in the logic market, 3.8% YoY in the micro market, and 5.1% in the analog market.
Japanese semiconductor market trends
The Japanese semiconductor market narrowed 0.6% YoY on a local-currency basis in 2020 to about JPY3.9tn.
The WSTS forecast estimates the Japanese semiconductor market turning positive on a local-currency basis in 2021, growing 11.8% YoY to about JPY4.4tn. The WSTS forecast for 2022 calls for 5.4% YoY growth to about JPY4.6tn.
Barriers to entry
The trading business does not require large-scale plant or facilities. However, the core sales broking operations need networks of suppliers and customers. In recent years, specialty trading firms undertake development support activities for customers, and this requires the accumulation of technical expertise. Although limited entry is possible for new entrants where the trading business generates synergies with the entrant’s main business, full-scale new entry is seen as difficult.
According to the company, Japanese suppliers are moving further toward a fabless business model (smaller sales and production functions) to reduce fixed costs and enable greater focus on product development. Hakuto is aware that this means increasing need for trading companies with technical knowledge and understanding. However, when a product’s sales volume increases, some suppliers may switch to direct sales to end-customers rather than dealing with a trading company. In such cases, Hakuto can appeal to suppliers by emphasizing that its highly honed market prowess adds value by developing new customers and promoting new products—functions the supplier could not handle on its own.
Competition
Semiconductor trading companies can be divided into manufacturer-affiliated firms and independent firms.Since the range of products handled is diverse, each firm tends to have its own distinct characteristics. However, manufacturer-affiliated firms tend to rely heavily on their parent’s products. According to Hakuto, Ryoden Trading Co Ltd has a similar business model since it not only has a semiconductor business but handles equipment and has production operations. However, Ryoden’s sales are largely dependent on parent Mitsubishi Electric Corp (TSE1:6503).
Since Hakuto is independent, it has diverse suppliers and rarely sees duplications in the products it handles between multiple brands. Major independent semiconductor trading companies include Macnica Fuji Electronics Holdings Inc. (TSE1: 3132), Marubun Corporation (TSE1: 7537) and Kaga Electronics Co., Ltd. (TSE1: 8154). Kaga has similarities to Hakuto through its diverse businesses. However, Shared Research thinks that Kaga has diversified into a broad array of businesses including golf and food, and has few businesses that directly compete with Hakuto. The distinctive characteristics of domestic semiconductor trading companies are summarized below.
*In April 2015 Macnica Inc. merged with Fuji Electronics Co., Ltd. after Macnica Inc. had been delisted in March 2015.
**In April 2019 UKC Holdings Corporation merged with Vitec Holdings Co., Ltd.
With regard to overseas semiconductor trading firms, major distributors include Avnet, Inc. (NASDAQ: AVT) and Arrow Electronics, Inc. (NASDAQ: ARW).
Strategy
The company is conscious of the need to maintain stable earnings in existing businesses while constantly being on the lookout for new commercial rights opportunities. It recognizes the importance of building overall group profit. For this reason, it sees the need to maintain a growth balance across all four businesses—components, devices, equipment and chemicals—while avoiding bias toward one business. To realize this goal, the company has formulated the following differentiation strategies:
Balanced management
Hakuto’s operations are not concentrated in any particular field, but spread over a range of businesses, underpinning stable management. Suppliers and customers are not dominated by a single firm, and trading takes place with a large number of companies. The company does not rely solely on the electronic component field, but spans electronic and electric equipment, and industrial chemicals. If business is concentrated on a single field or industry, a company’s performance is greatly affected by the performance of the sector as a whole. Since Hakuto operates in three segments, each with different business cycles, it can maintain a stable balance in sales and profits. In this respect, Hakuto is a rare case in the industry for its diversity of suppliers and products.
Technical services
Despite being a trading company, Hakuto employs a large number of technical staff. The company collaborates with suppliers to provide customers with technical support.
In the Electronic Devices and Components segment, field application engineers (FAEs) not only provide technical support for semiconductors but undertake design activities by proposing semiconductors that match customers’ product development needs. In the Electronic and Electric Equipment segment, FSEs provide total support encompassing equipment customization, installation, calibration and maintenance. The company carries out equipment maintenance and product demonstrations in its Isehara Technical Center (maintenance cost: JPY50mn per year) in Kanagawa Prefecture. According to the company, it has technical service capabilities on par with a manufacturer, one of Hakuto’s competitive advantages.
Strengths and weaknesses
Strengths
Product lineup with varying business cycles
Company founder Shigeo Takayama entered the industrial chemicals business at an early stage to avoid over-dependence on a single sector. His move paid off, and the company’s present business spans four product categories of electronic devices, electronic components, electronic and electric equipment, and industrial chemicals. Many of Hakuto’s competitors have a high dependence on semiconductor devices and see large fluctuations in operating performance. In contrast, Hakuto’s operating results are broadly stable due to the varying business cycles of its segments.
Independent trading company
Trading companies specializing in semiconductors are broadly divided into manufacturer-affiliated firms and independent firms. Manufacturer-affiliated firms have backup from the parent company, but handle a limited range of products. This indirectly narrows the customer base, making performance particularly susceptible to the impact of supplier and customer performance. Hakuto is not affected by an equity relationship with its suppliers, and has a high level of flexibility in dealing with suppliers and customers. Hakuto also has its finger on the pulse of the industry through relationships with many manufacturers and customers.
Many employees are science and engineering graduates
Hakuto sees itself as a technology-driven trading company. This status is supported by the recruitment of many science and engineering graduates. According to the company, although it has recently increased the ratio of humanities graduates, 70-80% of new recruits are still from a science or engineering background. By having many science and engineering graduates in sales roles, there is more technical understanding between employees, and new recruits make rapid progress in on-the-job training.
Weaknesses
High dependence on semiconductor devices
Even if the ratio is low compared with peers, semiconductor devices account for more than half of the company’s sales. Responding to any decline in Japan’s electronics manufacturing sector will be a key challenge.
Challenge maintaining growth pace
Hakuto’s business model is based on building up a large number of niche products. For this reason, considerable effort is needed to maintain a high growth rate by adding a large number of new businesses. Although the business is buttressed by staff with a deep technical understanding, competitors are also trying to add more value by boosting technical capabilities. In addition, the ratio of employees with science and engineering backgrounds is gradually falling, so one of the longer-term challenges will be to maintain the company’s human resource edge.
Hollowing out of the domestic business
The company’s trading business customers are moving production to Asia to be closer to future consumer markets, and Hakuto is moving more of its business to Asia in tandem with this trend. However, the more this trend advances, the greater the risk of a hollowing out of domestic operations. For this reason, the company is devoting considerable energy to finding better ways to serve domestic customers, including acquisition of commercial rights.
Historical financial statements
Income statement