The Sinanen Holdings Group (“Sinanen HD” or “the company”) is one of Japan’s major fuel trading houses, ranking sixth by sales among the listed fuel trading companies as of FY03/21. It handles a variety of fuels and petroleum products, with the sales of liquified petroleum (LP) gas*1 and kerosene*2 at the center of its operations. In the renewable energy space, the company is starting a wind power business using a new type of micro wind turbine, and also plans to launch a large wind farm in South Korea in a joint venture with a local company. In the non-energy domain, another focus area, it operates a bike sharing business, manufactures antimicrobial agents, and manages buildings. Established in 1927, the company originally made and sold briquettes*3 and briquette balls*4. Many of the fuel retailers among its customers also trace their roots back to these products.
LP gas: Sinanen HD sells LP gas mainly in eastern Japan, and the Hokuriku, Chubu, and Kansai regions. The number of its end users total roughly 700,000. Wholesale sales make up about three quarters of the company’s total sales volume in this business, with the high-margin direct sales to end users (retail sales) accounting for the remaining quarter. The company procures LP gas from suppliers such as ENEOS Globe, Astomos Energy, and Gyxis. Its wholesale customer base consists of several thousand local fuel retailers (LP gas and kerosene are often sold together to the same retailers). Among the customers of its retail sales channel are regular households, restaurants, and factories.
Petroleum products: The company sells petroleum products across Japan, mainly focusing on kerosene sales, which account for about 60% of the total sales volume. Gasoline and diesel oil sales have smaller shares, making up about 10% each. Petroleum products are sourced from companies such as Cosmo Oil Marketing, ENEOS, and Idemitsu Kosan, and are sold primarily to home improvement stores, gas stations, transport companies, and construction companies.
Electric power: The company has been building its electricity business in earnest since FY03/17. As an electricity retailer, it sells high-voltage electricity to businesses and low-voltage electricity to households. The main suppliers are power generators including the electric power majors; procurement from Japan Electric Power Exchange (JEPX) is limited. Electricity and LP gas are bundled for the majority of the company’s utility contracts with households, a strategy that has contributed to a reduction in cancellations rates.
Sinanen HD’s recurring profit margin was 1.1% in FY03/22. The low margin is attributable to a number of factors, one of which is the nature of the petroleum product wholesale business (generally, a low margin business). Additionally, looking at the company’s LP gas sales business, high-margin direct sales make up a smaller share of the total compared to the sales mix at its peers. The non-energy ventures also have yet to turn a profit as the bike sharing business is still in the investment phase. Improving profitability across the board is therefore a pressing management challenge for Sinanen HD.
In the short term, the company’s earnings are significantly susceptible to demand shifts caused by temperature changes (i.e., warm winters and cold waves), although they are not very vulnerable to economic cycles. Single-year and quarterly performances are affected by fluctuations in raw material prices, such as the price of crude oil and the propane contract price, but since procurement costs are retroactively adjusted based on the gas-cost adjustment system, margins are stable when averaged out. In FY03/21, operating profit rose 19.6% YoY, with all segments marking YoY operating growth. While the drop in selling price of fuels caused sales to fall YoY, curtailment of SG&A expenses in the Energy Wholesale/Retail and Related business (B2C segment), flexible procurement strategy in the Energy Solution business (B2B segment), and strong performance in the antimicrobial and systems businesses (Non-energy/Global segment) have contributed to earnings.
Sinanen HD regards the renewable energy business (B2B segment) as its next growth driver. In May 2020, it announced a plan to participate in a wind power project in South Korea. The company has a 65.3% stake in a joint venture it established with a local company, and plans to build a wind farm with total output capacity of 90MW. While the plan calls for a total investment of JPY22.9bn, the business is expected to deliver stable earnings and high profitability, since the electricity generated by the plant will be sold to a local power company at a long-term fixed price based on South Korea’s Renewable Portfolio Standard program (RPS*). The project is currently awaiting approval for development. The company aims to invest in several other renewable energy project overseas going forward. In Japan, it also launched a new business involving a new type of micro wind turbine. It began a pilot program in Saitama, and is working toward commercialization. *RPS: a program that requires power companies to procure a certain percentage of their electricity from renewable energy
Since the energy businesses have matured in recent years, Sinanen HD is directing more focus on the non-energy operations (Non-energy/Global segment) as a strategic area. Its activities in this domain cover a broad range of services and products including bicycle sales, bike sharing services, wood-based recycled fuel, antimicrobial agents, building management, and shared office services. According to the company, building management and bicycle sales have the highest sales mix in the segment. The building management operation encompasses cleaning, installation/repairs of equipment, and restoration of properties to their original state, as well as providing operational support to hospitals and funeral halls. With a view to supplying one-stop maintenance services targeting housing complexes, the company has been expanding its services across the Kanto region. In the bicycle business, the company operates 36 Daisharin-brand retail stores (as of end-March 2021) in the Tohoku and Kanto regions.
Sinanen HD is currently on its second medium-term management plan with achievement goals set for FY03/23. As a quantitative objective, the plan calls for the creation of a business structure that enables stable ROE of 6.0% or above (versus recent five-year average of 5.1%). As qualitative targets, the plan looks for 1) an improvement in capital efficiency (by improving the efficiency of existing businesses, selling off low-efficiency assets, and withdrawing from businesses with low-efficiency assets), 2) investments to drive sustainable growth (via acquisitions of commercial rights in the LP gas business, M&A in the building management business, aggressive investments in the bike sharing and the renewable energy businesses, and enhancements of core systems), and 3) a transformation of employee attitudes, practices, and conduct.
*¹LP gas: A gas used as a fuel for water heaters and gas stoves in households and business facilities. While city gas is supplied through gas pipelines, LP gas is filled into gas cylinders in liquified form and delivered to customers in trucks.
*²Kerosene: A petroleum-based fuel used in heating appliances such as oil stoves, oil fan heaters, and water heaters. It is mainly sold through retail channels such as fuel shops, rice stores, home improvement stores, and gas stations.
*³Briquettes, *⁴briquette balls: A household-oriented fuel derived from coal that was used before oil stoves became popular. It was used in cooking appliances such as kitchen stoves and heating appliances such as bed warmers.
Earnings trends
In FY03/22, the company recorded sales of JPY289.3bn, operating profit of JPY2.5bn, recurring profit of JPY3.3bn, and net income attributable to owners of the parent of JPY2.5bn. Annual dividends per share were JPY75.00. The company adopted the Accounting Standard for Revenue Recognition in FY03/22; no previous-year figures are provided for YoY comparison.
The company forecast for FY03/23 calls for sales of JPY310.0bn (+7.1% YoY), operating profit of JPY2.5bn (+0.8% YoY), recurring profit of JPY2.8bn (-14.4% YoY), net income attributable to owners of the parent of JPY2.9bn (+16.6% YoY), and annual dividends per share of JPY75.00. The sales figure assumes that crude oil and propane contract prices, which are at their highest levels since 2014, will remain at current levels. Ongoing IT investments from the previous fiscal year are expected to slow profits. Even so, the company anticipates a YoY rise in operating profit, due to passing on higher purchasing costs to customers and a contribution to profits from the bike sharing business.
Strengths and weaknesses
Shared Research believes Sinanen HD’s strengths are 1) the presence of roughly 90 fuel supply points (Kerosene Centers and Oil Squares) across Japan and a sales network of over 1,000 fuel retailers, 2) sales mix centered on LP gas and kerosene that creates a barrier to entry in cold regions, and 3) efficient facility/equipment utilization thanks to the distribution alliance with other LP gas operators.
The company’s weaknesses are 1) low profit margin in B2B due to focus on the wholesale channel in petroleum product sales, and 2) low profit margin in B2C due to small share of retail sales in the LP gas business.
Key financial data
Income statement
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
FY03/23
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Est.
Sales
274,027
310,102
281,375
209,112
218,242
244,370
244,567
237,036
217,122
289,340
310,000
YoY
0.7%
13.2%
-9.3%
-25.7%
4.4%
12.0%
0.1%
-3.1%
-8.4%
-
7.1%
Gross profit
27,551
28,866
28,136
29,215
29,874
31,598
30,272
32,772
33,840
34,406
YoY
-1.3%
4.8%
-2.5%
3.8%
2.3%
5.8%
-4.2%
8.3%
3.3%
-
Gross profit margin
10.1%
9.3%
10.0%
14.0%
13.7%
12.9%
12.4%
13.8%
15.6%
11.9%
Operating profit
2,347
1,688
1,703
3,504
2,934
3,348
1,771
2,454
2,935
2,480
2,500
YoY
-10.7%
-28.1%
0.9%
105.8%
-16.3%
14.1%
-47.1%
38.6%
19.6%
-
0.8%
Operating profit margin
0.9%
0.5%
0.6%
1.7%
1.3%
1.4%
0.7%
1.0%
1.4%
0.9%
0.8%
Recurring profit
3,005
2,513
2,629
4,274
3,424
3,948
2,158
2,203
3,023
3,272
2,800
YoY
-7.3%
-16.4%
4.6%
62.6%
-19.9%
15.3%
-45.3%
2.1%
37.2%
-
-14.4%
Recurring profit margin
1.1%
0.8%
0.9%
2.0%
1.6%
1.6%
0.9%
0.9%
1.4%
1.1%
0.9%
Net income
1,142
635
1,423
2,219
2,584
2,867
1,588
2,989
2,717
2,487
2,900
YoY
-27.2%
-44.4%
124.1%
55.9%
16.4%
11.0%
-44.6%
88.2%
-9.1%
-
16.6%
Net margin
0.4%
0.2%
0.5%
1.1%
1.2%
1.2%
0.6%
1.3%
1.3%
0.9%
0.9%
Per-share data (split-adjusted; JPY)
Issued shares at year-end('000 shares)
75,752
75,752
75,753
75,753
15,151
13,047
13,047
13,047
13,047
13,047
EPS (JPY)
17.9
9.9
22.2
34.6
200.3
231.1
146.0
274.8
249.8
228.3
265.9
EPS (fully diluted)
-
-
-
-
-
-
-
-
-
-
Dividend per share (JPY)
15.0
15.0
15.0
15.0
100.0
75.0
75.0
75.0
75.0
75.0
75.0
Book value per share (JPY)
721
716
734
749
3,903
4,307
4,324
4,426
4,426
4,922
Balance sheet (JPYmn)
Cash and cash equivalents
17,253
21,195
22,102
20,183
18,661
7,548
9,073
7,771
10,081
10,245
Total current assets
53,717
63,011
54,298
50,091
58,418
46,680
45,300
44,323
49,625
61,798
Tangible fixed assets
20,035
20,582
22,747
29,468
29,882
30,141
28,635
30,277
30,914
28,102
Investments and other assets
9,670
9,897
10,228
10,481
11,334
11,630
12,081
10,858
11,886
11,636
Intangible fixed assets
3,245
2,379
2,047
2,943
5,201
5,161
5,095
5,151
4,408
3,371
Total assets
86,668
95,870
89,322
92,985
104,836
93,614
91,112
90,611
96,834
104,908
Short-term debt
3,750
7,125
8,564
9,339
13,006
6,137
5,182
5,945
2,616
1,249
Total current liabilities
32,979
42,007
33,267
31,369
42,444
35,152
33,228
31,434
35,507
42,377
Long-term debt
3,009
2,522
3,202
7,773
7,283
6,959
6,334
6,399
5,125
4,280
Total fixed liabilities
7,676
7,983
8,978
13,442
11,706
11,598
10,495
10,354
9,421
8,149
Total liabilities
40,656
49,990
42,246
44,812
54,151
46,750
43,724
41,789
44,929
50,527
Shareholders' equity
45,971
45,828
47,065
48,162
50,672
46,850
47,025
48,136
51,202
53,688
Total net assets
46,011
45,880
47,075
48,173
50,685
46,863
47,388
48,821
51,905
54,381
Total interest-bearing debt
5,970
8,843
10,466
15,216
17,986
10,658
9,340
10,339
5,912
3,886
Cash flow statement(JPYmn)
Cash flows from operating activities
2,422
4,076
3,775
3,356
2,449
5,433
5,214
569
7,947
1,133
Cash flows from investing activities
-2,889
-2,764
-2,043
-4,020
-6,268
-1,282
-1,302
-1,094
36
2,154
Cash flows from financing activities
973
1,808
-52
-997
2,113
-15,227
-2,256
-778
-5,504
-3,120
Financial ratios
ROA (RP-based)
3.5%
2.8%
2.8%
4.7%
3.5%
4.0%
2.3%
2.4%
3.2%
3.2%
ROE
2.5%
1.4%
3.1%
4.7%
5.2%
5.9%
3.4%
6.3%
5.5%
4.7%
Financial leverage (equity multiplier)
1.89
2.09
1.90
1.93
2.07
2.00
1.94
1.88
1.89
1.95
Total asset turnover
3.21
3.40
3.04
2.29
2.21
2.46
2.65
2.61
2.32
2.87
Net margin
0.4%
0.2%
0.5%
1.1%
1.2%
1.2%
0.6%
1.3%
1.3%
0.9%
Source: Shared Research based on company data Note: The company adopted the new Accounting Standard for Revenue Recognition from FY03/22. Therefore, we have not provided a YoY comparison for FY03/22.
Segments
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Sales
274,027
310,102
281,375
209,112
218,242
244,370
244,567
237,036
217,122
289,340
YoY
0.7%
13.2%
-9.3%
-25.7%
4.4%
12.0%
0.1%
-3.1%
-8.4%
-
Retail/Wholesale Energy & Related (B2C)
116,607
70,202
69,115
83,465
77,679
72,271
62,994
73,152
YoY
-
-39.8%
-1.5%
20.8%
-6.9%
-7.0%
-12.8%
-
% of total
41.4%
33.6%
31.7%
34.2%
31.8%
30.5%
29.0%
25.3%
Energy Solution (B2B)
157,990
132,277
141,908
148,687
152,662
149,141
135,998
197,715
YoY
-
-16.3%
7.3%
4.8%
2.7%
-2.3%
-8.8%
-
% of total
56.1%
63.3%
65.0%
60.8%
62.4%
62.9%
62.6%
68.3%
Non-energy/Global
6,684
6,558
7,054
12,029
14,032
15,415
17,781
18,097
YoY
-
-1.9%
7.6%
70.5%
16.7%
9.9%
15.3%
-
% of total
2.4%
3.1%
3.2%
4.9%
5.7%
6.5%
8.2%
6.3%
Adjustments
93
74
164
187
193
208
347
374
Operating profit
2,347
1,688
1,703
3,504
2,934
3,348
1,771
2,454
2,935
2,480
YoY
-10.7%
-28.1%
0.9%
105.8%
-16.3%
14.1%
-47.1%
38.6%
19.6%
-15.5%
Operating profit margin
0.9%
0.5%
0.6%
1.7%
1.3%
1.4%
0.7%
1.0%
1.4%
0.9%
Retail/Wholesale Energy & Related (B2C)
2,996
3,327
1,537
2,011
308
766
963
1,039
YoY
-
11.0%
-53.8%
30.8%
-84.7%
148.7%
25.7%
-
Operating profit margin
2.6%
4.7%
2.2%
2.4%
0.4%
1.1%
1.5%
1.4%
% of total
116.9%
95.1%
97.0%
88.7%
57.2%
49.9%
45.9%
57.2%
Energy Solution (B2B)
-607
68
225
175
414
819
892
573
YoY
-
-
230.9%
-22.2%
136.6%
97.8%
8.9%
-
Operating profit margin
-
0.1%
0.2%
0.1%
0.3%
0.5%
0.7%
0.3%
% of total
-23.7%
1.9%
14.2%
7.7%
77.0%
53.3%
42.5%
31.6%
Non-energy/Global
173
105
-178
79
-184
-50
243
201
YoY
-
-39.3%
-
-
-
-
-
-
Operating profit margin
2.6%
1.6%
-
0.7%
-
-
1.4%
1.1%
% of total
6.8%
3.0%
-11.2%
3.5%
-34.2%
-3.3%
11.6%
11.1%
Adjustments
-665
-203
-859
4
1,349
1,082
1,233
918
836
665
Source: Shared Research based on company data
Recent updates
Company announces a revision of full-year earnings forecast
2022-05-11
Sinanen Holdings Co., Ltd. announced a revision to its full-year FY03/22 forecast.
Operating profit: JPY2.4bn (-18.2% YoY; JPY2.1bn; revised upward by JPY300mn)
Recurring profit: JPY3.2bn (+5.9% YoY; JPY1.7bn; revised upward by JPY1.5bn)
Net income attributable to owners of the parent: JPY2.4bn (-11.7% YoY; JPY1.5bn; revised upward by JPY900mn)
Reasons for the revision
The upward revision to the sales forecast was due to a significant increase in selling prices following the sharp rise in crude oil and propane contract prices.
At the operating profit level, the forecast revision reflects strong kerosene sales, the mainstay of the Energy Solution business, and diesel fuel sales, which the company focused on, despite sluggish sales in the bicycle business. Steady sales of Power CIS in the systems business also contributed to the greater-than-expected earnings.
At the recurring profit level, the forecast revision reflects the delay in the planning of a large onshore wind power generation project in South Korea, which should push back the accompanying non-operating expenses to the next fiscal year or later. The company also expects to record a gain on valuation of derivatives due to risk hedging efforts against fluctuations in crude oil prices and other factors.
At the net income level, the revised forecast takes into account the impact of an extraordinary gain of JPY900mn that is expected to be recorded as a result of the transfer of fixed assets announced in February 2022.
Company announces property sale, related extraordinary gain
2022-03-01
On February 28, 2022, Sinanen Holdings Co., Ltd. announced that it had decided to sell certain property holdings. The sale, detailed below, is aimed at both improving its capital efficiency and strengthening its financial position.
Overview of properties sold
Description
Book value
Gain on sale (estimate)
Current use
Buildings and 1,889.15sqm of land located in Honcho, Kawaguchi City, Saitama Prefecture
JPY1.3bn
JPY900mn
Seniors residential facility
Buildings and 967.93sqm of land, also located in Honcho, Kawaguchi City, Saitama Prefecture
Multi-family housing
The sales price of the two properties being sold are not being disclosed separately at the request of the buyer, but the company has said that the sale was made at a fair price that reflected the current market value. The estimated gain by the company on the sale is equal to the sales price less the current book value and related transaction costs.
The buyer is a domestic company but does not wish to be identified.
The sales contract was signed and the property transfer was made on February 28, 2022.
As a result of this property sale, the company said it expects to book an extraordinary gain of roughly JPY900mn in FY03/22. The company is still in the process of putting together new estimates for full-year results, which will include the impact of not just the property sale but other factors as well, and has promised to make a timely announcement of its revised estimates should the situation require.
Trends and outlook
Quarterly trends and results
Cumulative
FY03/20
FY03/21
FY03/22
FY03/22
(JPYmn)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
% of Est.
FY Est.
Sales
47,814
92,541
157,483
237,036
39,267
79,789
138,969
217,122
49,359
100,518
182,719
289,340
100.1%
289,000
YoY
-3.6%
-5.6%
-6.2%
-3.1%
-17.9%
-13.8%
-11.8%
-8.4%
-
-
-
-
33.1%
Gross profit
7,977
14,767
22,483
32,772
8,324
15,493
23,980
33,840
7,960
14,933
23,702
34,406
YoY
8.3%
7.0%
3.8%
8.3%
4.4%
4.9%
6.7%
3.3%
-
-
-
-
Gross profit margin
16.7%
16.0%
14.3%
13.8%
21.2%
19.4%
17.3%
15.6%
16.1%
14.9%
13.0%
11.9%
SG&A expenses
7,470
14,610
22,142
30,318
7,515
14,525
22,365
30,905
7,543
14,975
23,100
31,926
YoY
9.6%
10.4%
7.8%
6.4%
0.6%
-0.6%
1.0%
1.9%
-
-
-
-
SG&A ratio
15.6%
15.8%
14.1%
12.8%
19.1%
18.2%
16.1%
14.2%
15.3%
14.9%
12.6%
11.0%
Operating profit
507
156
340
2,454
809
968
1,615
2,935
417
-42
602
2,480
103.3%
2,400
YoY
-8.0%
-72.3%
-69.3%
38.6%
59.6%
520.5%
375.0%
19.6%
-
-
-
-
-18.2%
Operating profit margin
1.1%
0.2%
0.2%
1.0%
2.1%
1.2%
1.2%
1.4%
0.8%
-
0.3%
0.9%
0.8%
Recurring profit
685
373
674
2,203
700
927
1,686
3,023
578
323
1,087
3,272
102.3%
3,200
YoY
-1.7%
-49.1%
-47.3%
2.1%
2.2%
148.5%
150.1%
37.2%
-
-
-
-
5.9%
Recurring profit margin
1.4%
0.4%
0.4%
0.9%
1.8%
1.2%
1.2%
1.4%
1.2%
0.3%
0.6%
1.1%
1.1%
Net income
1,105
744
767
2,999
260
395
754
2,706
377
72
490
2,470
102.9%
2,400
YoY
177.6%
69.1%
-6.2%
89.0%
-76.5%
-46.9%
-1.7%
-9.8%
-
-
-
-
-11.3%
Net margin
2.3%
0.8%
0.5%
1.3%
0.7%
0.5%
0.5%
1.2%
0.8%
0.1%
0.3%
0.9%
0.8%
Quarterly
FY03/20
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Sales
47,814
44,727
64,942
79,553
39,267
40,522
59,180
78,153
49,359
51,159
82,201
106,621
YoY
-3.6%
-7.6%
-7.1%
3.8%
-17.9%
-9.4%
-8.9%
-1.8%
-
-
-
-
Gross profit
7,977
6,790
7,716
10,289
8,324
7,169
8,487
9,860
7,960
6,973
8,769
10,704
YoY
8.3%
5.6%
-1.8%
19.4%
4.4%
5.6%
10.0%
-4.2%
-
-
-
-
Gross profit margin
16.7%
15.2%
11.9%
12.9%
21.2%
17.7%
14.3%
12.6%
16.1%
13.6%
10.7%
10.0%
SG&A expenses
7,470
7,140
7,532
8,176
7,515
7,010
7,840
8,540
7,543
7,432
8,125
8,826
YoY
9.6%
11.2%
3.0%
2.8%
0.6%
-1.8%
4.1%
4.5%
-
-
-
-
SG&A ratio
15.6%
16.0%
11.6%
10.3%
19.1%
17.3%
13.2%
10.9%
15.3%
14.5%
9.9%
8.3%
Operating profit
507
-351
184
2,114
809
159
647
1,320
417
-459
644
1,878
YoY
-8.0%
-
-66.2%
218.9%
59.6%
-
251.6%
-37.6%
-
-
-
-
Operating profit margin
1.1%
-
0.3%
2.7%
2.1%
0.4%
1.1%
1.7%
0.8%
-
0.8%
1.8%
Recurring profit
685
-312
301
1,529
700
227
759
1,337
578
-255
764
2,185
YoY
-1.7%
-
-44.8%
73.8%
2.2%
-
152.2%
-12.6%
-
-
-
-
Recurring profit margin
1.4%
-
0.5%
1.9%
1.8%
0.6%
1.3%
1.7%
1.2%
-
0.9%
2.0%
Net income
1,105
-361
23
2,232
260
135
359
1,952
377
-305
418
1,980
YoY
177.6%
-
-93.9%
190.2%
-76.5%
-
1,460.9%
-12.5%
-
-
-
-
Net margin
2.3%
-
0.0%
2.8%
0.7%
0.3%
0.6%
2.5%
0.8%
-
0.5%
1.9%
Source: Shared Research based on company data
Notes: Figures may differ from company materials due to differences in rounding methods.
The company has adopted the new Accounting Standard for Revenue Recognition, starting in Q1 FY03/22. Since the figures for Q1 FY03/22 are based on the new accounting standard, YoY comparisons are not presented for the quarter.
By segment (cumulative)
FY03/20
FY03/21
FY03/22
(JPYmn)
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Q1
Q1–Q2
Q1–Q3
Q1–Q4
Sales
47,814
92,541
157,483
237,036
39,267
79,789
138,969
217,122
49,359
100,518
182,719
289,340
YoY
-3.6%
-5.6%
-6.2%
-3.1%
-17.9%
-13.8%
-11.8%
-8.4%
-
-
-
-
Retail/Wholesale Energy & Related
16,113
29,199
48,462
72,271
12,656
23,713
40,962
62,994
13,847
25,785
46,539
73,152
YoY
-0.7%
-4.6%
-8.2%
-7.0%
-21.5%
-18.8%
-15.5%
-12.8%
-
-
-
-
Energy Solution
27,989
55,634
97,736
149,141
22,180
47,237
84,788
135,998
30,889
65,570
122,506
197,715
YoY
-6.7%
-7.8%
-6.7%
-2.3%
-20.8%
-15.1%
-13.2%
-8.8%
-
-
-
-
Non-energy/Global
3,661
7,608
11,132
15,415
4,353
8,680
12,962
17,781
4,525
8,969
13,382
18,097
YoY
10.2%
9.2%
8.4%
9.9%
18.9%
14.1%
16.4%
15.3%
-
-
-
-
Other
49
99
152
208
77
158
256
347
96
193
291
374
Operating profit
507
156
340
2,454
809
968
255
2,935
417
-42
602
2,480
YoY
-8.0%
-72.3%
-69.3%
38.6%
59.6%
520.5%
-25.0%
19.6%
-
-
-
-
Retail/Wholesale Energy & Related
426
-28
-217
766
221
-81
-24
963
202
-238
85
1,039
YoY
-1.4%
-
-
148.7%
-48.1%
-
-
25.7%
-
-
-
-
Energy Solution
128
84
159
819
424
632
767
892
64
-202
-206
573
YoY
197.7%
-51.7%
-53.4%
97.8%
231.3%
652.4%
382.4%
8.9%
-
-
-
-
Non-energy/Global
-78
-77
-171
-50
101
174
236
243
123
274
279
201
YoY
-
-
-
-
-
-
-
-
-
-
-
-
Company-wide, eliminations
30
178
570
918
61
243
637
836
27
123
443
665
By segment (quarterly)
FY03/20
FY03/21
FY03/22
(JPYmn)
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Sales
47,814
44,727
64,942
79,553
39,267
40,522
59,180
78,153
49,359
51,159
82,201
106,621
YoY
-3.6%
-7.6%
-7.1%
3.8%
-17.9%
-9.4%
-8.9%
-1.8%
-
-
-
-
Retail/Wholesale Energy & Related
16,113
13,086
19,263
23,809
12,656
11,057
17,249
22,032
13,847
11,938
20,754
26,613
YoY
-0.7%
-9.0%
-13.1%
-4.4%
-21.5%
-15.5%
-10.5%
-7.5%
-
-
-
-
Energy Solution
27,989
27,645
42,102
51,405
22,180
25,057
37,551
51,210
30,889
34,681
56,936
75,209
YoY
-6.7%
-8.9%
-5.2%
7.3%
-20.8%
-9.4%
-10.8%
-0.4%
-
-
-
-
Non-energy/Global
3,661
3,947
3,524
4,283
4,353
4,327
4,282
4,819
4,525
4,444
4,413
4,715
YoY
10.2%
8.3%
6.7%
13.8%
18.9%
9.6%
21.5%
12.5%
-
-
-
-
Other
49
50
53
56
77
81
98
91
96
97
98
83
Operating profit
507
-351
184
2,114
809
159
-713
2,680
417
-459
644
1,878
YoY
-8.0%
-
-66.2%
218.9%
59.6%
-
-
26.8%
-
-
-
-
Retail/Wholesale Energy & Related
426
-454
-189
983
221
-302
57
987
202
-440
323
954
YoY
-1.4%
-
-
747.4%
-48.1%
-
-
0.4%
-
-
-
-
Energy Solution
128
-44
75
660
424
208
135
125
64
-266
-4
779
YoY
197.7%
-
-55.1%
804.1%
231.3%
-
80.0%
-81.1%
-
-
-
-
Non-energy/Global
-78
1
-94
121
101
73
62
7
123
151
5
-78
YoY
-
-97.0%
-
-
-
7,200.0%
-
-94.2%
-
-
-
-
Other
-
-
-
-
-
-
-
-
-
-
-
Company-wide, eliminations
30
148
392
348
61
182
394
199
27
96
320
222
Source: Shared Research based on company data Notes: Figures may differ from company materials due to differences in rounding methods.
The company has adopted the new Accounting Standard for Revenue Recognition, starting in Q1 FY03/22. Since the figures for Q1 FY03/22 are based on the new accounting standard, YoY comparisons are not presented for the quarter.
Full-year FY03/22 results
Summary
Sales: JPY289.3bn (no YoY comparison; see below)
Operating profit: JPY2.5bn
Recurring profit: JPY3.3bn
Net income attributable to owners of the parent: JPY2.5bn
For FY03/22, the progress rate against the company's forecast was 100.1% for sales, 103.3% for operating profit, 102.3% for recurring profit, and 102.9% for net income attributable to shareholders of the parent company. On May 10, 2022, the company revised its full-year forecasts for FY03/22; hence the small disparities.
The company adopted the new Accounting
Standard for Revenue Recognition at the start of Q1 FY03/22. Since figures
for the year are based on the new accounting standard, we have not provided
a YoY comparison. The adoption of the new standard had a downward impact
of JPY10.1bn for full-year sales and JPY10.1bn for cost of sales. Operating profit,
recurring profit, and net income declined by JPY4mn each.
Results by segment
Retail/Wholesale
Energy & Related business (B2C segment)
In mainstay LP gas and kerosene sales, sales volume decreased mainly in early spring and late autumn due to sluggish demand caused by higher average temperatures compared to the previous year. Selling prices, however, rose due to the hike in crude oil and propane contract prices. In addition to lower gross profit on petroleum products, particularly kerosene, the company experienced delays in passing on higher purchasing prices for LP gas in the form of increased selling prices. Even so, profit increased due to the impact of inventory valuations.
Energy
Solution business (B2B segment)
In the mainstay petroleum business, unit selling prices rose, reflecting sharply higher crude oil prices. Due to efforts to shift sales locations from existing petroleum sales facilities to Oil Square facilities with expanded capacity, sales volume rose favorably YoY, particularly for diesel oil. On the profit front, the company secured margins in the petroleum business through purchasing measures that corresponded to fluctuations in the crude oil market. In the electricity business, the company diversified its procurement amid a rapidly changing supply–demand environment characterized by high global LNG prices, but profit declined.
Non-energy/Global
segment
In the bike sharing business (Sinanen Mobility+ Co., Ltd.), the company developed docking stations for the Daichari bike sharing service. As of March 31, 2022, the company had 2,200 stations, and the number of bicycles under management had risen above 10,000. In November 2021, monthly use reached the highest level to date (600,000 times).
In the environmental and recycling business (Sinanen Ecowork Co., Ltd.), the handling volume of waste wood recycling increased thanks to a positive shift in demand and supply for wood chips amid continued drop in the amount of construction-related waste wood available due to the pandemic. Performance of other businesses, including metal recycling, was also favorable.
In the antimicrobial business (Sinanen Zeomic Co., Ltd.), pandemic-induced demand for antimicrobial products increased, leading to favorable sales in Japan and overseas.
In the systems business (Minos Co., Ltd.), the mainstay core system for LP gas sales made stable contributions. Power CIS*, a customer information system catering to the deregulated electricity retail sector, grew substantially, boosting profit.
*A customer information system (CIS) handles tasks ranging from the management of customer information to fee calculation and billing by type of contract.
Overall profits edged up in the building maintenance and management business, which centers on Takara Building Maintenance Co., Ltd. In addition to steady contributions from the fixed-term management of housing complexes such as condominiums, profit rose due to an increase in new orders for disinfection and cleaning services at medical facilities. One profit-sapping factor was a decline in the number of contracts in the property management business.
In the bicycle business (Sinanen Cycle Co., Ltd.), sales and profit declined. Business was affected by parts shortages, as well as by a downturn in demand following the pandemic-inspired boom in the previous fiscal year. Performance was also affected by soaring prices on overseas transportation and raw materials prices.
For details on previous quarterly and annual results, please refer to the Historical financial statements section.
FY03/23 forecast
FY03/20
FY03/21
FY03/22
FY03/23
(JPYmn)
1H Act.
2H Act.
FY Act.
1H Act.
2H Act.
FY Act.
1H Act.
2H Est.
FY Act.
FY Act.
Sales
92,541
144,495
237,036
79,789
137,333
217,122
100,518
188,822
289,340
310,000
Cost of sales
77,774
126,489
204,263
64,296
118,985
183,281
85,584
169,349
254,933
Gross profit
14,767
18,005
32,772
15,493
18,347
33,840
14,933
19,473
34,406
Gross profit margin
16.0%
12.5%
13.8%
19.4%
13.4%
15.6%
14.9%
10.3%
11.9%
SG&A expenses
14,610
15,708
30,318
14,525
16,380
30,905
14,975
16,951
31,926
SG&A ratio
15.8%
10.9%
12.8%
18.2%
11.9%
14.2%
14.9%
9.0%
11.0%
Operating profit
156
2,298
2,454
968
1,967
2,935
-42
2,522
2,480
2,500
Operating profit margin
0.2%
1.6%
1.0%
1.2%
1.4%
1.4%
0.0%
1.3%
0.9%
0.8%
Recurring profit
373
1,830
2,203
927
2,096
3,023
323
2,949
3,272
2,800
Recurring profit margin
0.4%
1.3%
0.9%
1.2%
1.5%
1.4%
0.3%
1.6%
1.1%
0.9%
Net income
744
2,255
2,999
395
2,311
2,706
72
2,415
2,487
2,900
Net margin
0.8%
1.6%
1.3%
0.5%
1.7%
1.2%
0.1%
1.3%
0.9%
0.9%
Source: Shared Research based on company data
FY03/23 company forecast
Sales: JPY310.0bn (+7.1% YoY)
Operating profit: JPY2.5bn (+0.8% YoY)
Recurring profit: JPY2.8bn (-14.4% YoY)
Net income attributable to owners of the parent: JPY2.9bn (+16.6% YoY)
Annual dividend: JPY75.00 per share (unchanged YoY)
Business environment
The environment surrounding the Sinanen group’s mainstay oil and gas business remains adverse. In Japan, energy demand continues to decline due to a shrinking population, the spread of energy-saving equipment, and changing lifestyles.
Sales
The company anticipates a 7.1% YoY increase in sales. Although it expects to be affected significantly by crude oil and propane contract prices, current price levels are at their highest since 2014. Annual sales forecasts are based on current price levels, but the company will revise its sales forecast as necessary in the event of a sharp decline.
Operating profit
Ongoing IT investments from the previous fiscal year are expected to slow profits. Even so, the company anticipates a 0.8% YoY rise in operating profit, due to passing on higher purchasing costs to customers and a contribution to profits from the bike sharing business. The company expects recurring profit to decline 14.4% YoY, due to the absence of the gain on valuation of derivatives it recorded in the previous year. After posting JPY2.1bn in extraordinary gains (gain on sale of fixed assets), the company expects a 16.6% YoY increase in net income attributable to owners of the parent.
Dividend policy
The company aims to return profit to shareholders through stable dividends, and targets a consolidated payout ratio of 30% or higher. It also plans to use internal reserves to expand its business domains and make capital investment to strengthen the business foundation.
As of May 13, 2022, the company has not disclosed segment-specific forecasts. This information will be updated following interviews with management.
Initial company forecasts and results
Results versus initial estimates
Results vs. Initial Est.
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
FY03/22
(JPYmn)
Cons.
Cons.
Cons.
Cons.
Cons.
Cons.
Sales (Initial Est.)
250,000
256,000
260,000
245,000
226,000
244,000
Sales (Results)
218,242
244,370
244,567
237,036
217,122
289,340
Results vs. Initial Est.
-12.7%
-4.5%
-5.9%
-3.3%
-3.9%
18.6%
Operating profit (Initial Est.)
3,100
3,600
3,300
2,600
2,200
2,100
Operating profit (Results)
2,934
3,348
1,771
2,454
2,935
2,480
Results vs. Initial Est.
-5.4%
-7.0%
-46.3%
-5.6%
33.4%
18.1%
Recurring profit (Initial Est.)
3,900
3,800
3,500
2,900
1,800
1,700
Recurring profit (Results)
3,424
3,948
2,158
2,203
3,023
3,272
Results vs. Initial Est.
-12.2%
3.9%
-38.3%
-24.0%
67.9%
92.5%
Net income (Initial Est.)
2,200
2,300
2,600
2,200
1,500
1,500
Net income (Results)
2,584
2,867
1,588
2,989
2,717
2,487
Results vs. Initial Est.
17.5%
24.7%
-38.9%
35.9%
81.1%
65.8%
Source: Shared Research based on company data
Medium-term management plan and business strategy
Second medium-term management plan (FY03/21–FY03/23)
Positioning
Period to reinforce the organizational foundation for sustainable growth, and to prepare the groundwork for further advances in the third medium-term management plan.
Qualitative targets
Improve capital efficiency
Invest to achieve sustainable growth
Transform attitudes, practices, and conducts of employees
Improve capital efficiency
Improve margins in existing businesses
Make greater use of, or sell, low-efficiency assets
Adopt selection and concentration strategy for existing businesses
Invest to achieve sustainable growth
Make investments to fuel growth of existing businesses: Pursue M&A deals to strengthen earnings foundations of existing businesses and M&A deals in the building maintenance and management business.
Make strategic investments in new businesses: Aggressively invest in the bike sharing business, the renewable energy business, and new businesses.
Improve core systems: Enhance core systems to cope with changes in the business environment, including business diversification.
Transform attitudes, practices, and conduct of employees
Improve corporate culture: Review common sense and customary practices from an individual and organizational standpoint, and cultivate employees who can cope with the high levels of change and risk of the modern era.
Promote work style reforms: Provide an environment in which employees can enjoy and feel enthusiastic about their work.
Cultivate, deploy, and reassign human resources: Create mechanisms to cultivate the spirit of entrepreneurship and develop diverse human resources.
Quantitative target
Establish a business structure that continually generates ROE of 6.0% or higher.
Business strategy
B2C segment (LP gas sales)
LP gas sales
The LP gas supplied by the company reaches roughly 700,000 end users across Japan. The company aims to develop the high-margin retail channel and expand its direct-sales customer base—currently around 210,000 end users—by obtaining retail commercial rights and acquiring LP gas (fuel) retailers. It plans to accelerate the process using multiple methods, including door-to-door sales by sales representatives and customer referrals from various partners. To prevent cancellations of household-use LP gas contracts, it will utilize registered stores and agents to promote the bundling of LP gas and low-voltage electricity. The strategy is to capture customers by establishing one-stop home and living services spanning petroleum products, gas, electricity, and renovations.
On the safety management and distribution front, the company intends to step up operational efficiency through the use of IoT (low-power wide-area [LPWA] networks), the integration of its distribution systems with those of peers (streamlining the congested transport systems), and consolidation of filling stations.
In peripheral fields, the company seeks to expand its real estate-related services by, for instance, steering customers who have vacated their homes (having their gas system terminated in the process) to its vacant property management service.
Japan Enagic (distribution alliance of several leading LP gas wholesalers)
Japan Enagic Co., Ltd. was established in October 2018 as a Kanto area-based transport and filling joint venture of five companies: Melife (subsidiary of Sinanen HD), LOGITRI Holdings (subsidiary of Mitsuuroko Group Holdings [TSE1: 8131]), Mitsuwa Industries, San-Ai Oil (TSE1: 8097), and Hashimoto Holdings. Each of the founding companies holds a 20% stake.
The joint venture serves to consolidate the LP gas distribution and filling operations of LOGITRI, Enagic Kanto, Mitsuwa Transportation, San-Ai Gas Supply Kanto, Maruha Transportation, and Kanagawa Enagic in the Kanto area. It aims to further streamline distribution systems and reduce costs by sharing management resources, including business facilities and filling stations.
Fuel oil sales
In the B2C segment, the company sells kerosene and diesel oil under a similar setup as the LP gas business, using both the direct-sales channel catering mainly to regular households and the wholesale channel catering to fuel retailers.
Electricity business (mainly low-voltage electricity sales)
In the B2C segment, the company sells low-voltage electricity mainly to its LP gas customers such as regular households. It secures the electricity through direct procurement from the power generators as well as through the Japan Electric Power Exchange (JEPX). The company says bundling electricity and LP gas in a package has proven effective since it boosts sales efficiency and profitability and also prevents contract cancellations. In addition to the focus on direct-sales customers, the company plans to step up marketing efforts aimed at distributors.
B2B segment (petroleum product business, etc.)
Petroleum product sales
In FY03/21, the company’s total sales volume of petroleum products came to 2.4mn kiloliters (kl). This breaks down to 1.5mn kl of kerosene, 0.4mn kl of heavy oil, 0.3mn kl of diesel oil, and 0.2mn kl of gasoline. The share of kerosene is substantially high at 61.8% of the total. In kerosene sales, the company intends to cultivate partnerships with home improvement stores and strengthen home-delivery services with a view to enhancing GPM. It will also strengthen distribution functions through small-lot deliveries using tank trucks, and seek to further expand and develop the B2B business. It will develop and maintain business sites in collaboration with the Sinanen group companies. These strategies have already paid off in the form of three consecutive years of rising kerosene sales volume from FY03/19 to FY03/21. The company also plans to boost the sales volume of diesel oil by strengthening the delivery network to construction sites and making better use of its fuel supply points (e.g. Kerosene Centers and Oil Squares).
Electricity business (mainly high-voltage electricity sales)
In the B2B segment, the company sells high-voltage electricity mainly to business sites. The electricity is mostly secured through direct procurement from power generators. Going forward, the company will work to join the balancing group in the electricity wholesale market. It also plans to provide a range of environmentally friendly electricity plans, including a low-CO2 emission power plan.
Solution business
The company aims to bolster its service offerings by expanding into housing products.
Non-energy/Global segment
Bicycle business
In the bicycle business, the company will open a flagship store for its Daisharin retail brand. It aims to increase margins in the business by reviewing store operation formats. It looks to develop private-brand bicycles, strengthen proposal capabilities, and cultivate new customers. It will also expand sales of service-oriented or functional products geared toward B2B channels.
Bike sharing business
Wholly owned subsidiary Sinanen Mobility+ Co., Ltd. operates a sharing service of electric bicycles*1 under the Daichari brand, using the Hello Cycling system provided by a Softbank group company OpenStreet Co., Ltd. The bicycles can be rented from and returned to dedicated bicycle docks (stations). To promote usage of the service, the company is opening new stations and increasing the number of bicycles under its management.
As of end-March 2020, Sinanen Mobility+ rolled out over 8,200 electric bicycles across 1,800 stations in Tokyo and the adjacent prefectures of Kanagawa, Chiba, and Saitama, making the business one of the largest of its kind in the country. It uses vast amounts of data to determine appropriate locations for stations, and enters into agreements with municipalities or forms alliances with private companies (e.g. real estate companies and the three leading convenience store operators). It also develops stations on land owned by individuals. Going forward, the company will continue to narrow down areas to establish stations, and pursue efficient operation.
By end-March 2023, Sinanen Mobility+ aims to become the largest bike sharing service in Japan with 2,700 bicycle stations and over 9,000 electric bicycles under management. As a Mobility as a Service*2 (MaaS) provider specializing in short-distance travel, it plans to team up with smart cities or other mobility business operators to expand its services.
Sinanen Mobility+ intends to actively partake in pilot programs*3 in collaboration with local governments and the private sector.
*1 Bike sharing service: A service that allows users to rent and return a bicycle from several dedicated bicycle docks (stations) established within a certain area. Rented bicycles can be returned at any station. Users are charged an hourly rate for the service and pay via smartphone.
*2 Mobility as a Service (MaaS): A service that facilitates continuous mobility through means of transportation other than personally owned vehicles.
*3 Main pilot programs: South Izu, Shizuoka Prefecture (19 locations, December 2017 launch); collaboration with retail chain Ito-Yokado (30 locations, June 2018 launch); collaboration with restaurant and convenience store operator Seven & I Food Systems (100 locations, September 2018 launch); Amagasaki, Hyogo Prefecture (12 locations, November 2018 launch); Asaka, Saitama Prefecture (18 locations, January 2019 launch); Zushi, Kanagawa Prefecture (8 locations, July 2019 launch); Shiki, Saitama Prefecture (38 locations, August 2020 launch); Odakyu railway stations in the Setagaya area (Tokyo) in collaboration with the Odakyu group (October 2020 launch); Niiza, Saitama Prefecture (around 40 locations, February 2021 launch); Fujimino, Saitama Prefecture (mid-May 2021 launch); Fujimi, Saitama Prefecture (mid-July 2021 launch)
Environmental and recycling business
The company targets stable operation of its plants manufacturing wood chips for use mainly in biomass power generation. It aims to streamline operations to secure stable earnings in the business. It will cultivate trading operations, and develop new products in the waste recycle business. It also intends to develop, promote, and expand new biomass fuel businesses.
Antimicrobial business
In the antimicrobial/deodorizer business, the company plans to not only supply products, but also provide technological information to support joint development of products. It will offer solutions for microbial or odor-related countermeasures and water treatment operations. It will also develop and promote new products such as lead adsorbents.
Systems business
The company plans to secure stable earnings in this business by strengthening quality control of the existing operations and enhancing customer satisfaction. It will expand business services and provide stable IT platforms. It also looks to create new businesses by commercializing low-power wide-area (LPWA)* networks and mobile products.
* Low-power wide-area (LPWA) network: A network that facilitates communication over a wide area with low power. LPWA networks are attracting attention as component of IoT configurations.
Building maintenance and management business
The company plans to expand the business across the Kanto region through organic growth and acquisitions. It will widen its business spheres into building maintenance, inspection, and construction fields. It will also develop the housing complex maintenance business in the Tokyo metropolitan area. It looks to streamline operations through IT solutions.
New businesses
Renewable energy (wind power) business in South Korea
The company partakes in a wind power project in South Korea. It is a renewable energy business under the South Korean Renewables Portfolio Standard (RPS), a program under which electricity and environmental value is sold to major power companies at long-term fixed prices. A wind farm with an output capacity of 90MW (90,000 kW) is slated for construction in South Jeolla Province, South Korea. The company has acquired a 65.3% stake in Bellsion Power Co., Ltd., the parent of the entity that owns the power generation rights. It is currently awaiting development approval.
* South Korean Renewables Portfolio Standard (RPS): In 2002, the government of South Korea promulgated the Act on the Promotion of the Development, Use, and Diffusion of New and Renewable Energy. The act classified fuel batteries, coal liquefaction and gasification, and hydrogen energy as new energy sources, and solar energy, wind power, bio energy, waste energy, hydro power, and marine energy as renewable energy sources. The latter qualified for inclusion in the feed-in tariff (FIT) scheme that ran from 2002 to 2012.
In 2009, the government formulated the Implementation Plan for Development, Use, and Diffusion of New and Renewable Energy. The country installed 26 domestically manufactured wind turbines on Jeju Island, started developing tidal power generation equipment, and began manufacturing solar panel domestically. The government aims to derive 11% of the country’s energy from renewable energy sources by 2030, and looks to concurrently promote exports of renewable-energy equipment. To these ends, it is providing organizational and capital support for the development and promotion of renewable energy technology in the country.
In an effort to expand renewable energy while avoiding excessive budget expenditures, the government decided to transition from the FIT program to the Renewable Portfolio Standard (RPS: a program that requires power companies to procure a certain percentage of their electricity from renewable energy sources) in 2011, and started implementing the standard from 2012. Under the current RPS program, power companies with generation capacity of 500,000kW or more must cover 10% of their power supply with renewable energy by 2022. As for the FIT scheme, renewable energy providers that registered in or prior to 2012 can continue to operate under the scheme until their contracts expire, but no new applications have been accepted since 2012.
New micro wind turbine-related business
This business entails the development and manufacture of a new type of micro wind turbines that is groundbreaking in terms of safety, quietness, and power efficiency. The turbines are very small and lightweight, but achieve efficient power generation even with very light wind. The company thinks the business can help spread the use of renewable energy and assist local governments and companies in their business continuity plan (BCP) initiatives.
Developed by Global Energy Co., Ltd. based in Hamamatsu (Shizuoka Prefecture), the micro wind turbines particularly stand out for their ultra-light blades made of a special material with high rigidity and their unique shape that enables efficient power generation. The turbines can also be operated safely in strong winds.
In February 2020, the company founded Sinagy Revo Co., Ltd. (wholly owned subsidiary) to develop a free-standing, pole-type power supply device and a rooftop wind power generation device equipped with these micro wind turbines. Sinagy Revo will handle the development, design, manufacture, sales, repairs, and maintenance of these devices. According to the company, the free-standing power supply device can serve as a power supply system during natural disasters since security cameras, LED lighting, telecom equipment such as Wi-Fi, and small storage batteries can be attached to it. Installing them at evacuation sites across the country, these devices can provide lighting during blackouts and give network and power supply access to evacuees. The security cameras and the telecommunications network will allow smartphone and PC users to check on the evacuation sites as well. In these ways, the product can help local governments step up efficiency of their disaster prevention systems and aid companies in their BCP efforts.
Sinagy Revo is currently conducting pilot programs as the final stage of product development. Targeting commercialization in FY03/22, it is also preparing proposals to target customers—mainly local governments and private-sector companies. It will promote adoption of these devices at roughly 70,000 evacuation sites across the country as a BCP-focused equipment, and work to establish a stand-alone power supply business. It also aims to cultivate a new renewable energy market of rooftop wind power generation equipment with multi-level micro wind turbines, and roll out such equipment globally.
Kitchen and bathroom renovation specialty store business
The company plans to expand its renovation business as part of an effort to strengthen the earnings capability of non-energy operations under B2C. To this end, it has opened pilot stores specializing in kitchen and bathroom renovations. It launched the first store in the Chuo district of Sagamihara in May 2018, the second store in Koshigaya in October 2019, and rolled out two more in FY03/21, including the Tokorozawa Showroom. It intends to open 20 stores in the future, and targets non-energy sales of JPY4.0bn. The company is also eyeing a gradual rollout of a franchise program for fuel retailers.
Shared office business
The company has launched a shared-office business under the seesaw brand. It aims to support startups while concurrently engaging in new business development for its own group. The seesaw facility rents out co-working space in the building that was occupied by the company’s headquarters prior to relocation in January 2019. The seesaw name, taken from the playground equipment, embodies the idea of gathering like-minded individuals to move society through the principle of leverage. The company expects to hold events such as new-business contests and business matching at the facility in the future.
Investment track record
Investment amounts by segment
(JPYmn)
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
B2C
635
1,019
655
972
876
B2B
1,535
314
736
385
183
Non-energy
335
155
625
1,114
1,867
Company-wide
535
753
303
302
99
Total
3,040
2,242
2,318
2,772
3,025
Source: Shared Research based on company data
The company ramped up investment in the Non-energy segment in FY03/19 and FY03/20, with the bulk of the increase allocated toward capital expenditure in the bike sharing business and in wood chip production facilities.
Operating profit
Operating profit
Segments
FY03/11
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Operating profit
3,182
2,627
2,347
1,688
1,703
3,504
2,934
3,348
1,771
2,454
2,935
Retail/Wholesale Energy & Related (B2C)
2,996
3,327
1,537
2,011
308
766
963
Operating profit margin
2.6%
4.7%
2.2%
2.4%
0.4%
1.1%
1.5%
Energy Solution (B2B)
-607
68
225
175
414
819
892
Operating profit margin
-
0.1%
0.2%
0.1%
0.3%
0.5%
0.7%
Non-energy/Global
173
105
-178
79
-184
-50
243
Operating profit margin
2.6%
1.6%
-
0.7%
-
-
1.4%
Adjustments
-1,047
-708
-665
-203
-859
4
1,349
1,082
1,233
918
836
Source: Shared Research based on the company’s securities reports and other materials
Operating profit in decline since 2010
The company’s consolidated operating profit hovered around JPY2.5bn to JPY5.0bn between FY03/05 and FY03/10. The high profit levels were underpinned by a less challenging competitive landscape in the LP gas business compared to today. Contributions also came from the strong performance in the petroleum business, thanks to high margins amid tight supply and demand for products in Asia owing to economic growth in China, and a temporary increase in margins due to sharp fluctuations in crude oil and LP gas prices.
In FY03/07, operating profit declined roughly 38.3% YoY to JPY2.6bn due to the fall in kerosene price amid record-high winter temperatures and an inability to pass on increases in the propane contract price* to customers. In FY03/09, operating profit increased 93.6% YoY to JPY4.9bn on improved margins due to a sharp drop in kerosene procurement price and the propane contract price. In FY03/10, operating profit fell 24.1% YoY to JPY3.7bn as margins worsened on a weak petroleum product market.
From FY03/11, operating profit fell to the JPY2.0–3.0bn range due to factors such as a normalization of international demand for products following the global financial crisis, a drop in petroleum product margins driven by lower domestic prices amid excess capacity, successive warm winters, and growing cost consciousness vis-à-vis energy consumption.
* Propane contract price: Contract price determined by the state-run Saudi Arabian Oil Company (Aramco), one of the world’s leading propane gas producer by volume. The price is set based on a comprehensive assessment of factors such as the price of crude oil and propane gas spot prices at major gas-producing countries like Saudi Arabia.
Headwinds abound: warm winters, growth in supply of condominium units, demographic aging, and fierce competition
From FY03/17, operating profit declined further to the JPY1.0–2.0bn range as demand for kerosene and LP gas contracted due to the convergence of factors such as warmer winters driven by global warming, the growing popularity of energy-efficient water heaters such as Eco-Jozu, the boom in high-rise condominium construction in metropolitan areas and the corresponding spread of air conditioners, and lower unit consumption among regional households attributable to demographic aging. At the same time, LP gas providers such as Nippon Gas (TSE1: 8174) and Tokai expanded their shares by concentrating on new customer acquisition, creating a challenging competitive landscape.
Profit contributions by the non-energy businesses still some way off
Meanwhile, the earnings contributions delivered by the non-energy businesses remain small. While this can be in part attributed to the continuous booking of expenses associated with the launch of new businesses, the low profitability of businesses that have a longer track record, such as the antimicrobial business and the environmental and recycling business, is also a factor. The company is counting on growth in the bike sharing and building maintenance and management businesses to drive earnings in the future.
Business
Business model
LP gas business
Suppliers: The company mainly procures LP gas from importers and primary dealers such as ENEOS Globe, Astomos Energy, and Gyxis. Pricing and purchase volumes are generally determined in annual contracts, but volume terms tend to be flexible.
Customers: The company supplies LP gas to several thousand fuel retailers through its wholesale channel, and to ordinary households, restaurants, factories, hospitals, nursing homes, and other facilities via direct-sales channels of the Melife subsidiaries. End users across the country total roughly 700,000, of which 210,000 are direct-sales customers. Selling prices for LP gas is not fixed, so the pricing structure varies by customer. Prices charged to customers track movements in LP gas procurement prices under the gas-cost adjustment system. They are also adjusted based on consumption volume per contract. This means unit prices are the highest for households, and decline for large-volume customers such as factories and restaurants.
Customer acquisition: The company mainly secures new customers through commercial rights acquisitions and door-to-door sales. Commercial rights acquisition entails buying the commercial rights of existing businesses, and inheriting corresponding customer bases. In many cases, struggling fuel retailers (e.g. small and aging retailers) sell their customer rights to large fuel trading houses. Door-to-door sales activities—which include sales visits, leaflet distribution, and sales phone calls—aim to make customers switch gas suppliers.
Petroleum business
Suppliers: The company mainly sources petroleum products from petroleum refineries such as Cosmo Oil Marketing, ENEOS, and Idemitsu Kosan. Procurement prices are determined based on yen-denominated Dubai crude oil prices and petroleum product spot prices. The company leverages its long business track record to flexibly negotiate transaction terms with the suppliers.
Customers: The company sells kerosene mainly to fuel retailers, home improvement stores, and service stations. Kerosene prices take into account the price of crude oil and the supply/demand balance, and are influenced by the prices negotiated between petroleum refineries and the Sapporo Co-op and leading home improvement stores ahead of the peak-demand period. These negotiated prices become industry indicators in effect.
Electricity business
Suppliers: The company procures electricity mainly from former general electricity utilities (the electric power majors) and other power generators under bilateral contracts, and from the Japan Electric Power Exchange (JEPX). Bilateral contracts typically extend for one year. Prices for electricity sourced from JEPX can decline to attractive levels when supply/demand conditions ease, but they are prone to sharp near-term fluctuations when supply/demand conditions abruptly tighten such as during extreme weather (heat waves or cold spells) and disasters (major earthquakes).
Customers: To prevent cancellations of LP gas contracts, the company promotes the bundling of LP gas and electricity services. Thus, it often supplies electricity to customers who are already purchasing its LP gas. The company also provides electricity to large-volume commercial customers.
Sales activities: The company uses home visits, such as LP gas safety inspection visits, as an opportunity to recommend the electricity and LP gas package. It began marketing environmentally friendly electricity as well, offering a lineup of plans using 100% renewable energy.
Business by segment
Segments
FY03/11
FY03/12
FY03/13
FY03/14
FY03/15
FY03/16
FY03/17
FY03/18
FY03/19
FY03/20
FY03/21
(JPYmn)
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Act.
Sales
246,826
272,050
274,027
310,102
281,375
209,112
218,242
244,370
244,567
237,036
217,122
YoY
14.2%
10.2%
0.7%
13.2%
-9.3%
-25.7%
4.4%
12.0%
0.1%
-3.1%
-8.4%
Retail/Wholesale Energy & Related (B2C)
116,607
70,202
69,115
83,465
77,679
72,271
62,994
YoY
-
-39.8%
-1.5%
20.8%
-6.9%
-7.0%
-12.8%
% of total
41.4%
33.6%
31.7%
34.2%
31.8%
30.5%
29.0%
Energy Solution (B2B)
157,990
132,277
141,908
148,687
152,662
149,141
135,998
YoY
-
-16.3%
7.3%
4.8%
2.7%
-2.3%
-8.8%
% of total
56.1%
63.3%
65.0%
60.8%
62.4%
62.9%
62.6%
Non-energy/Global
6,684
6,558
7,054
12,029
14,032
15,415
17,781
YoY
-
-1.9%
7.6%
70.5%
16.7%
9.9%
15.3%
% of total
2.4%
3.1%
3.2%
4.9%
5.7%
6.5%
8.2%
Operating profit
3,182
2,627
2,347
1,688
1,703
3,504
2,934
3,348
1,771
2,454
2,935
YoY
-13.8%
-17.4%
-10.7%
-28.1%
0.9%
105.8%
-16.3%
14.1%
-47.1%
38.6%
19.6%
Operating profit margin
1.3%
1.0%
0.9%
0.5%
0.6%
1.7%
1.3%
1.4%
0.7%
1.0%
1.4%
Retail/Wholesale Energy & Related (B2C)
2,996
3,327
1,537
2,011
308
766
963
YoY
-
11.0%
-53.8%
30.8%
-84.7%
148.7%
25.7%
Operating profit margin
2.6%
4.7%
2.2%
2.4%
0.4%
1.1%
1.5%
% of total
116.9%
95.1%
97.0%
88.7%
57.2%
49.9%
45.9%
Energy Solution (B2B)
-607
68
225
175
414
819
892
YoY
-
-
230.9%
-22.2%
136.6%
97.8%
8.9%
Operating profit margin
-
0.1%
0.2%
0.1%
0.3%
0.5%
0.7%
% of total
-23.7%
1.9%
14.2%
7.7%
77.0%
53.3%
42.5%
Non-energy/Global
173
105
-178
79
-184
-50
243
YoY
-
-39.3%
-
-
-
-
-
Operating profit margin
2.6%
1.6%
-
0.7%
-
-
1.4%
% of total
6.8%
3.0%
-11.2%
3.5%
-34.2%
-3.3%
11.6%
Adjustments
-1,047
-708
-665
-203
-859
4
1,349
1,082
1,233
918
836
Source: Shared Research based on company data
B2C segment (mainly sales of LP gas): 45.9% of operating profit (FY03/21)
Wholly owned sales subsidiaries Melife, Melife-East, Melife-West, and Melife-Hokkaido run the B2C business, which mainly comprises the wholesale sales and direct sales of LP gas used by general households. In FY03/21, these companies collectively sold 423,000 tons of LP gas (includes sales in the B2B segment). End users total about 700,000, of which 210,000 are direct-sales customers. Wholesale customers are local LP gas and fuel retailers. In direct sales, the Melife companies sell and deliver cylinders of LP gas to end users, but also make such deliveries on behalf of retailers in its wholesale channel. In addition, these companies sell kerosene to local fuel stores.
Peripheral businesses in the B2C segment include renovations, sales of gas appliances, sales of low-voltage electricity to households, and city gas operations (Hidaka Toshi Gas Co., Ltd.).
Supply chain
In the LP gas business, the company is involved in the entire supply chain from procurement to distribution, wholesale, and retail. The process from procurement to sales begins with the sourcing of LP gas from importers and primary dealers such as ENEOS Globe, Gyxis, and Astomos Energy. LP gas is then sold directly to consumers or to local fuel retailers, and delivered to the end users (households, restaurants, and business facilities, including factories, hospitals, and hotels).
Distribution is handled by subsidiaries such as Sinanen Himawari Service Center and Sinanen Tohoku Himawari Gas Center, as well as local distribution joint ventures including Japan Enagic.
Business structure of a typical LP gas company
Wholesalers
Retailers
Sinanen
Sales
100.0%
100.0%
100.0%
Gross profit margin
12.0%
47.7%
13.8%
Operating profit margin
4.0%
8.1%
1.0%
Expenses
100.0%
100.0%
Personnel
27.1%
45.5%
Safety inspection
0.9%
4.8%
Transportation
7.6%
5.9%
Depreciation
3.2%
4.8%
Other
61.3%
39.0%
Source: Shared Research based on data from the Japan LP Gas Association
Customer base
There are some 24mn users of LP gas in Japan, which is about 44% of all gas users including the 29mn city gas users. In the retail channel (direct sales to end users), the company sells LP gas to roughly 210,000 customers (end-March 2021). After adding in some 500,000 customers served by its wholesale channel distributors, the total customer base in the LP gas business comes to approximately 700,000.
Regional characteristics
The LP gas business is primarily based in eastern Japan. The sales volume in western Japan is low, although the company sells LP gas in the Osaka, Kyoto, Ishikawa, and Aichi prefectures as a result of past commercial rights and business acquisitions.
Earnings analysis
Sales
Shared Research looks at the segment’s sales in terms of sales volume and selling price*1. The sales volume is affected by temperature (particularly during the winter), new demand captured, population within serviced areas, and household compositions. The selling price—subject to the gas-cost adjustment system—change every month, affected by contract prices with gas-producing countries, exchange rates, wholesale prices, and revisions in retail prices.
Operating profit
Shared Research sees increases or decreases in the segment’s operating profit as the result of changes in sales volume and margin fluctuations. The sales volume of LP gas for household use is mainly affected by temperature changes, while the sales volume for LP gas used by businesses (restaurants, factories, etc.) is affected by changes in the economic cycle. Margin fluctuations are determined primarily by large changes in volume and the status of competition. Increased competition tends to lead to price wars that weigh on margins.
Short-term earnings are affected by changes in the value of inventory depending on cost, insurance, and freight (CIF) prices*2 (influenced by the propane contract price*3 and forex rates). Earnings are directly correlated to CIF prices with profit increasing when the CIF price rises and vice versa.
*1 Selling price: Wholesale price or retail price. Determined by adding to CIF prices various costs that occur during distribution (such as transport costs and costs of operating storage facilities). Retail price tends to respond to market prices only moderately.
*2 CIF price: Cost, insurance and freight prices. Japan imports most of its LP gas. The CIF price is based on what is called the free on board (FOB) price, which is based on the contract price determined by gas-producing countries. The FOB price adjusted for costs, insurance, and freight (CIF) charges and exchange rate is the CIF price.
*3 Propane contract price: Contract price determined by the state-run Saudi Arabian Oil Company (Aramco), one of the world’s leading propane gas producer by volume. The price is set based on a comprehensive assessment of factors such as the price of crude oil and propane gas spot prices at major gas-producing countries like Saudi Arabia.
Effect of propane contract price fluctuations
Fluctuations in propane contract price have a near-term impact on gross profit (see diagram below). For example, assume LP gas was stockpiled at the beginning of the fiscal year at a relatively high purchase price. In the event of a sharp drop in the propane contract price thereafter, new purchases based on the lower contract price will impact the value of total inventory that is adjusted on a moving average basis. The gross profit will in turn fall in tandem with the decline in unit selling prices, which are subject to the gas-cost adjustment system, and change to reflect swings in procurement prices.
Impact of changes in market conditions (top = price rising; bottom = price falling)
Source: Shared Research based on company data
Expansion of direct sales to customers
The company aims to enhance its margins by increasing the number of direct-sales customers through M&A activity (e.g., acquisitions of commercial rights). In general, in the LP gas supply chain, the order by margin level is retail > wholesale > importer and primary dealer. In April 2021, the gross margin was JPY139.6 per cubic meter (cbm) for importers/primary dealers and wholesalers combined, and JPY515.1 per cbm for retailers. Margin is low for importers and primary dealers (about 10% of JPY139.6 per cbm based on our estimate) because their facilities are usually concentrated, their handling volumes are massive, and they are competing in a sphere where it is hard to stand out from peers. On the other hand, the margin is high for retailers because many are small businesses with low per-store sales volume and facilities efficiency, and competition is relatively relaxed. Wholesalers with small-lot gas cylinder delivery systems are working to secure high retail margins by acquiring commercial rights* from small retailers, many of whom are facing challenges such as the difficulty to find successors.
*Commercial rights acquisition is a business practice particular to the LP gas industry. Although door-to-door sales activities to increase the number of retail contracts have become more common, the industry did not traditionally make direct approaches to consumers. Typically, when a new residence is built, a retailer approaches the construction company or contractor, who then refers the client (person who ordered the construction) to the retailer, and a new LP gas contract is concluded. In the case of pre-owned homes or rentals, the new resident usually just automatically chooses the LP gas retailer that already serviced the residence. For this reason, “commercial rights” exist in a practical sense despite having no legal basis, and they are bought and sold between LP gas companies.
LP gas retailers are increasingly selling their commercial rights and closing their businesses due to declines in customer count caused by a shrinking population and the flow of people into cities; reduced unit gas consumption caused by climatic warming and an aging population; the rising costs of delivery, safety management, and information systems; and the large sums offered by wholesalers for commercial rights acquisition.
Distribution joint venture (Japan Enagic)
The company establishes business tie-ups to streamline distribution as deemed necessary. Subsidiary Melife, operates a joint venture, Japan Enagic, alongside Mitsuuroko Group Holdings, Mitsuwa Sangyo, San-Ai Oil, and Hashimoto Holdings, each holding a 20% stake in the entity. Japan Enagic engages in LP gas delivery and filling operations. Its mandate is to consolidate LP gas delivery and filling operations in the Kanto area, streamline distribution, and reduce costs by sharing management resources (e.g. business facilities and filling stations).
Sales of gas appliances and equipment
The company also works to expand peripheral appliance sales and home renovation services related to LP gas. However, these services still account for a small share of sales and profit at present. In addition to gas stoves, water heaters, and related renovation services, the company has also stepped up sales of solar power generation systems, ENEFARM residential fuel cells, and other alternative energy equipment.
City gas business (operated by Hidaka Toshi Gas)
Hidaka Toshi Gas, a wholly owned subsidiary of Sinanen HD, operates the city gas business in Hidaka, Saitama Prefecture.
It has a relatively small business scale with a contracted customer base of roughly 7,000.
Fuel oil sales
The company sells kerosene and diesel oil under a similar setup as the LP gas business using both the direct-sales channel catering mainly to regular households and the wholesale channel catering to fuel retailers.
Electricity business (mainly low-voltage electricity)
In the B2C business, the company sells low-voltage electricity mainly to its LP gas customers such as regular households. It secures electricity through direct procurement from power generators as well as through the Japan Electric Power Exchange (JEPX). The company says bundling electricity and LP gas in a package has proven effective, since it boosts sales efficiency and profitability, and also prevents contract cancellations. In addition to its focus on direct-sales customers, the company plans to step up marketing efforts aimed at distributors. (The structure of the electricity business is explained in the “B2B segment” section.)
B2B segment (mainly sales of petroleum products): 42.5% of operating profit (FY03/21)
The B2B business, mainly operated by Sinanen Co., Ltd., entails the purchase of petroleum products (e.g., kerosene, diesel oil, and gasoline) from petroleum refineries such as Cosmo Oil Marketing, ENEOS, and Idemitsu Kosan for sale to distributors, home improvement stores, and large-volume customers. The company also sells gasoline and diesel oil to roughly 100 affiliated service stations (of which around 20 are managed directly). In FY03/21, the segment recorded sales volume of 2.4mn kiloliters (kl), breaking down by product into 1.5mn kl for kerosene, 0.4mn kl for heavy oil, 0.3mn kl for diesel oil, and 0.2mn kl for gasoline. Kerosene accounted for a large share of the total, at 61.8%, mainly because the company’s petroleum product business has historically concentrated on wholesale operations geared toward local fuel retailers.
Business structure
The company procures kerosene and other petroleum products from petroleum refineries such as Cosmo Oil Marketing, ENEOS, and Idemitsu Kosan. It then sells them wholesale to fuel retailers, home improvement stores, and other customers.
Sales of industrial fuels
The company also supplies industrial-use petroleum products to the on-site bases of large-volume customers. Sales of A fuel oil, diesel oil, and fuel for marine vessels are among the wide range of transactions handled in this business. Diesel oil sales target businesses operating fleets of large vehicles such as transport companies across Japan as well as construction sites. To factories, the company sells products such as A fuel oil and LP gas. For marine vessels, it handles A fuel oil for small vessels such as fishing ships, and C fuel oil for major vessels at shipping companies. It also sells fuel with low sulfur content for large marine vessels in Taiwan.
The industrial fuel business is characterized by slim margins because a large number of distributors aim to capture a share of the substantial transaction volume in this market, and customers are sensitive to price. Domestic demand continues to face structural headwinds such as the push toward carbon neutrality, demand for kerosene declining due to growing adoption of air conditioners and gas heating, metals and other materials manufacturing industries being hollowed out, customers shifting toward city gas, and demand from factories declining as energy-efficient solutions gain traction.
However, looking at kerosene, the company’s mainstay in industrial fuel sales, its sales volume and market share are slowly rising despite a downward trend in overall domestic sales volumes. Demand for kerosene has continued to decline due to consecutive warm winters in recent years, growth in the supply of condominium units, the popularity of air conditioners and gas-based heating systems, and the adoption of electrical underfloor heating systems, causing competitors to progressively downsize or withdraw from their businesses. In contrast, the company says it has expanded market share by leveraging its extensive knowledge of customer trends (those of consumers, fuel retailers, home improvement stores, and large-volume customers) and its sales capabilities.
Electricity business
In the electricity business, the company generates solar power and sells subdivided lots of solar power stations, supplies environmentally friendly power (generated with zero CO2 emissions), and provides maintenance service. It has the capability to function as a one-stop shop of power generation, equipment installation, electricity sales, and maintenance. The electricity sourced from the company-owned solar power stations and those sold to other parties in subdivided lots is also sold by the company, a licensed electricity retailer. Amid rising awareness of environmental, social, and corporate governance (ESG) and of sustainable development goals (SDGs), the company plans to expand sales of electricity generated with minimal impact on the environment. It plans to deploy across Asia the renewable energy technologies and energy-efficient solutions it developed in Japan.
Solar power generation and photovoltaic services business
In this business, the company provides maintenance services to ensure smooth operation of solar power systems, and sells the Ohisama Car Roof solar power generation system for carports. It also generates electricity from its own mega solar power stations, and provides maintenance services for residential and industrial solar power generation systems.
Electricity retailer
In April 2016, the Japanese government launched its electricity system reforms, implementing a full-scale deregulation of the electricity retail market. The company’s entry to the retail market as a so-called power producer and supplier (PPS) dates back to February 2014.
The company procures electricity from its own mega solar projects, spot transactions on the Japan Electric Power Exchange (JEPX), and via bilateral contracts with power generators. The company says its strength lies in its stable sourcing capability, citing that the JEPX price hike in January 2021 did not have a major impact on procurement. Main customers are factories, offices, and other businesses.
Electricity retailer
Electricity retailers prescribed in Article 2 of the Electricity Business Act refer to operators other than those that specialize in power generation, transmission, and distribution. They are registered and licensed by the Japanese Minister of Economy, Trade and Industry. Electricity retailers have no supply obligations similar to those for the former general electricity utilities (deemed electricity retailers)*, but are obliged, except with good reason, to ensure supply capacity sufficient to meet the electricity demand needs of the end users. Players include the retail arms of former general electricity utilities and the power producers and suppliers (PPS), the latter being relatively new market entrants that have surfaced since the earlier electricity industry reforms.
*Former general electricity utilities (deemed electricity retailers): The ten Japanese electric power majors that have been operating regionally since before industry liberalization. Entities include TEPCO Energy Partner, Tohoku Electric Power (TSE1: 9506), Hokkaido Electric Power (TSE1: 9509), and others. The general electricity utilities required a license from the Minister of Economy, Trade and Industry. They operated in a defined supply area and were obligated to supply enough electricity to meet the demand of “regulated customers” (end users in the area who were legally bound to procure from them). General electricity utilities were also responsible for ensuring ultimate supply security for the “liberalized customers” (end users to whom market liberalization had been extended). Revisions to the Electricity Business Act resulted in the abolishment of the general electricity utility classification and the emergence of a new classification comprising power generators, general transmission and distribution operators, and electricity retailers, all of whom operate under a licensing system.
Suppliers
Electricity retailers generally purchase electricity through a bilateral contract with power generators*1 or through spot transactions on the Japan Electric Power Exchange (JEPX)*2. The purchase price in a bilateral contract is typically higher than in spot transactions, because the contract guarantees a certain supply volume during the contract period*3. Meanwhile, since electricity cannot be stockpiled, spot transactions entail the risk of a sharp price hike should there be an expansion in the supply-demand gap due to weather-related events or natural disasters. An electricity retailer needs to establish its own procurement mix based on these price and risk factors. The company says it places a heavier weighting on purchases via bilateral contracts rather than through JEPX, as it prioritizes procurement stability.
*1 Power generators: Companies that generate electricity at their own power plants for wholesale to electricity retailers. They are required to file with the Ministry of Economy, Trade and Industry to operate. Players include former general electricity utilities such as Kyushu Electric Power and JERA, former wholesale electricity utilities such as J-POWER, and other suppliers from the energy industry (e.g., Tokyo Gas and ENEOS), manufacturing industry (e.g., Nippon Steel and Hitachi Zosen), and those associated with general trading companies (e.g., Itochu Enex).
*2 Japan Electric Power Exchange (JEPX): Established for the purpose of facilitating electric power spot and forward transactions, JEPX is the only wholesale electricity exchange in Japan. In addition to spot, forward, and intraday transactions, the exchange also features green-power electricity wholesale trading. In 2018, the exchange introduced a non-fossil value exchange and an indirect auction system. Since electricity cannot be stockpiled, spot prices can be highly volatile and pose a major risk factor for electricity retailers such as the PPS. Spot prices often soar in summer and winter, when demand increases. In 2018, prices spiked at the beginning of the year and twice during summer (prices that trended at about JPY10/kWh on average spiked to about JPY75/kWh on one summer afternoon).
*3 Contract periods in bilateral contracts: While terms may vary from months to years, most contract periods last for one year.
Customers
In the B2B segment, the company mainly sells high-voltage electricity. Customers are mostly factories, office buildings, stores, and other businesses.
Non-energy/Global segment: 11.6% of operating profit (FY03/21)
Bicycle business
The bicycle business is operated by wholly owned subsidiary Sinanen Bike Co., Ltd. As a leading bicycle importer in Japan, Sinanen Bike sells quality yet affordable bicycles, including imported bicycles of well-known foreign brands such as DAHON. Roughly 65% of its merchandise is sold through the retail channel (Daisharin retail stores) and about 35% through home improvement stores and specialist stores. As of end-March 2021, Sinanen Bike has rolled out a total of 36 Daisharin stores, mostly in eastern Japan.
Bike sharing business
The bike sharing business, which provides last-mile mobility solutions, is operated by wholly owned subsidiary Sinanen Mobility+ Co., Ltd. In Europe, the US, and China, public bike sharing systems are gaining traction as a new mode of transportation to complement existing railway infrastructure. Sinanen Mobility+ plans to roll out a bike sharing service across Japan in an effort to create a new transportation infrastructure in the country. As of end-March 2021, the company operated roughly 1,800 own-brand bike sharing docks (stations) in the premises of convenience stores and other venues in Tokyo, Saitama Prefecture, Kanagawa Prefecture, and Chiba Prefecture. The number of available bicycles at its stations expanded from roughly 2,000 at end-March 2019 to 8,200 at end-March 2021.
Environmental and recycling business
The environmental and recycling business is operated by wholly owned subsidiary Sinanen Ecowork Co., Ltd. The subsidiary engages in production and sales of wood chips (biomass fuel) as well as sales of waste recycled fuels. It processes waste wood on contract using its recycling centers in Chiba and Shiraoka where the waste wood is crushed and formed into wood chips after removing foreign matters. The wood chips (sorted by size) are then sold to end users for use as fuel for biomass power and raw materials to make paper and building materials. Sinanen Ecowork also procures wood chips from a collaborating wood chip manufacturer in the Kanto region. Through in-house production and third-party sourcing, the subsidiary has developed a stable supply system. Total wood chip handling volume reached about 110,000 tons at end-March 2020, and Sinanen Ecowork intends to expand that volume over the medium term. It is also building a system supporting broad treatment of waste materials other than waste wood by leveraging its network of business partners.
Antimicrobial business
Wholly owned subsidiary Sinanen Zeomic Co., Ltd. (founded in 1991) is a pioneer in inorganic antimicrobial agents. It manufactures the silver-base inorganic antimicrobial agent Zeomic, which uses the antimicrobial properties of silver by combining silver ions and zeolite minerals, and is widely applied in medical equipment, textiles, and daily necessities. The subsidiary has obtained regulatory approval (from the United States Food and Drug Administration [FDA] and Environmental Protection Agency [EPA]) for the antimicrobial agent, and has launched the product in overseas markets such as Europe, the US, China, and Southeast Asia. It plans to harness its technologies developed as an antimicrobial agent manufacturer to branch into production of deodorizers and water treatment agents, thus becoming a manufacturer of functional materials.
Systems business
Wholly owned subsidiary Minos Co., Ltd. (founded in 1976) provides an LP gas customer management system to LP gas retailers and a customer information system (Power CIS) to electricity retailers. In 2013, it launched the cloud-based Power Net G4 core business system for LP gas operations. In 2016, Minos rolled out the Power CIS customer information system that caters to the deregulated electricity retail sector. The subsidiary also provides account transfer payment collection services and centralized monitoring systems.
Building maintenance and management business
Takara Building Maintenance Co., Ltd., which became a wholly owned subsidiary in March 2017, provides one-stop building maintenance and management services. Established in 1981, Takara Building Maintenance has since provided building maintenance and management, comprehensive building inspection, and operation support services, as well as other in-house developed services.
Building maintenance and management services comprise services related to cleaning management, facilities management, fire-fighting equipment, statutory inspections, and housing complexes.
Comprehensive building inspection services include degradation inspections, legal compliance inspections, indoor environment inspections, earthquake resistance inspections, geographic history and geological inspections, energy-efficiency inspections, and various upgrade and repair work.
In-house developed services cover LED lighting installation support services, sales of water-saving equipment, sales of security camera systems, electronic breaker installation support services, and air conditioner cleaning services.
Operational support services encompass integrated support for property management, dispatch of various human resources, and operation services for hospitals, funeral halls, and other businesses.
In recent years, Takara Building Maintenance has expanded its comprehensive facility management services by moving into building and facility management, hospital operation support, and funeral hall-related operations. Going forward, it plans to focus on comprehensive maintenance services for housing complexes such as apartments and condominiums (installation and maintenance of various housing equipment; restoration to original state), and also expand the business base from the Tokyo metropolitan area to the Kanto region at large.
Other wholly owned subsidiaries of Sinanen HD that provide building management services include Indess Co., Ltd.* and Yutecs Co., Ltd.**
* Indess Co., Ltd. (Machida City, Tokyo; cleaning business) provides comprehensive maintenance services for apartments and condominiums (daily, recurrent-interval, and regular cleaning), renovation services aimed at restoring vacated properties to their original state, interior renovation services, residential cleaning services, all-round cleaning services (including floor cleaning for communal areas, dispatch of superintendents and daily cleaning staff, interior finishing services), all-round renovation services, and gas appliance installation (replacement) services.
** Yutecs Co., Ltd. (Setagaya-ku, Tokyo; equipment installation business) sells and provides installation services for water heaters, bath water heaters, gas stoves, and air conditioners, sells and provides installation services for kitchen and bathroom water heating equipment, offers comprehensive proposals for bulk replacement of equipment at housing complexes such as apartments and condominiums, provides proposals for lease-based replacement and installation of gas appliances, air conditioners, and other equipment. Yutecs was merged into Indess in October 2020.
Market and value chain
LP gas market
What is LP gas?
Liquefied petroleum gas (LP gas) is a fuel composed of hydrocarbons containing three or four carbon atoms—generally propane and butane, respectively. Residential and commercial LP gas mixtures tend to have compositions of 80 mol% or higher propane and 20 mol% or lower butane. LP gas exists as a gas at normal ambient temperatures and atmospheric pressure, but it turns into a liquid when exposed to high pressure or low temperatures. In its liquid state, LP gas is compressed at a ratio of roughly 1:250, making it easier to handle at each stage of transport, storage, and consumption.
Incidentally, the main constituent of city gas is methane, a hydrocarbon with one carbon atom. Like LP gas, city gas is transported from gas-producing countries in its liquid state, which is referred to as liquefied natural gas (LNG).
History of LP gas
LP gas is manufactured as a byproduct of natural gas processing and crude oil refining. It first gained traction in Japan around 1955 driven by an increase in production of LP gas in tandem with the rapid development of the petroleum refinery and petrochemical industries. At the time, LP gas was mainly sold in the form of propane tanks for residential and commercial use, and demand for propane gas rose as a replacement for traditional fuels such as charcoal, coal, and briquettes. At the same time, providers sought to develop industrial applications for butane gas, another byproduct gas.
Thereafter, the market for LP gas expanded as Japan entered its period of rapid economic growth. Japan started importing LP gas from the Middle East from 1961, and began using LP gas as fuel for taxis from 1962. At present, the bulk of the taxi companies in Japan run their fleets on LP gas.
Applications
At present, LP gas is widely used in households, stores and companies, factories, vehicles, as a supplement to increase the calorific value of city gas, and as a chemical raw material. In FY2016, Japan consumed 14.0mn tons of LP gas, accounting for 5% of its final energy consumption. LP gas is used by some 24.0mn Japanese households (roughly half of the total). It fuels appliances such as gas stoves, water heaters, portable stoves (that use gas cartridges), outdoor barbeque grills, and combine harvesters. LP gas is also used in roughly 220,000 taxis and other vehicles.
In the commercial arena, LP gas is employed in eating and drinking facilities such as restaurants, public facilities such as schools and hospitals, the food processing industry, as well as in hot-air balloons and torches.
Vehicles powered by LP gas have received praise for their economic and environmental benefits. LP gas is used in commercial vehicles such as delivery trucks, and fuels roughly 80% of Japan’s taxis.
In the industrial sphere, LP gas is known for its ease of handling because its combustion temperature and calorific value can be easily adjusted. Consequently, it is widely used in the steel and non-ferrous metals industry and manufacturing industries that produce steel products, ceramics, stone and clay products, transport equipment, food products, and electric appliances.
Production
LP gas has several sources. It can be separated and refined from gases generated at oil fields during the extraction process of crude oil. This source accounts for the largest share of LP gas production volume at gas-producing countries in the Middle East. LP gas can also be separated and refined from natural gas (chiefly methane) extracted from gas fields. Of the shale gas fields in the US, LP gas is extracted as a byproduct from gas fields of wet gases containing a large amount of heavy gases such as propane and butane. Finally, LP gas can be separated and refined from byproduct gases generated in oil refineries and ethylene plants. The bulk of the LP gas manufactured in Japan is generated in this way.
Source countries
Roughly 75% of the LP gas consumed in Japan is imported from overseas, and the remaining 25% is produced domestically as a byproduct of crude oil refining and chemicals production. Both imported and domestically produced LP gas are transported from primary to secondary terminals by coastal vessels or tank trucks. Residential LP gas is subsequently stored in gas cylinders at filling stations and delivered to end customers.
In FY2018, Japan mainly imported LP gas from the US (69.6% of total imports), the UAE (9.0%), Saudi Arabia (6.2%), Qatar (4.9%), and Kuwait (3.4%). Although LP gas imports were historically skewed toward the Middle East, the share of imports from the US has increased sharply in recent years in tandem with the shale gas boom in that country (LP gas being a byproduct of shale gas production). In the future, new liquified natural gas (LNG) projects in countries located in the Pacific Rim, including Australia and Canada, are expected to further boost LP gas output.
Supply systems
In the case of comparatively low-volume users such as households, LP gas is either delivered to individual homes in gas cylinders or through pipeline systems. The latter breaks down to small-area and community pipeline systems. In recent years, bulk supply (i.e., supply from a tank truck to a bulk storage tank on customer premises) has emerged as a popular option, providing the benefits of streamlined distribution, enhanced safety, and aesthetic appeal.
Distribution
The LP gas that is imported via tankers from the US, Saudi Arabia, and other gas-producing countries is unloaded at import (primary) terminals of importers and primary dealers such as ENEOS Globe. Primary terminals are facilities that accept imported LP gas, store the gas in tanks, and ship it in coastal tankers and tank trucks. There are 35 of these terminals across the country, keeping a permanent stockpile of roughly 1.5mn tons of LP gas for civilian use. Secondary terminals function as temporary storage locations for LP gas transported by coastal tankers from primary terminals, from where the gas is transported to filling stations and large-volume consumers by tank trucks. LP gas importers and primary dealers operate roughly 50 secondary terminals in Japan. Filling stations, also sometimes called tertiary terminals, are locations where LP gas is filled into gas cylinders, and from where the gas is transported to consumers and businesses via retailer delivery trucks. Roughly 2,200 filling stations are operated in Japan by fuel trading houses such as Sinanen HD, Iwatani, and Mitsuuroko Vessel.
Laws governing LP gas
In Japan, the manufacturing, stockpiling, and distribution of LP gas are governed by the High Pressure Gas Safety Act, while associated sales activities, equipment installation, and appliances fall under the LPG Act.
LP gas demand
Japanese demand for LP gas rose in the post-war period of rapid economic growth and peaked in FY1996. It has since trended down and currently hovers at the level recorded in the early 1980s. The main causes behind the decline have been warm winters driven by global warming, population outflows from regional and suburban areas, a decline in residential electricity consumption in regional and suburban areas accompanying demographic aging, the growing popularity of all-electric homes, the adoption of energy-efficient water heaters, and the hollowing out of manufacturing industries (particularly, the metallurgical industries).
LP gas demand volume in Japan (unit: 1,000 tons)
FY1956
FY1960
FY1965
FY1970
FY1975
FY1980
FY1985
FY1990
FY1995
FY2000
FY2005
FY2010
FY2015
FY2018
45
430
2,694
6,591
10,415
13,949
15,806
18,782
19,341
18,830
18,401
16,306
14,229
14,114
Source: Ministry of Economy, Trade, and Industry (METI) data
Composition of LP gas demand by application
In FY2018, LP gas demand broke down by application into 1) household/commercial use (42.8%, mainly ordinary households and restaurants), 2) special use (21.7%, chemical raw materials), 3) general industrial use (21.5%, mainly factory boiler and burners, heating furnaces, and hot‐water supply), 4) additive to city gas to increase calorific value (7.9%), and 5) automotive use (6.1%, mainly taxis and trucks). Notable trends in recent years have included an increase in the share of LP gas used as a chemical raw material, and a decline in the share of household/commercial use driven by the dwindling population in regional areas, the growth in supply of condominium units, and the spread of air conditioners.
Industry structure
There are four major LP gas importers and primary dealers (including Gyxis Corporation), 1,100 wholesalers (including Sinanen HD), and 21,000 retailers (including Sinanen HD).
LP gas importers and primary dealers are usually petroleum refineries or the subsidiaries of general trading houses. Previously, a congested market led to excessive competition, weighing on margins and causing fragile profit structures among players. In the 2000s, alliances and mergers resulted in the creation of four major importers and primary dealers (ENEOS Globe, Japan Gas Energy, Gyxis, and Astomos Energy).
Four major importers and primary dealers: ENEOS Globe is a joint venture by Nippon Oil & Gas and Mitsui Marubeni Liquefied Gas. Japan Gas Energy is a joint venture by Nissho LP Gas and the LP gas divisions of Japan Energy and Itochu Enex. Gyxis is a joint venture by the LP gas divisions of Cosmo Oil, Sumitomo Corporation, Showa Shell Sekiyu, and TonenGeneral Sekiyu. Astomos Energy is a joint venture by the LP gas divisions of Idemitsu Kosan and Mitsubishi Corporation.
Wholesalers include companies such as Iwatani (which also operates as an importer and primary dealer), Japan Agricultural Cooperatives (JA), Mitsuuroko, Itochu Enex, San-Ai Oil, Itami Sangyo, Hashimoto Sangyo, Horikawa Sangyo, Saisan, and Ichitaka Gas One. Prominent companies operate in various areas of Japan, aggressively working to acquire commercial rights and step up door-to-door sales to accelerate expansion in the high-margin retail business.
Retailers consist of the roughly 21,000 distributors spread across Japan, many of which are small business operators in regional areas. Major retailers such as Nippon Gas and Tokai Holdings control their entire distribution supply chain. In recent years, major retailers and wholesalers have expanded their market shares by rapidly growing their customer bases through the acquisition of commercial rights.
Petroleum products market
Kerosene
Kerosene is a colorless and transparent liquid fuel that is mainly used for heating. Kerosene used to heat Japanese houses is classified as white (refined) kerosene. It has less than 80ppm of sulfur content, does not have a strong odor, and exhibits superior combustion properties.
General consumer use account for roughly 60% of the total demand for kerosene, with heating for households being the main application. Unlike other petroleum products, kerosene is mainly sold in small lots through a complex array of distribution channels. At the wholesale level, kerosene is supplied by fuel trading houses and distributors. At the retail level, it is sold by fuel retailers, service stations, rice shops, home improvement stores, agricultural cooperatives, co-ops, etc. One factor that has contributed to the diversity in kerosene sales channels is the fact that door-to-door vending using small tank trucks is legal in Japan. Kerosene for industrial use is sold directly by petroleum refineries or through fuel trading houses and distributors.
Peak demand during winter period
Demand for kerosene peaks during the winter when demand for heating increases. As a result, kerosene prices tend to be higher in the winter than in the summer. Kerosene sales volume and prices are subject to sharp seasonal fluctuations. During the first oil crisis, the Japanese government rolled out policies to ensure soaring oil prices would not affect household finances directly, and decided to not impose a tax on kerosene. For this reason, kerosene prices have remained low relative to gasoline and diesel oil. The kerosene prices negotiated between co-ops in high-demand areas (e.g., the Sapporo Co-op) and petroleum refineries at the start of autumn (commonly referred to as co-op prices) have long served as an indicator for peak-demand kerosene prices at the start of the winter season. In recent years, home improvement stores have also increased their bargaining power, and this has eroded the importance of co-op prices as indicators.
Crude oil price (left) and kerosene price (right)
Source: Shared Research based on Bloomberg data (left)
Shared Research based on Agency for Natural Resources and Energy data (right)
Distribution
Petroleum refineries such as ENEOS import crude oil from oil-producing nations such as Saudi Arabia and the UAE. After the oil is transported to Japan using oil tankers, it is offloaded and refined at domestic refineries and used to produce kerosene, gasoline, and other petroleum products. These products are shipped by tank truck from refineries and secondary terminals to tank terminals of fuel trading houses and distributors, as well as kerosene centers, services stations, home improvement stores, and other retailers.
Kerosene demand
Japanese demand for kerosene expanded during the post-war period of rapid economic growth and reached a record high in FY1995, after which demand entered a downtrend. At present, demand is running below the levels recorded in the 1960s. The main causes of the decline have been successive warm winters driven by global warming, population decline, advances in insulation performance of houses, the spread of air conditioners and underfloor heating systems, the growth in the supply of condominium units, the increased adoption of gas-based heating systems, and the growing popularity of all-electric homes.
Kerosene demand volume in Japan (unit: 1,000kl)
FY1955
FY1960
FY1965
FY1970
FY1975
FY1980
FY1985
FY1990
FY1995
FY2000
FY2005
FY2010
FY2015
FY2019
542
1,912
5,236
15,835
21,663
23,565
25,307
26,701
30,017
29,917
28,265
20,332
15,946
13,621
Source: METI data
Structure of petroleum products industry and dwindling number of service stations
The Japanese petroleum products sector comprise the three major petroleum refineries (ENEOS, Idemitsu Kosan, and Cosmo Oil Marketing), several fuel trading houses (such as the Sinanen HD, JA, Usami Koyu, Mitsubishi Corporation Energy, Marubeni Energy, Itochu Enex, San-Ai Oil, and Kamei), and retailers. Retailers that sell automotive fuel mainly do so through service stations. As of end-March 2020, some 30,000 refinery-affiliated and independent service stations were operating in Japan. The number of service stations has trended down over the last 20 years. Service stations face a challenging operating environment attributable to lower demand as car ownership is declining while fuel efficiency is increasing (due to greater use of microcars [Japanese Kei cars] and hybrid vehicles) and to chronic oversupply of gasoline.
Structure of petroleum products demand in Japan
In FY03/20, the petrochemical feedstock naphtha accounted for 25.8% of Japanese demand for petrochemical products. Automotive gasoline accounted for 29.8%, diesel oil for diesel vehicles for 20.4%, kerosene for small-scale heating for 8.3%, A fuel oil for small and mid-sized boilers, business office heating, and marine fuel for small vessels for 6.2%, C fuel oil for power generation, large boilers, and marine fuel for large vessels for 4.5%, and aircraft jet fuel for 3.1%.
An analysis of changes in Japanese demand for petroleum products over the last 10 years shows that demand has declined 10.1% for naphtha (due to reductions in capital expenditures at ethylene plants), 14.5% for gasoline (due to improvements in vehicle fuel efficiency and growth in the number of Kei cars), 32.1% for kerosene (due to growth in the supply of condominium units and the spread of air conditioners and underfloor heating systems), 36.7% for A fuel oil (due to a switch to city gas and the hollowing out of industries), 55.0% for C fuel oil (due to a reduction in operation of oil-fired power plants and a transition to other fuels in the manufacturing sector), and 2.6% in jet fuel (due to improvement in aircraft fuel efficiency). Over the same period, demand has increased 3.9% for diesel oil (due to growth in demand for small-lot deliveries).
Electricity market
Electricity demand in Japan
Electricity consumption in Japan had remained firm from FY2000, hitting a record high of 1.0tn kWh in FY2010 due to a severe heat wave. However, it declined thereafter following the Great East Japan Earthquake in 2011, when the rapid spread of energy-saving home appliances and LED lighting accelerated moves to conserve energy. The decline in production in the semiconductor and materials industries further reduced consumption, which continued to decline through FY2015. After remaining flat at about 950bn kWh, electricity consumption trended downward again from FY2018, in part due to factors such as torrential rain and the rainy season lasting for a particularly long time (which resulted in an unusually cool summer that dampened electricity demand). Electricity demand among businesses, e.g., for office buildings, has remained generally flat as demand growth from an increase in office buildings and fast-paced spread of OA equipment was offset by demand curtailment through energy conservation initiatives (e.g., the use of equipment with improved energy efficiency).
Electricity consumption in Japan (kWh mn)
(GWh)
FY1960
FY1965
FY1970
FY1975
FY1980
FY1985
FY1990
FY1995
FY2000
FY2005
FY2010
FY2015
FY2019
Electricity consumption in Japan
99,411
168,821
319,701
428,335
520,251
599,306
765,602
881,559
982,066
1,043,800
1,056,441
955,345
947,030
Source: Shared Research, based on Ministry of Economy, Trade and Industry data on electricity use
Gradual liberalization of the electricity market in Japan
Since FY2000, the Agency for Natural Resources and Energy—a bureau of the Ministry of Economy, Trade and Industry—has led the phased liberalization of the electricity retail market in Japan. With the deregulation of the low-voltage sector*, the retail market became fully liberalized in April 2016. The market for low-voltage power (about JPY8tn) previously dominated by the general electricity utilities was opened up, enabling all customers including households to choose from various providers and pricing plans. Together with the already deregulated high-voltage sectors, the fully liberalized retail market is valued at about JPY18tn.
* Prior to April 2016, power producers and suppliers (PPS) could only supply electricity to end users contracted for 50kW or more, which included extra-high-voltage customers (e.g., large plants and department stores) and high-voltage customers (e.g., midsized plants and supermarkets). The restriction was lifted in April 2016, giving PPS access to the previously regulated low-voltage customers such as households.
In May 2018, Japan launched a non-fossil fuel energy value trading market, which allows participants to trade the environmental value of power supplies.
In July 2019, the baseload market was established to equalize access to the supply of baseload power among the electricity retailers.
The legal separation of power transmission and distribution operations was accomplished in April 2020. Specifically, the transmission and distribution arms of the former general electricity utilities were split off into a separate legal entity and made into a group subsidiary. In a liberalized market, it is essential for all players to have fair and equal access to transmission and distribution networks, but the previously applied accounting separation was not enough to accomplish this. Under an accounting separation, verification by an external party remained difficult, since the internal business dealings between the power generation and the transmission/distribution arms could not be clarified in the form of a contract between legal entities. An accounting separation also did not allow for the application of wheeling regulations. In response to these issues, the legal separation was enacted to improve the neutrality of transmission and distribution operations. TEPCO Power Grid, Inc. (TEPCO Group), Kansai Transmission and Distribution, Inc. (Kansai Electric Power subsidiary), and Chubu Electric Power Grid Co., Inc. (Chubu Electric Power subsidiary) are some of the power transmission and distribution businesses spun off from the regional electric power majors.
Going forward, as the utilization of variable renewable power sources (including wind power and solar power) increases, Japan intends to gradually introduce from 2021 a supply-demand adjustment market, where participants can respond to output fluctuations by efficiently trading adjustment capacity across wide areas.
Process until deregulation of the electricity retail market
Executive summary
Business overview
The Sinanen Holdings Group (“Sinanen HD” or “the company”) is one of Japan’s major fuel trading houses, ranking sixth by sales among the listed fuel trading companies as of FY03/21. It handles a variety of fuels and petroleum products, with the sales of liquified petroleum (LP) gas*1 and kerosene*2 at the center of its operations. In the renewable energy space, the company is starting a wind power business using a new type of micro wind turbine, and also plans to launch a large wind farm in South Korea in a joint venture with a local company. In the non-energy domain, another focus area, it operates a bike sharing business, manufactures antimicrobial agents, and manages buildings. Established in 1927, the company originally made and sold briquettes*3 and briquette balls*4. Many of the fuel retailers among its customers also trace their roots back to these products.
LP gas: Sinanen HD sells LP gas mainly in eastern Japan, and the Hokuriku, Chubu, and Kansai regions. The number of its end users total roughly 700,000. Wholesale sales make up about three quarters of the company’s total sales volume in this business, with the high-margin direct sales to end users (retail sales) accounting for the remaining quarter. The company procures LP gas from suppliers such as ENEOS Globe, Astomos Energy, and Gyxis. Its wholesale customer base consists of several thousand local fuel retailers (LP gas and kerosene are often sold together to the same retailers). Among the customers of its retail sales channel are regular households, restaurants, and factories.
Petroleum products: The company sells petroleum products across Japan, mainly focusing on kerosene sales, which account for about 60% of the total sales volume. Gasoline and diesel oil sales have smaller shares, making up about 10% each. Petroleum products are sourced from companies such as Cosmo Oil Marketing, ENEOS, and Idemitsu Kosan, and are sold primarily to home improvement stores, gas stations, transport companies, and construction companies.
Electric power: The company has been building its electricity business in earnest since FY03/17. As an electricity retailer, it sells high-voltage electricity to businesses and low-voltage electricity to households. The main suppliers are power generators including the electric power majors; procurement from Japan Electric Power Exchange (JEPX) is limited. Electricity and LP gas are bundled for the majority of the company’s utility contracts with households, a strategy that has contributed to a reduction in cancellations rates.
Sinanen HD’s recurring profit margin was 1.1% in FY03/22. The low margin is attributable to a number of factors, one of which is the nature of the petroleum product wholesale business (generally, a low margin business). Additionally, looking at the company’s LP gas sales business, high-margin direct sales make up a smaller share of the total compared to the sales mix at its peers. The non-energy ventures also have yet to turn a profit as the bike sharing business is still in the investment phase. Improving profitability across the board is therefore a pressing management challenge for Sinanen HD.
In the short term, the company’s earnings are significantly susceptible to demand shifts caused by temperature changes (i.e., warm winters and cold waves), although they are not very vulnerable to economic cycles. Single-year and quarterly performances are affected by fluctuations in raw material prices, such as the price of crude oil and the propane contract price, but since procurement costs are retroactively adjusted based on the gas-cost adjustment system, margins are stable when averaged out. In FY03/21, operating profit rose 19.6% YoY, with all segments marking YoY operating growth. While the drop in selling price of fuels caused sales to fall YoY, curtailment of SG&A expenses in the Energy Wholesale/Retail and Related business (B2C segment), flexible procurement strategy in the Energy Solution business (B2B segment), and strong performance in the antimicrobial and systems businesses (Non-energy/Global segment) have contributed to earnings.
Sinanen HD regards the renewable energy business (B2B segment) as its next growth driver. In May 2020, it announced a plan to participate in a wind power project in South Korea. The company has a 65.3% stake in a joint venture it established with a local company, and plans to build a wind farm with total output capacity of 90MW. While the plan calls for a total investment of JPY22.9bn, the business is expected to deliver stable earnings and high profitability, since the electricity generated by the plant will be sold to a local power company at a long-term fixed price based on South Korea’s Renewable Portfolio Standard program (RPS*). The project is currently awaiting approval for development. The company aims to invest in several other renewable energy project overseas going forward. In Japan, it also launched a new business involving a new type of micro wind turbine. It began a pilot program in Saitama, and is working toward commercialization.
*RPS: a program that requires power companies to procure a certain percentage of their electricity from renewable energy
Since the energy businesses have matured in recent years, Sinanen HD is directing more focus on the non-energy operations (Non-energy/Global segment) as a strategic area. Its activities in this domain cover a broad range of services and products including bicycle sales, bike sharing services, wood-based recycled fuel, antimicrobial agents, building management, and shared office services. According to the company, building management and bicycle sales have the highest sales mix in the segment. The building management operation encompasses cleaning, installation/repairs of equipment, and restoration of properties to their original state, as well as providing operational support to hospitals and funeral halls. With a view to supplying one-stop maintenance services targeting housing complexes, the company has been expanding its services across the Kanto region. In the bicycle business, the company operates 36 Daisharin-brand retail stores (as of end-March 2021) in the Tohoku and Kanto regions.
Sinanen HD is currently on its second medium-term management plan with achievement goals set for FY03/23. As a quantitative objective, the plan calls for the creation of a business structure that enables stable ROE of 6.0% or above (versus recent five-year average of 5.1%). As qualitative targets, the plan looks for 1) an improvement in capital efficiency (by improving the efficiency of existing businesses, selling off low-efficiency assets, and withdrawing from businesses with low-efficiency assets), 2) investments to drive sustainable growth (via acquisitions of commercial rights in the LP gas business, M&A in the building management business, aggressive investments in the bike sharing and the renewable energy businesses, and enhancements of core systems), and 3) a transformation of employee attitudes, practices, and conduct.
Earnings trends
In FY03/22, the company recorded sales of JPY289.3bn, operating profit of JPY2.5bn, recurring profit of JPY3.3bn, and net income attributable to owners of the parent of JPY2.5bn. Annual dividends per share were JPY75.00. The company adopted the Accounting Standard for Revenue Recognition in FY03/22; no previous-year figures are provided for YoY comparison.
The company forecast for FY03/23 calls for sales of JPY310.0bn (+7.1% YoY), operating profit of JPY2.5bn (+0.8% YoY), recurring profit of JPY2.8bn (-14.4% YoY), net income attributable to owners of the parent of JPY2.9bn (+16.6% YoY), and annual dividends per share of JPY75.00. The sales figure assumes that crude oil and propane contract prices, which are at their highest levels since 2014, will remain at current levels. Ongoing IT investments from the previous fiscal year are expected to slow profits. Even so, the company anticipates a YoY rise in operating profit, due to passing on higher purchasing costs to customers and a contribution to profits from the bike sharing business.
Strengths and weaknesses
Shared Research believes Sinanen HD’s strengths are 1) the presence of roughly 90 fuel supply points (Kerosene Centers and Oil Squares) across Japan and a sales network of over 1,000 fuel retailers, 2) sales mix centered on LP gas and kerosene that creates a barrier to entry in cold regions, and 3) efficient facility/equipment utilization thanks to the distribution alliance with other LP gas operators.
The company’s weaknesses are 1) low profit margin in B2B due to focus on the wholesale channel in petroleum product sales, and 2) low profit margin in B2C due to small share of retail sales in the LP gas business.
Key financial data
Note: The company adopted the new Accounting Standard for Revenue Recognition from FY03/22. Therefore, we have not provided a YoY comparison for FY03/22.
Recent updates
Company announces a revision of full-year earnings forecast
Sinanen Holdings Co., Ltd. announced a revision to its full-year FY03/22 forecast.
Revision of full-year FY03/22 forecast
Reasons for the revision
The upward revision to the sales forecast was due to a significant increase in selling prices following the sharp rise in crude oil and propane contract prices.
At the operating profit level, the forecast revision reflects strong kerosene sales, the mainstay of the Energy Solution business, and diesel fuel sales, which the company focused on, despite sluggish sales in the bicycle business. Steady sales of Power CIS in the systems business also contributed to the greater-than-expected earnings.
At the recurring profit level, the forecast revision reflects the delay in the planning of a large onshore wind power generation project in South Korea, which should push back the accompanying non-operating expenses to the next fiscal year or later. The company also expects to record a gain on valuation of derivatives due to risk hedging efforts against fluctuations in crude oil prices and other factors.
At the net income level, the revised forecast takes into account the impact of an extraordinary gain of JPY900mn that is expected to be recorded as a result of the transfer of fixed assets announced in February 2022.
Company announces property sale, related extraordinary gain
On February 28, 2022, Sinanen Holdings Co., Ltd. announced that it had decided to sell certain property holdings. The sale, detailed below, is aimed at both improving its capital efficiency and strengthening its financial position.
As a result of this property sale, the company said it expects to book an extraordinary gain of roughly JPY900mn in FY03/22. The company is still in the process of putting together new estimates for full-year results, which will include the impact of not just the property sale but other factors as well, and has promised to make a timely announcement of its revised estimates should the situation require.
Trends and outlook
Quarterly trends and results
Notes: Figures may differ from company materials due to differences in rounding methods.
The company has adopted the new Accounting Standard for Revenue Recognition, starting in Q1 FY03/22. Since the figures for Q1 FY03/22 are based on the new accounting standard, YoY comparisons are not presented for the quarter.
Notes: Figures may differ from company materials due to differences in rounding methods.
The company has adopted the new Accounting Standard for Revenue Recognition, starting in Q1 FY03/22. Since the figures for Q1 FY03/22 are based on the new accounting standard, YoY comparisons are not presented for the quarter.
Full-year FY03/22 results
Summary
For FY03/22, the progress rate against the company's forecast was 100.1% for sales, 103.3% for operating profit, 102.3% for recurring profit, and 102.9% for net income attributable to shareholders of the parent company. On May 10, 2022, the company revised its full-year forecasts for FY03/22; hence the small disparities.
The company adopted the new Accounting Standard for Revenue Recognition at the start of Q1 FY03/22. Since figures for the year are based on the new accounting standard, we have not provided a YoY comparison. The adoption of the new standard had a downward impact of JPY10.1bn for full-year sales and JPY10.1bn for cost of sales. Operating profit, recurring profit, and net income declined by JPY4mn each.
Results by segment
Retail/Wholesale Energy & Related business (B2C segment)
In mainstay LP gas and kerosene sales, sales volume decreased mainly in early spring and late autumn due to sluggish demand caused by higher average temperatures compared to the previous year. Selling prices, however, rose due to the hike in crude oil and propane contract prices. In addition to lower gross profit on petroleum products, particularly kerosene, the company experienced delays in passing on higher purchasing prices for LP gas in the form of increased selling prices. Even so, profit increased due to the impact of inventory valuations.
Energy Solution business (B2B segment)
In the mainstay petroleum business, unit selling prices rose, reflecting sharply higher crude oil prices. Due to efforts to shift sales locations from existing petroleum sales facilities to Oil Square facilities with expanded capacity, sales volume rose favorably YoY, particularly for diesel oil. On the profit front, the company secured margins in the petroleum business through purchasing measures that corresponded to fluctuations in the crude oil market. In the electricity business, the company diversified its procurement amid a rapidly changing supply–demand environment characterized by high global LNG prices, but profit declined.
Non-energy/Global segment
In the bike sharing business (Sinanen Mobility+ Co., Ltd.), the company developed docking stations for the Daichari bike sharing service. As of March 31, 2022, the company had 2,200 stations, and the number of bicycles under management had risen above 10,000. In November 2021, monthly use reached the highest level to date (600,000 times).
In the environmental and recycling business (Sinanen Ecowork Co., Ltd.), the handling volume of waste wood recycling increased thanks to a positive shift in demand and supply for wood chips amid continued drop in the amount of construction-related waste wood available due to the pandemic. Performance of other businesses, including metal recycling, was also favorable.
In the antimicrobial business (Sinanen Zeomic Co., Ltd.), pandemic-induced demand for antimicrobial products increased, leading to favorable sales in Japan and overseas.
In the systems business (Minos Co., Ltd.), the mainstay core system for LP gas sales made stable contributions. Power CIS*, a customer information system catering to the deregulated electricity retail sector, grew substantially, boosting profit.
Overall profits edged up in the building maintenance and management business, which centers on Takara Building Maintenance Co., Ltd. In addition to steady contributions from the fixed-term management of housing complexes such as condominiums, profit rose due to an increase in new orders for disinfection and cleaning services at medical facilities. One profit-sapping factor was a decline in the number of contracts in the property management business.
In the bicycle business (Sinanen Cycle Co., Ltd.), sales and profit declined. Business was affected by parts shortages, as well as by a downturn in demand following the pandemic-inspired boom in the previous fiscal year. Performance was also affected by soaring prices on overseas transportation and raw materials prices.
For details on previous quarterly and annual results, please refer to the Historical financial statements section.
FY03/23 forecast
FY03/23 company forecast
Business environment
The environment surrounding the Sinanen group’s mainstay oil and gas business remains adverse. In Japan, energy demand continues to decline due to a shrinking population, the spread of energy-saving equipment, and changing lifestyles.
Sales
The company anticipates a 7.1% YoY increase in sales. Although it expects to be affected significantly by crude oil and propane contract prices, current price levels are at their highest since 2014. Annual sales forecasts are based on current price levels, but the company will revise its sales forecast as necessary in the event of a sharp decline.
Operating profit
Ongoing IT investments from the previous fiscal year are expected to slow profits. Even so, the company anticipates a 0.8% YoY rise in operating profit, due to passing on higher purchasing costs to customers and a contribution to profits from the bike sharing business. The company expects recurring profit to decline 14.4% YoY, due to the absence of the gain on valuation of derivatives it recorded in the previous year. After posting JPY2.1bn in extraordinary gains (gain on sale of fixed assets), the company expects a 16.6% YoY increase in net income attributable to owners of the parent.
Dividend policy
The company aims to return profit to shareholders through stable dividends, and targets a consolidated payout ratio of 30% or higher. It also plans to use internal reserves to expand its business domains and make capital investment to strengthen the business foundation.
As of May 13, 2022, the company has not disclosed segment-specific forecasts. This information will be updated following interviews with management.
Initial company forecasts and results
Medium-term management plan and business strategy
Second medium-term management plan (FY03/21–FY03/23)
Positioning
Period to reinforce the organizational foundation for sustainable growth, and to prepare the groundwork for further advances in the third medium-term management plan.
Qualitative targets
Improve capital efficiency
Invest to achieve sustainable growth
Transform attitudes, practices, and conducts of employees
Improve capital efficiency
Improve margins in existing businesses
Make greater use of, or sell, low-efficiency assets
Adopt selection and concentration strategy for existing businesses
Invest to achieve sustainable growth
Make investments to fuel growth of existing businesses: Pursue M&A deals to strengthen earnings foundations of existing businesses and M&A deals in the building maintenance and management business.
Make strategic investments in new businesses: Aggressively invest in the bike sharing business, the renewable energy business, and new businesses.
Improve core systems: Enhance core systems to cope with changes in the business environment, including business diversification.
Transform attitudes, practices, and conduct of employees
Improve corporate culture: Review common sense and customary practices from an individual and organizational standpoint, and cultivate employees who can cope with the high levels of change and risk of the modern era.
Promote work style reforms: Provide an environment in which employees can enjoy and feel enthusiastic about their work.
Cultivate, deploy, and reassign human resources: Create mechanisms to cultivate the spirit of entrepreneurship and develop diverse human resources.
Quantitative target
Establish a business structure that continually generates ROE of 6.0% or higher.
Business strategy
B2C segment (LP gas sales)
LP gas sales
The LP gas supplied by the company reaches roughly 700,000 end users across Japan. The company aims to develop the high-margin retail channel and expand its direct-sales customer base—currently around 210,000 end users—by obtaining retail commercial rights and acquiring LP gas (fuel) retailers. It plans to accelerate the process using multiple methods, including door-to-door sales by sales representatives and customer referrals from various partners. To prevent cancellations of household-use LP gas contracts, it will utilize registered stores and agents to promote the bundling of LP gas and low-voltage electricity. The strategy is to capture customers by establishing one-stop home and living services spanning petroleum products, gas, electricity, and renovations.
On the safety management and distribution front, the company intends to step up operational efficiency through the use of IoT (low-power wide-area [LPWA] networks), the integration of its distribution systems with those of peers (streamlining the congested transport systems), and consolidation of filling stations.
In peripheral fields, the company seeks to expand its real estate-related services by, for instance, steering customers who have vacated their homes (having their gas system terminated in the process) to its vacant property management service.
Japan Enagic (distribution alliance of several leading LP gas wholesalers)
Japan Enagic Co., Ltd. was established in October 2018 as a Kanto area-based transport and filling joint venture of five companies: Melife (subsidiary of Sinanen HD), LOGITRI Holdings (subsidiary of Mitsuuroko Group Holdings [TSE1: 8131]), Mitsuwa Industries, San-Ai Oil (TSE1: 8097), and Hashimoto Holdings. Each of the founding companies holds a 20% stake.
The joint venture serves to consolidate the LP gas distribution and filling operations of LOGITRI, Enagic Kanto, Mitsuwa Transportation, San-Ai Gas Supply Kanto, Maruha Transportation, and Kanagawa Enagic in the Kanto area. It aims to further streamline distribution systems and reduce costs by sharing management resources, including business facilities and filling stations.
Fuel oil sales
In the B2C segment, the company sells kerosene and diesel oil under a similar setup as the LP gas business, using both the direct-sales channel catering mainly to regular households and the wholesale channel catering to fuel retailers.
Electricity business (mainly low-voltage electricity sales)
In the B2C segment, the company sells low-voltage electricity mainly to its LP gas customers such as regular households. It secures the electricity through direct procurement from the power generators as well as through the Japan Electric Power Exchange (JEPX). The company says bundling electricity and LP gas in a package has proven effective since it boosts sales efficiency and profitability and also prevents contract cancellations. In addition to the focus on direct-sales customers, the company plans to step up marketing efforts aimed at distributors.
B2B segment (petroleum product business, etc.)
Petroleum product sales
In FY03/21, the company’s total sales volume of petroleum products came to 2.4mn kiloliters (kl). This breaks down to 1.5mn kl of kerosene, 0.4mn kl of heavy oil, 0.3mn kl of diesel oil, and 0.2mn kl of gasoline. The share of kerosene is substantially high at 61.8% of the total. In kerosene sales, the company intends to cultivate partnerships with home improvement stores and strengthen home-delivery services with a view to enhancing GPM. It will also strengthen distribution functions through small-lot deliveries using tank trucks, and seek to further expand and develop the B2B business. It will develop and maintain business sites in collaboration with the Sinanen group companies. These strategies have already paid off in the form of three consecutive years of rising kerosene sales volume from FY03/19 to FY03/21. The company also plans to boost the sales volume of diesel oil by strengthening the delivery network to construction sites and making better use of its fuel supply points (e.g. Kerosene Centers and Oil Squares).
Electricity business (mainly high-voltage electricity sales)
In the B2B segment, the company sells high-voltage electricity mainly to business sites. The electricity is mostly secured through direct procurement from power generators. Going forward, the company will work to join the balancing group in the electricity wholesale market. It also plans to provide a range of environmentally friendly electricity plans, including a low-CO2 emission power plan.
Solution business
The company aims to bolster its service offerings by expanding into housing products.
Non-energy/Global segment
Bicycle business
In the bicycle business, the company will open a flagship store for its Daisharin retail brand. It aims to increase margins in the business by reviewing store operation formats. It looks to develop private-brand bicycles, strengthen proposal capabilities, and cultivate new customers. It will also expand sales of service-oriented or functional products geared toward B2B channels.
Bike sharing business
Wholly owned subsidiary Sinanen Mobility+ Co., Ltd. operates a sharing service of electric bicycles*1 under the Daichari brand, using the Hello Cycling system provided by a Softbank group company OpenStreet Co., Ltd. The bicycles can be rented from and returned to dedicated bicycle docks (stations). To promote usage of the service, the company is opening new stations and increasing the number of bicycles under its management.
As of end-March 2020, Sinanen Mobility+ rolled out over 8,200 electric bicycles across 1,800 stations in Tokyo and the adjacent prefectures of Kanagawa, Chiba, and Saitama, making the business one of the largest of its kind in the country. It uses vast amounts of data to determine appropriate locations for stations, and enters into agreements with municipalities or forms alliances with private companies (e.g. real estate companies and the three leading convenience store operators). It also develops stations on land owned by individuals. Going forward, the company will continue to narrow down areas to establish stations, and pursue efficient operation.
By end-March 2023, Sinanen Mobility+ aims to become the largest bike sharing service in Japan with 2,700 bicycle stations and over 9,000 electric bicycles under management. As a Mobility as a Service*2 (MaaS) provider specializing in short-distance travel, it plans to team up with smart cities or other mobility business operators to expand its services.
Sinanen Mobility+ intends to actively partake in pilot programs*3 in collaboration with local governments and the private sector.
Environmental and recycling business
The company targets stable operation of its plants manufacturing wood chips for use mainly in biomass power generation. It aims to streamline operations to secure stable earnings in the business. It will cultivate trading operations, and develop new products in the waste recycle business. It also intends to develop, promote, and expand new biomass fuel businesses.
Antimicrobial business
In the antimicrobial/deodorizer business, the company plans to not only supply products, but also provide technological information to support joint development of products. It will offer solutions for microbial or odor-related countermeasures and water treatment operations. It will also develop and promote new products such as lead adsorbents.
Systems business
The company plans to secure stable earnings in this business by strengthening quality control of the existing operations and enhancing customer satisfaction. It will expand business services and provide stable IT platforms. It also looks to create new businesses by commercializing low-power wide-area (LPWA)* networks and mobile products.
Building maintenance and management business
The company plans to expand the business across the Kanto region through organic growth and acquisitions. It will widen its business spheres into building maintenance, inspection, and construction fields. It will also develop the housing complex maintenance business in the Tokyo metropolitan area. It looks to streamline operations through IT solutions.
New businesses
Renewable energy (wind power) business in South Korea
The company partakes in a wind power project in South Korea. It is a renewable energy business under the South Korean Renewables Portfolio Standard (RPS), a program under which electricity and environmental value is sold to major power companies at long-term fixed prices. A wind farm with an output capacity of 90MW (90,000 kW) is slated for construction in South Jeolla Province, South Korea. The company has acquired a 65.3% stake in Bellsion Power Co., Ltd., the parent of the entity that owns the power generation rights. It is currently awaiting development approval.
New micro wind turbine-related business
This business entails the development and manufacture of a new type of micro wind turbines that is groundbreaking in terms of safety, quietness, and power efficiency. The turbines are very small and lightweight, but achieve efficient power generation even with very light wind. The company thinks the business can help spread the use of renewable energy and assist local governments and companies in their business continuity plan (BCP) initiatives.
Developed by Global Energy Co., Ltd. based in Hamamatsu (Shizuoka Prefecture), the micro wind turbines particularly stand out for their ultra-light blades made of a special material with high rigidity and their unique shape that enables efficient power generation. The turbines can also be operated safely in strong winds.
In February 2020, the company founded Sinagy Revo Co., Ltd. (wholly owned subsidiary) to develop a free-standing, pole-type power supply device and a rooftop wind power generation device equipped with these micro wind turbines. Sinagy Revo will handle the development, design, manufacture, sales, repairs, and maintenance of these devices. According to the company, the free-standing power supply device can serve as a power supply system during natural disasters since security cameras, LED lighting, telecom equipment such as Wi-Fi, and small storage batteries can be attached to it. Installing them at evacuation sites across the country, these devices can provide lighting during blackouts and give network and power supply access to evacuees. The security cameras and the telecommunications network will allow smartphone and PC users to check on the evacuation sites as well. In these ways, the product can help local governments step up efficiency of their disaster prevention systems and aid companies in their BCP efforts.
Sinagy Revo is currently conducting pilot programs as the final stage of product development. Targeting commercialization in FY03/22, it is also preparing proposals to target customers—mainly local governments and private-sector companies. It will promote adoption of these devices at roughly 70,000 evacuation sites across the country as a BCP-focused equipment, and work to establish a stand-alone power supply business. It also aims to cultivate a new renewable energy market of rooftop wind power generation equipment with multi-level micro wind turbines, and roll out such equipment globally.
Kitchen and bathroom renovation specialty store business
The company plans to expand its renovation business as part of an effort to strengthen the earnings capability of non-energy operations under B2C. To this end, it has opened pilot stores specializing in kitchen and bathroom renovations. It launched the first store in the Chuo district of Sagamihara in May 2018, the second store in Koshigaya in October 2019, and rolled out two more in FY03/21, including the Tokorozawa Showroom. It intends to open 20 stores in the future, and targets non-energy sales of JPY4.0bn. The company is also eyeing a gradual rollout of a franchise program for fuel retailers.
Shared office business
The company has launched a shared-office business under the seesaw brand. It aims to support startups while concurrently engaging in new business development for its own group. The seesaw facility rents out co-working space in the building that was occupied by the company’s headquarters prior to relocation in January 2019. The seesaw name, taken from the playground equipment, embodies the idea of gathering like-minded individuals to move society through the principle of leverage. The company expects to hold events such as new-business contests and business matching at the facility in the future.
Investment track record
The company ramped up investment in the Non-energy segment in FY03/19 and FY03/20, with the bulk of the increase allocated toward capital expenditure in the bike sharing business and in wood chip production facilities.
Operating profit
Operating profit in decline since 2010
The company’s consolidated operating profit hovered around JPY2.5bn to JPY5.0bn between FY03/05 and FY03/10. The high profit levels were underpinned by a less challenging competitive landscape in the LP gas business compared to today. Contributions also came from the strong performance in the petroleum business, thanks to high margins amid tight supply and demand for products in Asia owing to economic growth in China, and a temporary increase in margins due to sharp fluctuations in crude oil and LP gas prices.
In FY03/07, operating profit declined roughly 38.3% YoY to JPY2.6bn due to the fall in kerosene price amid record-high winter temperatures and an inability to pass on increases in the propane contract price* to customers. In FY03/09, operating profit increased 93.6% YoY to JPY4.9bn on improved margins due to a sharp drop in kerosene procurement price and the propane contract price. In FY03/10, operating profit fell 24.1% YoY to JPY3.7bn as margins worsened on a weak petroleum product market.
From FY03/11, operating profit fell to the JPY2.0–3.0bn range due to factors such as a normalization of international demand for products following the global financial crisis, a drop in petroleum product margins driven by lower domestic prices amid excess capacity, successive warm winters, and growing cost consciousness vis-à-vis energy consumption.
Headwinds abound: warm winters, growth in supply of condominium units, demographic aging, and fierce competition
From FY03/17, operating profit declined further to the JPY1.0–2.0bn range as demand for kerosene and LP gas contracted due to the convergence of factors such as warmer winters driven by global warming, the growing popularity of energy-efficient water heaters such as Eco-Jozu, the boom in high-rise condominium construction in metropolitan areas and the corresponding spread of air conditioners, and lower unit consumption among regional households attributable to demographic aging. At the same time, LP gas providers such as Nippon Gas (TSE1: 8174) and Tokai expanded their shares by concentrating on new customer acquisition, creating a challenging competitive landscape.
Profit contributions by the non-energy businesses still some way off
Meanwhile, the earnings contributions delivered by the non-energy businesses remain small. While this can be in part attributed to the continuous booking of expenses associated with the launch of new businesses, the low profitability of businesses that have a longer track record, such as the antimicrobial business and the environmental and recycling business, is also a factor. The company is counting on growth in the bike sharing and building maintenance and management businesses to drive earnings in the future.
Business
Business model
LP gas business
Suppliers: The company mainly procures LP gas from importers and primary dealers such as ENEOS Globe, Astomos Energy, and Gyxis. Pricing and purchase volumes are generally determined in annual contracts, but volume terms tend to be flexible.
Customers: The company supplies LP gas to several thousand fuel retailers through its wholesale channel, and to ordinary households, restaurants, factories, hospitals, nursing homes, and other facilities via direct-sales channels of the Melife subsidiaries. End users across the country total roughly 700,000, of which 210,000 are direct-sales customers. Selling prices for LP gas is not fixed, so the pricing structure varies by customer. Prices charged to customers track movements in LP gas procurement prices under the gas-cost adjustment system. They are also adjusted based on consumption volume per contract. This means unit prices are the highest for households, and decline for large-volume customers such as factories and restaurants.
Customer acquisition: The company mainly secures new customers through commercial rights acquisitions and door-to-door sales. Commercial rights acquisition entails buying the commercial rights of existing businesses, and inheriting corresponding customer bases. In many cases, struggling fuel retailers (e.g. small and aging retailers) sell their customer rights to large fuel trading houses. Door-to-door sales activities—which include sales visits, leaflet distribution, and sales phone calls—aim to make customers switch gas suppliers.
Petroleum business
Suppliers: The company mainly sources petroleum products from petroleum refineries such as Cosmo Oil Marketing, ENEOS, and Idemitsu Kosan. Procurement prices are determined based on yen-denominated Dubai crude oil prices and petroleum product spot prices. The company leverages its long business track record to flexibly negotiate transaction terms with the suppliers.
Customers: The company sells kerosene mainly to fuel retailers, home improvement stores, and service stations. Kerosene prices take into account the price of crude oil and the supply/demand balance, and are influenced by the prices negotiated between petroleum refineries and the Sapporo Co-op and leading home improvement stores ahead of the peak-demand period. These negotiated prices become industry indicators in effect.
Electricity business
Suppliers: The company procures electricity mainly from former general electricity utilities (the electric power majors) and other power generators under bilateral contracts, and from the Japan Electric Power Exchange (JEPX). Bilateral contracts typically extend for one year. Prices for electricity sourced from JEPX can decline to attractive levels when supply/demand conditions ease, but they are prone to sharp near-term fluctuations when supply/demand conditions abruptly tighten such as during extreme weather (heat waves or cold spells) and disasters (major earthquakes).
Customers: To prevent cancellations of LP gas contracts, the company promotes the bundling of LP gas and electricity services. Thus, it often supplies electricity to customers who are already purchasing its LP gas. The company also provides electricity to large-volume commercial customers.
Sales activities: The company uses home visits, such as LP gas safety inspection visits, as an opportunity to recommend the electricity and LP gas package. It began marketing environmentally friendly electricity as well, offering a lineup of plans using 100% renewable energy.
Business by segment
B2C segment (mainly sales of LP gas): 45.9% of operating profit (FY03/21)
Wholly owned sales subsidiaries Melife, Melife-East, Melife-West, and Melife-Hokkaido run the B2C business, which mainly comprises the wholesale sales and direct sales of LP gas used by general households. In FY03/21, these companies collectively sold 423,000 tons of LP gas (includes sales in the B2B segment). End users total about 700,000, of which 210,000 are direct-sales customers. Wholesale customers are local LP gas and fuel retailers. In direct sales, the Melife companies sell and deliver cylinders of LP gas to end users, but also make such deliveries on behalf of retailers in its wholesale channel. In addition, these companies sell kerosene to local fuel stores.
Peripheral businesses in the B2C segment include renovations, sales of gas appliances, sales of low-voltage electricity to households, and city gas operations (Hidaka Toshi Gas Co., Ltd.).
Supply chain
In the LP gas business, the company is involved in the entire supply chain from procurement to distribution, wholesale, and retail. The process from procurement to sales begins with the sourcing of LP gas from importers and primary dealers such as ENEOS Globe, Gyxis, and Astomos Energy. LP gas is then sold directly to consumers or to local fuel retailers, and delivered to the end users (households, restaurants, and business facilities, including factories, hospitals, and hotels).
Distribution is handled by subsidiaries such as Sinanen Himawari Service Center and Sinanen Tohoku Himawari Gas Center, as well as local distribution joint ventures including Japan Enagic.
Customer base
There are some 24mn users of LP gas in Japan, which is about 44% of all gas users including the 29mn city gas users. In the retail channel (direct sales to end users), the company sells LP gas to roughly 210,000 customers (end-March 2021). After adding in some 500,000 customers served by its wholesale channel distributors, the total customer base in the LP gas business comes to approximately 700,000.
Regional characteristics
The LP gas business is primarily based in eastern Japan. The sales volume in western Japan is low, although the company sells LP gas in the Osaka, Kyoto, Ishikawa, and Aichi prefectures as a result of past commercial rights and business acquisitions.
Earnings analysis
Sales
Shared Research looks at the segment’s sales in terms of sales volume and selling price*1. The sales volume is affected by temperature (particularly during the winter), new demand captured, population within serviced areas, and household compositions. The selling price—subject to the gas-cost adjustment system—change every month, affected by contract prices with gas-producing countries, exchange rates, wholesale prices, and revisions in retail prices.
Operating profit
Shared Research sees increases or decreases in the segment’s operating profit as the result of changes in sales volume and margin fluctuations. The sales volume of LP gas for household use is mainly affected by temperature changes, while the sales volume for LP gas used by businesses (restaurants, factories, etc.) is affected by changes in the economic cycle. Margin fluctuations are determined primarily by large changes in volume and the status of competition. Increased competition tends to lead to price wars that weigh on margins.
Short-term earnings are affected by changes in the value of inventory depending on cost, insurance, and freight (CIF) prices*2 (influenced by the propane contract price*3 and forex rates). Earnings are directly correlated to CIF prices with profit increasing when the CIF price rises and vice versa.
Effect of propane contract price fluctuations
Fluctuations in propane contract price have a near-term impact on gross profit (see diagram below). For example, assume LP gas was stockpiled at the beginning of the fiscal year at a relatively high purchase price. In the event of a sharp drop in the propane contract price thereafter, new purchases based on the lower contract price will impact the value of total inventory that is adjusted on a moving average basis. The gross profit will in turn fall in tandem with the decline in unit selling prices, which are subject to the gas-cost adjustment system, and change to reflect swings in procurement prices.
Expansion of direct sales to customers
The company aims to enhance its margins by increasing the number of direct-sales customers through M&A activity (e.g., acquisitions of commercial rights). In general, in the LP gas supply chain, the order by margin level is retail > wholesale > importer and primary dealer. In April 2021, the gross margin was JPY139.6 per cubic meter (cbm) for importers/primary dealers and wholesalers combined, and JPY515.1 per cbm for retailers. Margin is low for importers and primary dealers (about 10% of JPY139.6 per cbm based on our estimate) because their facilities are usually concentrated, their handling volumes are massive, and they are competing in a sphere where it is hard to stand out from peers. On the other hand, the margin is high for retailers because many are small businesses with low per-store sales volume and facilities efficiency, and competition is relatively relaxed. Wholesalers with small-lot gas cylinder delivery systems are working to secure high retail margins by acquiring commercial rights* from small retailers, many of whom are facing challenges such as the difficulty to find successors.
LP gas retailers are increasingly selling their commercial rights and closing their businesses due to declines in customer count caused by a shrinking population and the flow of people into cities; reduced unit gas consumption caused by climatic warming and an aging population; the rising costs of delivery, safety management, and information systems; and the large sums offered by wholesalers for commercial rights acquisition.
Distribution joint venture (Japan Enagic)
The company establishes business tie-ups to streamline distribution as deemed necessary. Subsidiary Melife, operates a joint venture, Japan Enagic, alongside Mitsuuroko Group Holdings, Mitsuwa Sangyo, San-Ai Oil, and Hashimoto Holdings, each holding a 20% stake in the entity. Japan Enagic engages in LP gas delivery and filling operations. Its mandate is to consolidate LP gas delivery and filling operations in the Kanto area, streamline distribution, and reduce costs by sharing management resources (e.g. business facilities and filling stations).
Sales of gas appliances and equipment
The company also works to expand peripheral appliance sales and home renovation services related to LP gas. However, these services still account for a small share of sales and profit at present. In addition to gas stoves, water heaters, and related renovation services, the company has also stepped up sales of solar power generation systems, ENEFARM residential fuel cells, and other alternative energy equipment.
City gas business (operated by Hidaka Toshi Gas)
Hidaka Toshi Gas, a wholly owned subsidiary of Sinanen HD, operates the city gas business in Hidaka, Saitama Prefecture.
It has a relatively small business scale with a contracted customer base of roughly 7,000.
Fuel oil sales
The company sells kerosene and diesel oil under a similar setup as the LP gas business using both the direct-sales channel catering mainly to regular households and the wholesale channel catering to fuel retailers.
Electricity business (mainly low-voltage electricity)
In the B2C business, the company sells low-voltage electricity mainly to its LP gas customers such as regular households. It secures electricity through direct procurement from power generators as well as through the Japan Electric Power Exchange (JEPX). The company says bundling electricity and LP gas in a package has proven effective, since it boosts sales efficiency and profitability, and also prevents contract cancellations. In addition to its focus on direct-sales customers, the company plans to step up marketing efforts aimed at distributors. (The structure of the electricity business is explained in the “B2B segment” section.)
B2B segment (mainly sales of petroleum products): 42.5% of operating profit (FY03/21)
The B2B business, mainly operated by Sinanen Co., Ltd., entails the purchase of petroleum products (e.g., kerosene, diesel oil, and gasoline) from petroleum refineries such as Cosmo Oil Marketing, ENEOS, and Idemitsu Kosan for sale to distributors, home improvement stores, and large-volume customers. The company also sells gasoline and diesel oil to roughly 100 affiliated service stations (of which around 20 are managed directly). In FY03/21, the segment recorded sales volume of 2.4mn kiloliters (kl), breaking down by product into 1.5mn kl for kerosene, 0.4mn kl for heavy oil, 0.3mn kl for diesel oil, and 0.2mn kl for gasoline. Kerosene accounted for a large share of the total, at 61.8%, mainly because the company’s petroleum product business has historically concentrated on wholesale operations geared toward local fuel retailers.
Business structure
The company procures kerosene and other petroleum products from petroleum refineries such as Cosmo Oil Marketing, ENEOS, and Idemitsu Kosan. It then sells them wholesale to fuel retailers, home improvement stores, and other customers.
Sales of industrial fuels
The company also supplies industrial-use petroleum products to the on-site bases of large-volume customers. Sales of A fuel oil, diesel oil, and fuel for marine vessels are among the wide range of transactions handled in this business. Diesel oil sales target businesses operating fleets of large vehicles such as transport companies across Japan as well as construction sites. To factories, the company sells products such as A fuel oil and LP gas. For marine vessels, it handles A fuel oil for small vessels such as fishing ships, and C fuel oil for major vessels at shipping companies. It also sells fuel with low sulfur content for large marine vessels in Taiwan.
The industrial fuel business is characterized by slim margins because a large number of distributors aim to capture a share of the substantial transaction volume in this market, and customers are sensitive to price. Domestic demand continues to face structural headwinds such as the push toward carbon neutrality, demand for kerosene declining due to growing adoption of air conditioners and gas heating, metals and other materials manufacturing industries being hollowed out, customers shifting toward city gas, and demand from factories declining as energy-efficient solutions gain traction.
However, looking at kerosene, the company’s mainstay in industrial fuel sales, its sales volume and market share are slowly rising despite a downward trend in overall domestic sales volumes. Demand for kerosene has continued to decline due to consecutive warm winters in recent years, growth in the supply of condominium units, the popularity of air conditioners and gas-based heating systems, and the adoption of electrical underfloor heating systems, causing competitors to progressively downsize or withdraw from their businesses. In contrast, the company says it has expanded market share by leveraging its extensive knowledge of customer trends (those of consumers, fuel retailers, home improvement stores, and large-volume customers) and its sales capabilities.
Electricity business
In the electricity business, the company generates solar power and sells subdivided lots of solar power stations, supplies environmentally friendly power (generated with zero CO2 emissions), and provides maintenance service. It has the capability to function as a one-stop shop of power generation, equipment installation, electricity sales, and maintenance. The electricity sourced from the company-owned solar power stations and those sold to other parties in subdivided lots is also sold by the company, a licensed electricity retailer. Amid rising awareness of environmental, social, and corporate governance (ESG) and of sustainable development goals (SDGs), the company plans to expand sales of electricity generated with minimal impact on the environment. It plans to deploy across Asia the renewable energy technologies and energy-efficient solutions it developed in Japan.
Solar power generation and photovoltaic services business
In this business, the company provides maintenance services to ensure smooth operation of solar power systems, and sells the Ohisama Car Roof solar power generation system for carports. It also generates electricity from its own mega solar power stations, and provides maintenance services for residential and industrial solar power generation systems.
Electricity retailer
In April 2016, the Japanese government launched its electricity system reforms, implementing a full-scale deregulation of the electricity retail market. The company’s entry to the retail market as a so-called power producer and supplier (PPS) dates back to February 2014.
The company procures electricity from its own mega solar projects, spot transactions on the Japan Electric Power Exchange (JEPX), and via bilateral contracts with power generators. The company says its strength lies in its stable sourcing capability, citing that the JEPX price hike in January 2021 did not have a major impact on procurement. Main customers are factories, offices, and other businesses.
Electricity retailer
Electricity retailers prescribed in Article 2 of the Electricity Business Act refer to operators other than those that specialize in power generation, transmission, and distribution. They are registered and licensed by the Japanese Minister of Economy, Trade and Industry. Electricity retailers have no supply obligations similar to those for the former general electricity utilities (deemed electricity retailers)*, but are obliged, except with good reason, to ensure supply capacity sufficient to meet the electricity demand needs of the end users. Players include the retail arms of former general electricity utilities and the power producers and suppliers (PPS), the latter being relatively new market entrants that have surfaced since the earlier electricity industry reforms.
Suppliers
Electricity retailers generally purchase electricity through a bilateral contract with power generators*1 or through spot transactions on the Japan Electric Power Exchange (JEPX)*2. The purchase price in a bilateral contract is typically higher than in spot transactions, because the contract guarantees a certain supply volume during the contract period*3. Meanwhile, since electricity cannot be stockpiled, spot transactions entail the risk of a sharp price hike should there be an expansion in the supply-demand gap due to weather-related events or natural disasters. An electricity retailer needs to establish its own procurement mix based on these price and risk factors. The company says it places a heavier weighting on purchases via bilateral contracts rather than through JEPX, as it prioritizes procurement stability.
Customers
In the B2B segment, the company mainly sells high-voltage electricity. Customers are mostly factories, office buildings, stores, and other businesses.
Non-energy/Global segment: 11.6% of operating profit (FY03/21)
Bicycle business
The bicycle business is operated by wholly owned subsidiary Sinanen Bike Co., Ltd. As a leading bicycle importer in Japan, Sinanen Bike sells quality yet affordable bicycles, including imported bicycles of well-known foreign brands such as DAHON. Roughly 65% of its merchandise is sold through the retail channel (Daisharin retail stores) and about 35% through home improvement stores and specialist stores. As of end-March 2021, Sinanen Bike has rolled out a total of 36 Daisharin stores, mostly in eastern Japan.
Bike sharing business
The bike sharing business, which provides last-mile mobility solutions, is operated by wholly owned subsidiary Sinanen Mobility+ Co., Ltd. In Europe, the US, and China, public bike sharing systems are gaining traction as a new mode of transportation to complement existing railway infrastructure. Sinanen Mobility+ plans to roll out a bike sharing service across Japan in an effort to create a new transportation infrastructure in the country. As of end-March 2021, the company operated roughly 1,800 own-brand bike sharing docks (stations) in the premises of convenience stores and other venues in Tokyo, Saitama Prefecture, Kanagawa Prefecture, and Chiba Prefecture. The number of available bicycles at its stations expanded from roughly 2,000 at end-March 2019 to 8,200 at end-March 2021.
Environmental and recycling business
The environmental and recycling business is operated by wholly owned subsidiary Sinanen Ecowork Co., Ltd. The subsidiary engages in production and sales of wood chips (biomass fuel) as well as sales of waste recycled fuels. It processes waste wood on contract using its recycling centers in Chiba and Shiraoka where the waste wood is crushed and formed into wood chips after removing foreign matters. The wood chips (sorted by size) are then sold to end users for use as fuel for biomass power and raw materials to make paper and building materials. Sinanen Ecowork also procures wood chips from a collaborating wood chip manufacturer in the Kanto region. Through in-house production and third-party sourcing, the subsidiary has developed a stable supply system. Total wood chip handling volume reached about 110,000 tons at end-March 2020, and Sinanen Ecowork intends to expand that volume over the medium term. It is also building a system supporting broad treatment of waste materials other than waste wood by leveraging its network of business partners.
Antimicrobial business
Wholly owned subsidiary Sinanen Zeomic Co., Ltd. (founded in 1991) is a pioneer in inorganic antimicrobial agents. It manufactures the silver-base inorganic antimicrobial agent Zeomic, which uses the antimicrobial properties of silver by combining silver ions and zeolite minerals, and is widely applied in medical equipment, textiles, and daily necessities. The subsidiary has obtained regulatory approval (from the United States Food and Drug Administration [FDA] and Environmental Protection Agency [EPA]) for the antimicrobial agent, and has launched the product in overseas markets such as Europe, the US, China, and Southeast Asia. It plans to harness its technologies developed as an antimicrobial agent manufacturer to branch into production of deodorizers and water treatment agents, thus becoming a manufacturer of functional materials.
Systems business
Wholly owned subsidiary Minos Co., Ltd. (founded in 1976) provides an LP gas customer management system to LP gas retailers and a customer information system (Power CIS) to electricity retailers. In 2013, it launched the cloud-based Power Net G4 core business system for LP gas operations. In 2016, Minos rolled out the Power CIS customer information system that caters to the deregulated electricity retail sector. The subsidiary also provides account transfer payment collection services and centralized monitoring systems.
Building maintenance and management business
Takara Building Maintenance Co., Ltd., which became a wholly owned subsidiary in March 2017, provides one-stop building maintenance and management services. Established in 1981, Takara Building Maintenance has since provided building maintenance and management, comprehensive building inspection, and operation support services, as well as other in-house developed services.
Building maintenance and management services comprise services related to cleaning management, facilities management, fire-fighting equipment, statutory inspections, and housing complexes.
Comprehensive building inspection services include degradation inspections, legal compliance inspections, indoor environment inspections, earthquake resistance inspections, geographic history and geological inspections, energy-efficiency inspections, and various upgrade and repair work.
In-house developed services cover LED lighting installation support services, sales of water-saving equipment, sales of security camera systems, electronic breaker installation support services, and air conditioner cleaning services.
Operational support services encompass integrated support for property management, dispatch of various human resources, and operation services for hospitals, funeral halls, and other businesses.
In recent years, Takara Building Maintenance has expanded its comprehensive facility management services by moving into building and facility management, hospital operation support, and funeral hall-related operations. Going forward, it plans to focus on comprehensive maintenance services for housing complexes such as apartments and condominiums (installation and maintenance of various housing equipment; restoration to original state), and also expand the business base from the Tokyo metropolitan area to the Kanto region at large.
Other wholly owned subsidiaries of Sinanen HD that provide building management services include Indess Co., Ltd.* and Yutecs Co., Ltd.**
Market and value chain
LP gas market
What is LP gas?
Liquefied petroleum gas (LP gas) is a fuel composed of hydrocarbons containing three or four carbon atoms—generally propane and butane, respectively. Residential and commercial LP gas mixtures tend to have compositions of 80 mol% or higher propane and 20 mol% or lower butane. LP gas exists as a gas at normal ambient temperatures and atmospheric pressure, but it turns into a liquid when exposed to high pressure or low temperatures. In its liquid state, LP gas is compressed at a ratio of roughly 1:250, making it easier to handle at each stage of transport, storage, and consumption.
Incidentally, the main constituent of city gas is methane, a hydrocarbon with one carbon atom. Like LP gas, city gas is transported from gas-producing countries in its liquid state, which is referred to as liquefied natural gas (LNG).
History of LP gas
LP gas is manufactured as a byproduct of natural gas processing and crude oil refining. It first gained traction in Japan around 1955 driven by an increase in production of LP gas in tandem with the rapid development of the petroleum refinery and petrochemical industries. At the time, LP gas was mainly sold in the form of propane tanks for residential and commercial use, and demand for propane gas rose as a replacement for traditional fuels such as charcoal, coal, and briquettes. At the same time, providers sought to develop industrial applications for butane gas, another byproduct gas.
Thereafter, the market for LP gas expanded as Japan entered its period of rapid economic growth. Japan started importing LP gas from the Middle East from 1961, and began using LP gas as fuel for taxis from 1962. At present, the bulk of the taxi companies in Japan run their fleets on LP gas.
Applications
At present, LP gas is widely used in households, stores and companies, factories, vehicles, as a supplement to increase the calorific value of city gas, and as a chemical raw material. In FY2016, Japan consumed 14.0mn tons of LP gas, accounting for 5% of its final energy consumption. LP gas is used by some 24.0mn Japanese households (roughly half of the total). It fuels appliances such as gas stoves, water heaters, portable stoves (that use gas cartridges), outdoor barbeque grills, and combine harvesters. LP gas is also used in roughly 220,000 taxis and other vehicles.
In the commercial arena, LP gas is employed in eating and drinking facilities such as restaurants, public facilities such as schools and hospitals, the food processing industry, as well as in hot-air balloons and torches.
Vehicles powered by LP gas have received praise for their economic and environmental benefits. LP gas is used in commercial vehicles such as delivery trucks, and fuels roughly 80% of Japan’s taxis.
In the industrial sphere, LP gas is known for its ease of handling because its combustion temperature and calorific value can be easily adjusted. Consequently, it is widely used in the steel and non-ferrous metals industry and manufacturing industries that produce steel products, ceramics, stone and clay products, transport equipment, food products, and electric appliances.
Production
LP gas has several sources. It can be separated and refined from gases generated at oil fields during the extraction process of crude oil. This source accounts for the largest share of LP gas production volume at gas-producing countries in the Middle East. LP gas can also be separated and refined from natural gas (chiefly methane) extracted from gas fields. Of the shale gas fields in the US, LP gas is extracted as a byproduct from gas fields of wet gases containing a large amount of heavy gases such as propane and butane. Finally, LP gas can be separated and refined from byproduct gases generated in oil refineries and ethylene plants. The bulk of the LP gas manufactured in Japan is generated in this way.
Source countries
Roughly 75% of the LP gas consumed in Japan is imported from overseas, and the remaining 25% is produced domestically as a byproduct of crude oil refining and chemicals production. Both imported and domestically produced LP gas are transported from primary to secondary terminals by coastal vessels or tank trucks. Residential LP gas is subsequently stored in gas cylinders at filling stations and delivered to end customers.
In FY2018, Japan mainly imported LP gas from the US (69.6% of total imports), the UAE (9.0%), Saudi Arabia (6.2%), Qatar (4.9%), and Kuwait (3.4%). Although LP gas imports were historically skewed toward the Middle East, the share of imports from the US has increased sharply in recent years in tandem with the shale gas boom in that country (LP gas being a byproduct of shale gas production). In the future, new liquified natural gas (LNG) projects in countries located in the Pacific Rim, including Australia and Canada, are expected to further boost LP gas output.
Supply systems
In the case of comparatively low-volume users such as households, LP gas is either delivered to individual homes in gas cylinders or through pipeline systems. The latter breaks down to small-area and community pipeline systems. In recent years, bulk supply (i.e., supply from a tank truck to a bulk storage tank on customer premises) has emerged as a popular option, providing the benefits of streamlined distribution, enhanced safety, and aesthetic appeal.
Distribution
The LP gas that is imported via tankers from the US, Saudi Arabia, and other gas-producing countries is unloaded at import (primary) terminals of importers and primary dealers such as ENEOS Globe. Primary terminals are facilities that accept imported LP gas, store the gas in tanks, and ship it in coastal tankers and tank trucks. There are 35 of these terminals across the country, keeping a permanent stockpile of roughly 1.5mn tons of LP gas for civilian use. Secondary terminals function as temporary storage locations for LP gas transported by coastal tankers from primary terminals, from where the gas is transported to filling stations and large-volume consumers by tank trucks. LP gas importers and primary dealers operate roughly 50 secondary terminals in Japan. Filling stations, also sometimes called tertiary terminals, are locations where LP gas is filled into gas cylinders, and from where the gas is transported to consumers and businesses via retailer delivery trucks. Roughly 2,200 filling stations are operated in Japan by fuel trading houses such as Sinanen HD, Iwatani, and Mitsuuroko Vessel.
Laws governing LP gas
In Japan, the manufacturing, stockpiling, and distribution of LP gas are governed by the High Pressure Gas Safety Act, while associated sales activities, equipment installation, and appliances fall under the LPG Act.
LP gas demand
Japanese demand for LP gas rose in the post-war period of rapid economic growth and peaked in FY1996. It has since trended down and currently hovers at the level recorded in the early 1980s. The main causes behind the decline have been warm winters driven by global warming, population outflows from regional and suburban areas, a decline in residential electricity consumption in regional and suburban areas accompanying demographic aging, the growing popularity of all-electric homes, the adoption of energy-efficient water heaters, and the hollowing out of manufacturing industries (particularly, the metallurgical industries).
Composition of LP gas demand by application
In FY2018, LP gas demand broke down by application into 1) household/commercial use (42.8%, mainly ordinary households and restaurants), 2) special use (21.7%, chemical raw materials), 3) general industrial use (21.5%, mainly factory boiler and burners, heating furnaces, and hot‐water supply), 4) additive to city gas to increase calorific value (7.9%), and 5) automotive use (6.1%, mainly taxis and trucks). Notable trends in recent years have included an increase in the share of LP gas used as a chemical raw material, and a decline in the share of household/commercial use driven by the dwindling population in regional areas, the growth in supply of condominium units, and the spread of air conditioners.
Industry structure
There are four major LP gas importers and primary dealers (including Gyxis Corporation), 1,100 wholesalers (including Sinanen HD), and 21,000 retailers (including Sinanen HD).
LP gas importers and primary dealers are usually petroleum refineries or the subsidiaries of general trading houses. Previously, a congested market led to excessive competition, weighing on margins and causing fragile profit structures among players. In the 2000s, alliances and mergers resulted in the creation of four major importers and primary dealers (ENEOS Globe, Japan Gas Energy, Gyxis, and Astomos Energy).
Wholesalers include companies such as Iwatani (which also operates as an importer and primary dealer), Japan Agricultural Cooperatives (JA), Mitsuuroko, Itochu Enex, San-Ai Oil, Itami Sangyo, Hashimoto Sangyo, Horikawa Sangyo, Saisan, and Ichitaka Gas One. Prominent companies operate in various areas of Japan, aggressively working to acquire commercial rights and step up door-to-door sales to accelerate expansion in the high-margin retail business.
Retailers consist of the roughly 21,000 distributors spread across Japan, many of which are small business operators in regional areas. Major retailers such as Nippon Gas and Tokai Holdings control their entire distribution supply chain. In recent years, major retailers and wholesalers have expanded their market shares by rapidly growing their customer bases through the acquisition of commercial rights.
Petroleum products market
Kerosene
Kerosene is a colorless and transparent liquid fuel that is mainly used for heating. Kerosene used to heat Japanese houses is classified as white (refined) kerosene. It has less than 80ppm of sulfur content, does not have a strong odor, and exhibits superior combustion properties.
General consumer use account for roughly 60% of the total demand for kerosene, with heating for households being the main application. Unlike other petroleum products, kerosene is mainly sold in small lots through a complex array of distribution channels. At the wholesale level, kerosene is supplied by fuel trading houses and distributors. At the retail level, it is sold by fuel retailers, service stations, rice shops, home improvement stores, agricultural cooperatives, co-ops, etc. One factor that has contributed to the diversity in kerosene sales channels is the fact that door-to-door vending using small tank trucks is legal in Japan. Kerosene for industrial use is sold directly by petroleum refineries or through fuel trading houses and distributors.
Peak demand during winter period
Demand for kerosene peaks during the winter when demand for heating increases. As a result, kerosene prices tend to be higher in the winter than in the summer. Kerosene sales volume and prices are subject to sharp seasonal fluctuations. During the first oil crisis, the Japanese government rolled out policies to ensure soaring oil prices would not affect household finances directly, and decided to not impose a tax on kerosene. For this reason, kerosene prices have remained low relative to gasoline and diesel oil. The kerosene prices negotiated between co-ops in high-demand areas (e.g., the Sapporo Co-op) and petroleum refineries at the start of autumn (commonly referred to as co-op prices) have long served as an indicator for peak-demand kerosene prices at the start of the winter season. In recent years, home improvement stores have also increased their bargaining power, and this has eroded the importance of co-op prices as indicators.
Shared Research based on Agency for Natural Resources and Energy data (right)
Distribution
Petroleum refineries such as ENEOS import crude oil from oil-producing nations such as Saudi Arabia and the UAE. After the oil is transported to Japan using oil tankers, it is offloaded and refined at domestic refineries and used to produce kerosene, gasoline, and other petroleum products. These products are shipped by tank truck from refineries and secondary terminals to tank terminals of fuel trading houses and distributors, as well as kerosene centers, services stations, home improvement stores, and other retailers.
Kerosene demand
Japanese demand for kerosene expanded during the post-war period of rapid economic growth and reached a record high in FY1995, after which demand entered a downtrend. At present, demand is running below the levels recorded in the 1960s. The main causes of the decline have been successive warm winters driven by global warming, population decline, advances in insulation performance of houses, the spread of air conditioners and underfloor heating systems, the growth in the supply of condominium units, the increased adoption of gas-based heating systems, and the growing popularity of all-electric homes.
Structure of petroleum products industry and dwindling number of service stations
The Japanese petroleum products sector comprise the three major petroleum refineries (ENEOS, Idemitsu Kosan, and Cosmo Oil Marketing), several fuel trading houses (such as the Sinanen HD, JA, Usami Koyu, Mitsubishi Corporation Energy, Marubeni Energy, Itochu Enex, San-Ai Oil, and Kamei), and retailers. Retailers that sell automotive fuel mainly do so through service stations. As of end-March 2020, some 30,000 refinery-affiliated and independent service stations were operating in Japan. The number of service stations has trended down over the last 20 years. Service stations face a challenging operating environment attributable to lower demand as car ownership is declining while fuel efficiency is increasing (due to greater use of microcars [Japanese Kei cars] and hybrid vehicles) and to chronic oversupply of gasoline.
Structure of petroleum products demand in Japan
In FY03/20, the petrochemical feedstock naphtha accounted for 25.8% of Japanese demand for petrochemical products. Automotive gasoline accounted for 29.8%, diesel oil for diesel vehicles for 20.4%, kerosene for small-scale heating for 8.3%, A fuel oil for small and mid-sized boilers, business office heating, and marine fuel for small vessels for 6.2%, C fuel oil for power generation, large boilers, and marine fuel for large vessels for 4.5%, and aircraft jet fuel for 3.1%.
An analysis of changes in Japanese demand for petroleum products over the last 10 years shows that demand has declined 10.1% for naphtha (due to reductions in capital expenditures at ethylene plants), 14.5% for gasoline (due to improvements in vehicle fuel efficiency and growth in the number of Kei cars), 32.1% for kerosene (due to growth in the supply of condominium units and the spread of air conditioners and underfloor heating systems), 36.7% for A fuel oil (due to a switch to city gas and the hollowing out of industries), 55.0% for C fuel oil (due to a reduction in operation of oil-fired power plants and a transition to other fuels in the manufacturing sector), and 2.6% in jet fuel (due to improvement in aircraft fuel efficiency). Over the same period, demand has increased 3.9% for diesel oil (due to growth in demand for small-lot deliveries).
Electricity market
Electricity demand in Japan
Electricity consumption in Japan had remained firm from FY2000, hitting a record high of 1.0tn kWh in FY2010 due to a severe heat wave. However, it declined thereafter following the Great East Japan Earthquake in 2011, when the rapid spread of energy-saving home appliances and LED lighting accelerated moves to conserve energy. The decline in production in the semiconductor and materials industries further reduced consumption, which continued to decline through FY2015. After remaining flat at about 950bn kWh, electricity consumption trended downward again from FY2018, in part due to factors such as torrential rain and the rainy season lasting for a particularly long time (which resulted in an unusually cool summer that dampened electricity demand). Electricity demand among businesses, e.g., for office buildings, has remained generally flat as demand growth from an increase in office buildings and fast-paced spread of OA equipment was offset by demand curtailment through energy conservation initiatives (e.g., the use of equipment with improved energy efficiency).
Gradual liberalization of the electricity market in Japan
Since FY2000, the Agency for Natural Resources and Energy—a bureau of the Ministry of Economy, Trade and Industry—has led the phased liberalization of the electricity retail market in Japan. With the deregulation of the low-voltage sector*, the retail market became fully liberalized in April 2016. The market for low-voltage power (about JPY8tn) previously dominated by the general electricity utilities was opened up, enabling all customers including households to choose from various providers and pricing plans. Together with the already deregulated high-voltage sectors, the fully liberalized retail market is valued at about JPY18tn.
* Prior to April 2016, power producers and suppliers (PPS) could only supply electricity to end users contracted for 50kW or more, which included extra-high-voltage customers (e.g., large plants and department stores) and high-voltage customers (e.g., midsized plants and supermarkets). The restriction was lifted in April 2016, giving PPS access to the previously regulated low-voltage customers such as households.
In May 2018, Japan launched a non-fossil fuel energy value trading market, which allows participants to trade the environmental value of power supplies.
In July 2019, the baseload market was established to equalize access to the supply of baseload power among the electricity retailers.
The legal separation of power transmission and distribution operations was accomplished in April 2020. Specifically, the transmission and distribution arms of the former general electricity utilities were split off into a separate legal entity and made into a group subsidiary. In a liberalized market, it is essential for all players to have fair and equal access to transmission and distribution networks, but the previously applied accounting separation was not enough to accomplish this. Under an accounting separation, verification by an external party remained difficult, since the internal business dealings between the power generation and the transmission/distribution arms could not be clarified in the form of a contract between legal entities. An accounting separation also did not allow for the application of wheeling regulations. In response to these issues, the legal separation was enacted to improve the neutrality of transmission and distribution operations. TEPCO Power Grid, Inc. (TEPCO Group), Kansai Transmission and Distribution, Inc. (Kansai Electric Power subsidiary), and Chubu Electric Power Grid Co., Inc. (Chubu Electric Power subsidiary) are some of the power transmission and distribution businesses spun off from the regional electric power majors.
Going forward, as the utilization of variable renewable power sources (including wind power and solar power) increases, Japan intends to gradually introduce from 2021 a supply-demand adjustment market, where participants can respond to output fluctuations by efficiently trading adjustment capacity across wide areas.