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 Established in 1927, the company originally made and sold briquettes^*3 and briquette balls^*4.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 70% 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 30%. 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 cancellation rates.

Sinanen HD’s recurring profit margin was 1.4% in FY03/21. 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 established a joint venture with a South Korean company with a 65.3% stake and planned invest JPY22.8bn to build a wind power generation facility with a total output of 90MW.

Since the announcement of the plan in May 2020, the company has negotiated with the local government and other related parties, but the acquisition of necessary permits is significantly behind schedule, causing delays in overall business development. Under these circumstances, the company decided to revise its plan in October 2021, and the start date of commercial operations, originally scheduled for 2H FY03/22, is now undetermined.

In the new micro wind turbine business, the company started a pilot program in Saitama in March 2021, and is working toward commercialization.

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 5.3%). 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 FY03/21, sales fell YoY, owing to a drop in the prices of LP gas raw materials (i.e., crude oil price and propane contract price). However, profit grew on improved margins in petroleum products, such as marine fuel, and an increase in electricity sales volume. Sales were JPY217.1bn (-8.4% YoY), operating profit was JPY2.9bn (+19.6% YoY), recurring profit was JPY3.0bn (+37.2% YoY), and net income attributable to owners of the parent was JPY2.7bn (-9.1% YoY). The dividend per share was JPY75.0.

In FY03/22, the company expects sales to grow YoY on the account of rising crude oil and propane contract prices. Meanwhile, it looks for a drop in profit, owing to upfront spending in new businesses that form the foundation for future growth, along with outlays associated with various IT investments. Its full-year forecast currently calls for sales of JPY244.0bn (+12.4% YoY), operating profit of JPY2.1bn (-28.4% YoY), recurring profit of JPY1.7bn (-43.8% YoY), and net income attributable to owners of the parent of JPY1.5bn (-44.8% YoY). It projects a dividend of JPY75.0 per share. The company noted that cold waves have triggered a surge in fuel demand and wholesale electricity prices have also risen significantly. Although these factors have heightened uncertainties surrounding its business performance, Sinanen HD maintained its full-year forecast at the time of the 1H results announcement, as its earnings are weighted toward 2H (especially Q4).

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			FY03/12	FY03/13	FY03/14	FY03/15	FY03/16	FY03/17	FY03/18	FY03/19	FY03/20	FY03/21	FY03/22
(JPYmn)			Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Cons.	Est.
Sales			272,050	274,027	310,102	281,375	209,112	218,242	244,370	244,567	237,036	217,122	244,000
	YoY		10.2%	0.7%	13.2%	-9.3%	-25.7%	4.4%	12.0%	0.1%	-3.1%	-8.4%	12.4%
Gross profit			27,924	27,551	28,866	28,136	29,215	29,874	31,598	30,272	32,772	33,840
	YoY		-1.6%	-1.3%	4.8%	-2.5%	3.8%	2.3%	5.8%	-4.2%	8.3%	3.3%
	Gross profit margin		10.3%	10.1%	9.3%	10.0%	14.0%	13.7%	12.9%	12.4%	13.8%	15.6%
Operating profit			2,627	2,347	1,688	1,703	3,504	2,934	3,348	1,771	2,454	2,935	2,100
	YoY		-17.4%	-10.7%	-28.1%	0.9%	105.8%	-16.3%	14.1%	-47.1%	38.6%	19.6%	-28.4%
	Operating profit margin		1.0%	0.9%	0.5%	0.6%	1.7%	1.3%	1.4%	0.7%	1.0%	1.4%	0.9%
Recurring profit			3,241	3,005	2,513	2,629	4,274	3,424	3,948	2,158	2,203	3,023	1,700
	YoY		-16.8%	-7.3%	-16.4%	4.6%	62.6%	-19.9%	15.3%	-45.3%	2.1%	37.2%	-43.8%
	Recurring profit margin		1.2%	1.1%	0.8%	0.9%	2.0%	1.6%	1.6%	0.9%	0.9%	1.4%	0.7%
Net income			1,569	1,142	635	1,423	2,219	2,584	2,867	1,588	2,989	2,717	1,500
	YoY		28.3%	-27.2%	-44.4%	124.1%	55.9%	16.4%	11.0%	-44.6%	88.2%	-9.1%	-44.8%
	Net margin		0.6%	0.4%	0.2%	0.5%	1.1%	1.2%	1.2%	0.6%	1.3%	1.3%	0.6%
Per-share data (split-adjusted; JPY)
Shares issued (year-end; '000)			75,752	75,752	75,752	75,753	75,753	15,151	13,047	13,047	13,047	13,047
EPS (JPY)			24.2	17.9	9.9	22.2	34.6	200.3	231.1	146.0	274.8	249.8	137.9
EPS (fully diluted)			-	-	-	-	-	-	-	-	-	-
Dividend per share (JPY)			15.0	15.0	15.0	15.0	15.0	100.0	75.0	75.0	75.0	75.0	75.0
Book value per share (JPY)			713	721	716	734	749	3,903	4,307	4,324	4,426	4,426
Balance sheet (JPYmn)
		Cash and cash equivalents	16,652	17,253	21,195	22,102	20,183	18,661	7,548	9,073	7,771	10,081
Total current assets			55,135	53,717	63,011	54,298	50,091	58,418	46,680	45,300	44,323	49,625
Tangible fixed assets			18,744	20,035	20,582	22,747	29,468	29,882	30,141	28,635	30,277	30,914
Investments and other assets			8,093	9,670	9,897	10,228	10,481	11,334	11,630	12,081	10,858	11,886
Intangible fixed assets			2,104	3,245	2,379	2,047	2,943	5,201	5,161	5,095	5,151	4,408
Total assets			84,077	86,668	95,870	89,322	92,985	104,836	93,614	91,112	90,611	96,834
		Short-term debt	899	3,750	7,125	8,564	9,339	13,006	6,137	5,182	5,945	2,616
Total current liabilities			32,672	32,979	42,007	33,267	31,369	42,444	35,152	33,228	31,434	35,507
		Long-term debt	1,756	3,009	2,522	3,202	7,773	7,283	6,959	6,334	6,399	5,125
Total fixed liabilities			6,064	7,676	7,983	8,978	13,442	11,706	11,598	10,495	10,354	9,421
Total liabilities			38,737	40,656	49,990	42,246	44,812	54,151	46,750	43,724	41,789	44,929
		Shareholders' equity	45,307	45,971	45,828	47,065	48,162	50,672	46,850	47,025	48,136	51,202
Total net assets			45,339	46,011	45,880	47,075	48,173	50,685	46,863	47,388	48,821	51,905
Total liabilities and net assets			84,076	86,667	95,870	89,321	92,985	104,836	93,613	91,112	90,610	96,834
Total interest-bearing debt			2,179	5,970	8,843	10,466	15,216	17,986	10,658	9,340	10,339	5,912
Cash flow statement (JPYmn)
Cash flows from operating activities			1,250	2,422	4,076	3,775	3,356	2,449	5,433	5,214	569	7,947
Cash flows from investing activities			-2,897	-2,889	-2,764	-2,043	-4,020	-6,268	-1,282	-1,302	-1,094	36
Cash flows from financing activities			-1,057	973	1,808	-52	-997	2,113	-15,227	-2,256	-778	-5,504
Financial ratios
ROA (RP-based)			4.0%	3.5%	2.8%	2.8%	4.7%	3.5%	4.0%	2.3%	2.4%	3.2%
ROE			3.5%	2.5%	1.4%	3.1%	4.7%	5.2%	5.9%	3.4%	6.3%	5.5%
		Equity ratio	53.9%	53.0%	47.8%	52.7%	51.8%	48.3%	50.0%	51.6%	53.1%	52.9%
		Total asset turnover	334.3%	321.0%	339.8%	303.9%	229.4%	220.6%	246.3%	264.8%	260.9%	231.7%
		Net margin	0.6%	0.4%	0.2%	0.5%	1.1%	1.2%	1.2%	0.6%	1.3%	1.3%

Source: Shared Research based on company data

Segments			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.
Sales			272,050	274,027	310,102	281,375	209,112	218,242	244,370	244,567	237,036	217,122
	YoY		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			2,627	2,347	1,688	1,703	3,504	2,934	3,348	1,771	2,454	2,935
	YoY		-17.4%	-10.7%	-28.1%	0.9%	105.8%	-16.3%	14.1%	-47.1%	38.6%	19.6%
	Operating profit margin		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		-708	-665	-203	-859	4	1,349	1,082	1,233	918	836

Source: Shared Research based on company data

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	% 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	41.2%	244,000
	YoY	-3.6%	-5.6%	-6.2%	-3.1%	-17.9%	-13.8%	-11.8%	-8.4%	-	-		12.4%
Gross profit		7,977	14,767	22,483	32,772	8,324	15,493	23,980	33,840	7,960	14,933
	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%
SG&A expenses		7,470	14,610	22,142	30,318	7,515	14,525	22,365	30,905	7,543	14,975
	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%
Operating profit		507	156	340	2,454	809	968	1,615	2,935	417	-42	-	2,100
	YoY	-8.0%	-72.3%	-69.3%	38.6%	59.6%	520.5%	375.0%	19.6%	-	-		-28.4%
	Operating profit margin	1.1%	0.2%	0.2%	1.0%	2.1%	1.2%	1.2%	1.4%	0.8%	-		0.9%
Recurring profit		685	373	674	2,203	700	927	1,686	3,023	578	323	19.0%	1,700
	YoY	-1.7%	-49.1%	-47.3%	2.1%	2.2%	148.5%	150.1%	37.2%	-	-		-43.8%
	Recurring profit margin	1.4%	0.4%	0.4%	0.9%	1.8%	1.2%	1.2%	1.4%	1.2%	0.3%		0.7%
Net income		1,105	744	767	2,999	260	395	754	2,706	377	72	4.8%	1,500
	YoY	177.6%	69.1%	-6.2%	89.0%	-76.5%	-46.9%	-1.7%	-9.8%	-	-		-44.6%
	Net margin	2.3%	0.8%	0.5%	1.3%	0.7%	0.5%	0.5%	1.2%	0.8%	0.1%		0.6%
Quarterly		FY03/20				FY03/21				FY03/22
(JPYmn)		Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Sales		47,814	44,727	64,942	79,553	39,267	40,522	59,180	78,153	49,359	51,159
	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
	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%
SG&A expenses		7,470	7,140	7,532	8,176	7,515	7,010	7,840	8,540	7,543	7,432
	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%
Operating profit		507	-351	184	2,114	809	159	647	1,320	417	-459
	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%	-
Recurring profit		685	-312	301	1,529	700	227	759	1,337	578	-255
	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%	-
Net income		1,105	-361	23	2,232	260	135	359	1,952	377	-305
	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%	-

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		FY03/22
(JPYmn)			Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	Q1–Q3	Q1–Q4	Q1	Q1–Q2	% 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	41.2%	244,000
	YoY		-3.6%	-5.6%	-6.2%	-3.1%	-17.9%	-13.8%	-11.8%	-8.4%	-	-		12.4%
	Retail/Wholesale Energy & Related		16,113	29,199	48,462	72,271	12,656	23,713	40,962	62,994	13,847
		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
		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
		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
Operating profit			507	156	340	2,454	809	968	255	2,935	417	-42	-	2,100
	YoY		-8.0%	-72.3%	-69.3%	38.6%	59.6%	520.5%	-25.0%	19.6%	-	-		-28.4%
	Retail/Wholesale Energy & Related		426	-28	-217	766	221	-81	-24	963	202
		YoY	-1.4%	-	-	148.7%	-48.1%	-	-	25.7%	-
	Energy Solution		128	84	159	819	424	632	767	892	64
		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
		YoY	-	-	-	-	-	-	-	-	-
	Company-wide, eliminations		30	178	570	918	61	243	637	836	27
By segment (quarterly)			FY03/20				FY03/21				FY03/22
(JPYmn)			Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
Sales			47,814	44,727	64,942	79,553	39,267	40,522	59,180	78,153	49,359	51,159
	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
		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
		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
		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
Operating profit			507	-351	184	2,114	809	159	-713	2,680	417	-459
	YoY		-8.0%	-	-66.2%	218.9%	59.6%	-	-	26.8%	-	-
	Retail/Wholesale Energy & Related		426	-454	-189	983	221	-302	57	987	202
		YoY	-1.4%	-	-	747.4%	-48.1%	-	-	0.4%	-
	Energy Solution		128	-44	75	660	424	208	135	125	64
		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
		YoY	-	-97.0%	-	-	-	7,200.0%	-	-94.2%	-
	Company-wide, eliminations		30	148	392	348	61	182	394	199	27

Source: Shared Research based on company data

1H FY03/22 results

Summary

1H FY03/22 results

Sales: JPY100.5bn (JPY79.8mn in 1H FY03/21)
Operating loss: JPY42mn (JPY968mn profit in 1H 03/21)
Recurring profit: JPY323mn (JPY927mn)
Net income attributable to owners of the parent: JPY72mn (JPY395mn)
*There are no YoY comparisons as the company adopted the Accounting Standard for Revenue Recognition at the start of Q1 FY03/22.

On a simple comparison with 1H FY03/21 (i.e., excluding the impact of the new accounting standard), sales increased by 33.3%, operating profit decreased by 64.5%, recurring profit decreased by 23.5%, and net income attributable to owners of the parent decreased by 17.7%. The adoption of the new accounting standard weighed down 1H sales by JPY5.8bn and operating profit, recurring profit, and pre-tax profit by JPY385mn (details follow). The company says that the impact of the standard will lessen from 2H and will mostly disappear by the end of FY03/22.

Sales increased YoY on higher unit selling prices stemming from a surge in crude oil price. Profits fell, however, due to the strengthening of investments for growth and a reactionary decline in the B2B segment caused by a steep rise in electricity procurement prices. FY03/22 marks the second year of Sinanen HD's second medium-term management plan (FY03/21–FY03/23), and the company is stepping up investments to achieve sustainable growth toward the third medium-term plan starting in FY03/24 and the 100th anniversary of its founding in 2027.

Progress against forecast

1H sales reached 41.2% of the FY03/22 full-year target (36.7% versus full-year results in 1H FY03/21), while 1H earnings finished at a loss at the operating level versus the year-ago operating profit of JPY968mn (33.0% versus full-year results in 1H FY03/21). The progress rates were 19.0% for recurring profit (30.7%) and 4.8% for net income attributable to owners of the parent (14.6%). Despite the impact of the adoption of the new accounting standard and a reactionary decline in the B2B segment, 1H results came in above company forecasts. The company maintained its full-year forecast.

By segment, the B2C segment and the Non-energy/Global segment performed well (the B2C segment turned profitable, and operating profit in the Non-energy/Global segment increased by 57.0% YoY). The Non-energy/Global segment contributed most to the higher-than-expected overall performance in 1H, and the B2C segment also exceeded the forecast slightly. On the other hand, the B2B segment posted an operating loss of JPY200mn in 1H FY03/22, compared to an operating profit of JPY960mn in the same period the previous year, due to investment for future growth and the impact of higher electricity procurement prices.

Application of Accounting Standard for Revenue Recognition

The company has applied the Accounting Standard for Revenue Recognition from the beginning of FY03/22. The company did not report YoY comparisons for 1H results for this reason.

Following the adoption of the standard, the company partially changed its method of revenue recognition in the mainstay LP gas sales business. Specifically, it relates to revenue generated during the account closing month. The company previously booked revenue based on customer usage fees on the date of meter reading, but after the adoption of the new standard, it will book an estimated amount for revenue between the date of meter reading and the account closing date. Under the pre-application method, revenue for approximately two weeks from the day after the meter reading date in March 2021 to the end of the same month was to be recorded in Q1 FY03/22 results. However, due to the application of the new standard, this revenue was not recorded in the consolidated statement of income and comprehensive income for the same period but was added to retained earnings on the balance sheet at the beginning of FY03/22. On the other hand, revenue for the corresponding period in September 2021 is included in the 1H FY03/22 results as estimated revenue. As LP gas consumption is usually lower in September than in March, this had a negative impact of JPY385mn on 1H FY03/22 sales and profit (JPY248mn in Q1 and JPY137mn in Q2).

In addition to the above factors, before adopting the new accounting standard the company recognized revenue based on the total amount of consideration received from customers (for transactions in which the company's role in the sale of products to customers was that of an agent). After adopting the new standard, the company will recognize as revenue the net amount of the total consideration minus the amount paid to third parties.

As a result, the application of the new accounting standard pushed down 1H sales by JPY5.9bn, cost of sales by JPY5.5bn, and operating profit, recurring profit and pre-tax profit each by JPY385mn.

Sales

Sales for 1H FY03/22 were JPY100.5bn (there is no YoY comparison as the company adopted the Accounting Standard for Revenue Recognition at the start of Q1 FY03/22; sales of JPY79.8bn in 1H FY03/21). Excluding the impact of the new accounting standard, sales were JPY106.4bn (+33.3% YoY). Sales by segment were as follows.

Retail/Wholesale Energy & Related business (B2C segment): JPY25.8bn (JPY27.3bn excluding the impact of the new accounting standard [+15.0% YoY])
Energy Solution business (B2B segment): JPY65.6bn (JPY70.0bn [+48.1% YoY])
Non-energy/Global segment: JPY9.0bn (JPY9.0bn [+3.3% YoY])
Other/adjustments: JPY193mn (JPY193mn [22.1% YoY])

In the Retail/Wholesale Energy & Related business (B2C segment) and the Energy Solution business (B2B segment), the sales volume of mainstay oil and gas products was almost flat YoY. Sales growth was mainly supported by higher selling prices due to a hike in crude oil and propane contract prices. In the Non-energy/Global segment, the bike sharing business saw a steady increase in the number of rental stations, due in part to the trend to avoid three Cs (closed spaces, crowded places, and close-contact settings), and the building maintenance and management business enjoyed strong sales in disinfection and cleaning services at medical facilities, driving higher earnings in the segment.

Operating loss

Despite higher YoY sales, the company posted an operating loss of JPY42mn (vs. operating profit of JPY968mn in 1H FY03/21) in 1H FY03/22. This was mainly due to large upfront spending for future growth and a reactionary decline stemming from a sharp rise in the electricity procurement price in the B2B segment, which performed well last year. The gross profit margin declined 4.5pp YoY to 14.9%, and the SG&A-to-sales ratio declined 3.3pp YoY to 14.9%. In the company's current business model, sales are heavily influenced by market conditions such as crude oil prices, so it is focusing on profit rather than sales.

Operating profit (loss) by segment for 1H FY03/22 (excluding impact of the new accounting standard) is as follows.

Retail/Wholesale Energy & Related business (B2C segment): Operating profit of JPY140mn (vs. operating loss of JPY80mn in 1H FY03/21)

Positive factors: Recovery in the housing business (JPY90mn), lower variable costs (gas cylinders and other supplies; JPY120 million yen)
Negative factors: Decrease in gross profit (mainly in the petroleum and electricity businesses; JPY30mn)

Energy Solution business (B2B segment): Operating loss of JPY200mn (vs. operating profit of JPY630mn in 1H FY03/21)

Negative factors: Decrease in gross profit (mainly in the electricity business; JPY300mn), increase in sales commissions (mainly related to the environmentally friendly electricity business; JPY120mn), increase in commissions paid (mainly related to the wind farm project in South Korea; JPY50mn), increase in personnel expenses (to strengthen the Sinanen Akari-no-Mori Denki business; JPY90mn), investment in development of micro wind turbines (JPY100mn)

Non-energy/Global segment: Operating profit of JPY270mn (+57.0% YoY)

Positive factors: Narrower loss in the bike sharing business (JPY100mn), building maintenance and management business (JPY50m)

Other/adjustments: Operating profit of JPY120mn (-48.6% YoY)

Negative factors: increase in commissions paid (IT expenses for digital transformation and other initiatives; JPY70mn), increase in personnel expenses at the holding company (increase in administrative staff, mainly in the IT strategy department; JPY90mn)

External environment

The business environment surrounding the company has changed dramatically with the complete liberalization of the gas and electricity retail markets triggering intense competition. The Japanese government’s declaration to become carbon neutral by 2050 further compounded the challenge. The crude oil price and propane contract price, which had dipped temporarily in April 2021, spiked again as the supply tightened due to the OPEC Plus agreement to reduce production, and as the demand grew in line with the economic recovery in the US and Europe, which were among the first regions to roll out COVID-19 vaccinations. Meanwhile, overall domestic demand for petroleum and gas has continued to fall due to the nation’s declining childbirth and aging population, spread of energy-saving equipment, and changes in lifestyles.

Continued investment for growth

Sinanen HD launched its second medium-term business plan, a three-year plan starting in FY03/21, under the slogan of “Challenging New Worlds with Big Sky-thinking.” FY03/22 marks the second year of the plan (FY03/21–FY03/23), and the company is continuing to step up investments to achieve sustainable growth toward the third medium-term plan starting in FY03/24 and the 100th anniversary of its founding in 2027. As a result, the company forecasts a 12.4% YoY increase in sales but a 28.4% decline in operating profit in FY03/22.

Results by segment

Retail/Wholesale Energy & Related business (B2C segment)

Sales: JPY25.8bn (JPY27.2bn excluding the impact of the new accounting standard [+15.0% YoY])
Operating profit: JPY140mn (excluding the impact of the new accounting standard [operating loss of JPY80mn in 1H FY03/21)

Sales volume slightly fell in the mainstay LP gas and kerosene businesses, affected by the drop in demand due to unseasonably warm weather in the early spring of 2021. Selling prices, however, rose due to a hike in the crude oil price and propane contract price, supporting higher YoY sales. Despite the negative impact of the application of the new accounting standard, segment profit increased YoY on a recovery in the housing business, a decrease in variable costs (mainly costs for gas cylinders and other equipment), and marginal gains in LP gas sales. As mentioned above, the method of recognizing revenue from LP gas sales in March and September changed with the adoption of the new accounting standard. Since LP gas consumption is lower in September than in March, this had a negative impact of JPY385mn on 1H sales and profit (JPY248mn in Q1, JPY137mn in Q2).

Energy Solution business (B2B segment)

Sales: JPY65.6bn (JPY70.0bn excluding the impact of the new accounting standard [+48.1% YoY])
Operating loss: JPY200mn (excluding the impact of the new accounting standard [operating profit of JPY630mn in 1H FY03/21])

Sales volume in the mainstay petroleum business increased modestly from the previous year level, but similarly to the B2C business, selling prices rose significantly due to a hike in the price of crude oil. On the profit front, despite the firm performance in diesel oil sales, earnings were weak overall mainly because of higher electricity procurement costs, increase in promotional expenses (related to the environmentally friendly electricity business launched in FY03/21), and investment in the micro wind turbine business. Regarding the wind farm project in South Korea, a new business, the company announced on October 8, 2021 that the acquisition of necessary permits was behind schedule largely due to the pandemic and opposition from local residents, and stated that the date for the start of commercial operation was undetermined (details follow). In the new micro wind turbine business, on top of the pilot program in Saitama, the company is planning to roll out a number of programs to test different types of climates, including one in Sapporo, up north in Hokkaido.

Non-energy/Global segment

Sales: JPY9.0bn (JPY9.0bn excluding the impact of the new accounting standard [+3.3% YoY])
Operating profit: JPY270mn (+57.0% YoY)

Operating profit increased 57.0% YoY, driven by the bike sharing business, which posted a narrower loss on sales growth and improved operational efficiency, and the building management and maintenance business, which enjoyed robust sales of disinfection and cleaning services at medical facilities. The systems business also boosted earnings with solid performance of the Power CIS customer information system.

At Sinanen Bike, which sells bicycles, sales were weak in the absence of the year-ago demand boost from the COVID-19-related cash handout by the Japanese government. Sinanen Mobility+, which runs a bike sharing business, focused on expanding its bicycle dock network for the Daichari bike sharing service. One such effort was the launch of new pilot programs in collaboration with municipalities such as the City of Fujimino (Saitama Prefecture). Business rollout was steady with over 2,000 bicycle docks (stations) and over 8,200 share bicycles under management as of end-September 2021.

Sinanen Mobility+ has been working to develop bicycle docks in target areas where it expected high utilization by expanding collaboration with Odakyu Electric Railway and forging a new partnership with JR East Urban Development Corporation. Meanwhile, its initiatives to raise profitability, including the reorganization of operational structure, are beginning to show results.

At Sinanen Ecowork, which operates in the environmental and recycling space, the handling volume of waste wood recycling recovered 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. The performances of other businesses at the subsidiary, including metal recycling, were also strong and contributed to sales and earnings.

Sinanen Zeomic in the antimicrobial business maintained robust sales in Japan and abroad, underpinned by the pandemic-induced demand increase for antimicrobial agents. However, profit remained largely flat YoY due to an increase in cost of sales. The subsidiary continued to cultivate new customers through prototype development for a major manufacturer, among other efforts.

Performance of Minos, a systems business operator, was also strong. The mainstay core system for LP gas sales made stable contributions, and the Power CIS customer information system catering to the deregulated electricity retail sector saw substantial business growth.

The overall performance was firm at Takara Building Maintenance, the core subsidiary in the building maintenance and management business. In addition to the fixed-term management of housing complexes such as condominiums, which brings in steady revenue, the increase in new orders for disinfection and cleaning services at medical facilities, and the bounceback in the number of maintenance contracts with housing complexes also contributed to the results.

Outlook for 2H FY03/22

Company forecast for 2H FY03/22: sales of JPY143.5bn and operating profit of JPY2.1bn

Subtracting the 1H results from the full-year forecast, 2H forecast calls for sales of JPY143.5bn (+4.5% YoY; simple comparison without considering the impact of the application of the new accounting standard) and operating profit of JPY2.1bn (+8.9% YoY). In 1H, the adoption of the new accounting standard weighed down profits by JPY385mn, but it is expected to lift profits by almost the same amount in 2H. The company says the impact of the new standard will mostly disappear by the end of FY03/22.

Crude oil and propane contract prices

When the crude oil price and the propane contract price fluctuate sharply, there is a time lag between the hike in procurement prices and the price pass-through. Profit margins shrank in 1H FY03/22 due to a one- to two-month time lag, but the company expects to maintain profit margins in 2H. If procurement prices fall in 2H, however, the company faces the risk of recording inventory write-downs.

Electricity procurement price

In the B2C segment, the company procures all electricity directly from power generators under bilateral contracts, and in the B2B segment, it utilizes both direct procurement and the wholesale market (around 50/50 split between the two channels). Overall, the company sources about 30% of electricity from the wholesale market. The company was affected by a sharp rise in the wholesale electricity price at the Japan Electric Power Exchange (JEPX) in October 2021 (the system price, which was around JPY10/kWh on September 30, 2021, surpassed JPY50/kWh on October 11, 2021). Since November 2021, prices have settled down, but have generally remained above the level at the end of September. Since December 2021, the company has used forward contracts, so even if electricity prices fluctuate significantly, it says the impact will be minimal.

Impact of changes in plans for wind power farm project in South Korea

In the wind power project in South Korea, Sinanen HD planned to start commercial operation in 2H FY03/22, but due to a change in the plan, the start date is now undetermined (see below). The company had included interest expenses related to project financing in its FY03/22 plan as non-operating expenses. Since interest expenses will be incurred after the project financing, the delays in the plan will be a positive factor for recurring profit in FY03/22.

Changes in plans for wind power farm project in South Korea

In May 2020, the company announced it would participate in a large-scale wind power farm project in South Korea. The company had originally planned to start commercial operations in 2H FY03/22, but the start date is now undetermined. The company has been negotiating with the local government and other related parties to obtain permits, but due to opposition from local residents and the spread of COVID-19 in South Korea, the acquisition of permits is behind schedule. Local residents have protested against the wind farm on the grounds of noise and environmental impact, but the project has met environmental standards. The company believes that some of the protests have monetary aims. In addition to the interruption in the local government's decision on development permits, there have been obstacles in obtaining wind data and other operations. As of end-1H FY03/22, a third party is assessing the probability of the project and reviewing the business plan in light of the delays.

Growth in the bike sharing business

Sales in the bike sharing business were robust in 1H. As of September 30, 2021, the number of rental stations exceeded 2,000 and the number of bicycles installed exceeded 8,200. In Q2 FY3/21 (July–September), the number of users was 357,000 (+82.7% YoY), and the number of bicycles used was 1,509,000 (+76.3% YoY). The business has continued to grow since, and both figures reached record highs in October and November 2021.

The company believes that bike sharing have become widely established as a third type of transportation infrastructure. From 2H onward, the company aims to further increase the presence of its bike sharing business as a short-distance transport service. The company has accumulated expertise in rental station development, and in FY03/22 it has focused on operational efficiency. Although the business is still in the red, the company has succeeded in narrowing the loss by JPY100mn YoY in 1H, and is eyeing a turn to profitability in FY03/23.

ESG initiatives

In terms of the environment, the company is involved in the energy business and considers its contribution to the environment to be important. From FY03/23 onwards, the company plans to move quickly to endorse the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), and looks to take action at its main group companies to reduce CO2 emissions.

On the social front, the company is promoting reforms in corporate culture and work styles. In FY03/22, it has implemented reforms across the entire group and at each of its operating companies in parallel.

Sinanen HD is also striving to improve its group governance. On November 24, 2021, the Tokyo Stock Exchange published a list of examples of corporate governance initiatives, and introduced the company's corporate culture reforms and group collaboration aimed at corporate value enhancement. The company believes that its efforts to disseminate management's group vision to employees with a view to improving group governance have been highly evaluated.

The company plans to accelerate ESG initiatives and disclosure in 2H and beyond.

For details on previous quarterly and annual results, please refer to the Historical financial statements section.

Full-year company forecast

		FY03/20			FY03/21			FY03/22
(JPYmn)		1H Act.	2H Act.	FY Act.	1H Act.	2H Act.	FY Act.	1H Act.	2H Est.	FY Est.
Sales		92,541	144,495	237,036	79,789	137,333	217,122	100,518	143,482	244,000
Cost of sales		77,774	126,489	204,263	64,296	118,985	183,281	85,584
Gross profit		14,767	18,005	32,772	15,493	18,347	33,840	14,933
	Gross profit margin	16.0%	12.5%	13.8%	19.4%	13.4%	15.6%	14.9%
SG&A expenses		14,610	15,708	30,318	14,525	16,380	30,905	14,975
	SG&A ratio	15.8%	10.9%	12.8%	18.2%	11.9%	14.2%	14.9%
Operating profit		156	2,298	2,454	968	1,967	2,935	-42	2,142	2,100
	Operating profit margin	0.2%	1.6%	1.0%	1.2%	1.4%	1.4%	0.0%	1.5%	0.9%
Recurring profit		373	1,830	2,203	927	2,096	3,023	323	1,377	1,700
	Recurring profit margin	0.4%	1.3%	0.9%	1.2%	1.5%	1.4%	0.3%	1.0%	0.7%
Net income		744	2,255	2,999	395	2,311	2,706	72	1,428	1,500
	Net margin	0.8%	1.6%	1.3%	0.5%	1.7%	1.2%	0.1%	1.0%	0.6%

Source: Shared Research based on company data

FY03/22 forecast

Sales: JPY244.0bn (+12.4% YoY)
Operating profit: JPY2.1bn (-28.4% YoY)
Recurring profit: JPY1.7bn (-43.8% YoY)
Net income: JPY1.5bn (-44.8% YoY)
Dividend: JPY75.00 per share (unchanged YoY)
* Net income attributable to owners of the parent

Forecast assumptions

The FY03/22 forecast assumes the impact of the COVID-19 pandemic felt in FY03/21 (see “Full-year FY03/21 results” section for details) will continue through FY03/22. Still, the company expects the overall effect to be limited. In the event the spread of COVID-19 spurs a greater-than-expected adverse effect on each business, Sinanen HD’s performance will likely be hurt to a greater extent. However, the company maintains that signs to this effect are marginal as of mid-May 2021, and that it will promptly make disclosure when it sees the need to revise the forecast.

Factors behind the 28.4% YoY decline in operating profit

FY03/22 marks the second year of the company’s second medium-term management plan spanning FY03/21 to FY03/23. Sinanen HD intends to use the year to firmly lay out the foundation for substantial growth under the next (third) medium-term plan.

In FY03/22, the company projects earnings at all profit lines to fall YoY, as it intends to invest in new businesses that will form the foundation for its future; various IT investments are also in the plan. Meanwhile, it expects the impact of the pandemic on earnings to be limited, and such impact is therefore not a major factor in the forecast. Since Sinanen HD is in the business of supplying energy that sustains the livelihoods of people, it believes the pandemic will have little impact on consumption volume.

Factors behind the projected YoY change in operating profit, by segment

Retail/Wholesale Energy & Related (B2C segment): +JPY350mn impact on operating profit

Energy solution (B2B segment): -JPY750mn impact on operating profit (of which, -JPY610mn in personnel expenses and other investment associated with new businesses)

Non-energy/Global segment: + JPY70mn impact on operating profit (includes a JPY100mn negative impact from investment in the bike sharing business)

Adjustments: -JPY500mn impact on operating profit (of which, -JPY300mn in personnel expenses and other investment associated with digital transformation)

Application of Accounting Standard for Revenue Recognition

Effective from the beginning of FY03/22, the company has adopted the Accounting Standard for Revenue Recognition. Under the new standard, the company recognizes revenue based on the amount it expects to receive in exchange for the promised goods or services when control of the goods or services is transferred to the customer. As a result, the company partially changed its method of accounting for revenue in the mainstay LP gas sales business. Specifically, it relates to revenue generated during the account closing month. The company previously booked revenue based on customer usage fees on the date of meter reading, but after the adoption of the new standard, it will book an estimated amount for revenue between the date of meter reading and the account closing date. Although there will be positive and negative impacts on a quarterly basis, the impact will mostly level off on a full-year basis. In addition, prior to the adoption of the new accounting standard, for transactions in which the company's role in the sale of products to customers was that of an agent, the company recognized revenue based on the total amount of consideration received from customers. After the adoption of the new standard, the company will recognize as revenue the net amount of the total consideration minus the amount paid to third parties.

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.

Outlook by segment

Retail/Wholesale Energy and Related business (B2C segment)

The company forecasts a segment operating profit of JPY1.3bn (+36.0%, or +JPY347mn YoY) in FY03/22. The 36.0% YoY increase factors in the growth in sales owing to the acquisition of new customers and sales rights in the LP gas and kerosene businesses. Other positive factors contributing to operating profit include a JPY700mn increase in gross profit (+JPY200mn in gas business, etc.; +JPY500mn in electricity business), JPY400mn increase from sales growth in the housing equipment business, and a JPY40mn increase from the launch of a real estate business. Meanwhile, negative factors weighing down the operating profit include a JPY200mn increase in distribution-related expenses and a JPY600mn increase in personnel and sales-related expenses. LP gas and kerosene are the mainstay merchandise in the B2C segment, and the company does not expect a radical shift to carbon neutrality in this field. It plans to remain focused on commercial rights and other acquisition opportunities.

Energy solution business (B2B segment)

The company forecasts a segment operating profit of JPY140mn (-84.3%, or -JPY752mn YoY). While gross profit is expected to rise YoY, mainly in the electricity business, investments in the micro wind turbine project and the wind farm project in South Korea will likely push down the operating profit. Expenses associated with the environmentally friendly electricity business, which the company began in earnest in FY03/21, is another factor leading to the projected 84.3% YoY drop in segment operating profit. Wind power generation, the new micro wind turbine, and petroleum products account for the lion’s share in the B2B segment. The company plans to make upfront spending to build its renewable energy business in Japan and overseas.

Positive factors contributing to operating profit in the segment include a JPY110mn increase in gross profit (+JPY570mn in electricity, +JPY140mn from gasoline sales growth, -JPY600mn in reactionary drop related to kerosene sales, etc.), and +JPY180mn in sales growth associated with environmental solutions. Negative factors include a JPY300mn increase in distribution-related expenses (driver shortages causing delivery fees to rise), JPY310mn in new business investment (JPY190mn in micro wind turbines and JPY120mn in the South Korean wind farm), JPY300mn in expenses related to the environmentally friendly electricity business (includes personnel expenses), and JPY130mn in other expenses.

Non-energy/Global segment

The company forecasts a segment operating profit of JPY310mn (+27.6% YoY, or JPY67mn YoY). It intends to continue investing in the bike sharing business while improving the operational efficiency and profitability. An infrastructure upgrade in the systems business is also in the plan, but overall, the company projects a YoY operating profit growth of 27.6% in this segment.

Positive factors contributing to operating profit are an earnings improvement of JPY280mn in the bike sharing business and an earnings improvement of JPY70mn in the bicycle business (mainly Daisharin stores; thanks to closure of loss-making stores and franchising implemented in FY03/21). Negative factors include a JPY100mn investment in the bike sharing business (higher depreciation; straight-line depreciation over two years), JPY160mn on infrastructure upgrade in the systems business, and JPY20mn in other expenses.

Progress in the second medium-term management plan (FY03/21–FY03/23)

Streamlining of existing businesses

In April 2021, Sinanen HD decided to withdraw from the biomass business (sales of consumer-use charcoal made of capim, a perennial plant) in Brazil. The company began selling the product in 2018, but has since concluded that the expected return from this business will not be enough to satisfy its investment criteria. A JPY404mn loss on business liquidation (extraordinary loss) was recorded in FY03/21, and withdrawal from the business via share transfer will be completed in FY03/22.

Bike sharing business

The company operates a sharing service of electric bicycles under the Daichari brand, using a system provided by the Softbank group. It intends to continue investing in the business in FY03/22. Expanding the network of Daichari bicycle docks (stations) along target municipalities, commercial facilities, and major stations, the company has rolled out over 8,200 electric bicycles across some 1,800 locations as of end-March 2021.

Key performance indicators in this business—user count and number of use—have been rising, supported in part by the 3Cs measure (avoiding closed spaces, crowded places, and close contact) for preventing COVID-19 outbreak. Performance in April 2021 remained strong, and for Q1 FY03/22, the company estimates a total user count of 28,500 (+89.5% YoY) and total use of 119,400 times (twofold increase YoY). Bike sharing systems are gaining traction as a new form of transportation infrastructure, and the company hopes to build its presence in the business. Having accumulated knowledge on station development, it will work to roll out stations with efficiency and turn a profit for the full year in FY03/24.

Progress in the new micro wind turbine business

Sinanen HD established a subsidiary in April 2020 and began a pilot program in Saitama from March 2021. The company says the new micro wind turbine stands out for its power generation capacity (935W in wind and solar power combined [500W from the wind turbine and 435W from the solar panel attachment]), ease of installation, and expanded functionality (option to add a security camera, LED lighting, Wi-Fi and other communication tools, etc.).

Akari-no-Mori project

In November 2020, the company launched the Sinanen Akari-no-Mori project, an initiative to encourage the use of clean power by offering an environmentally friendly power plan to corporate customers. From FY03/22 onward, it will expand its services to meet the needs of environmentally conscious customers beyond the corporate clientele. To this end, it launched the Sinanen Akari-no-Mori Denki, a clean power plan for regular households, in March 2021. Collaborating with Sanrio (TSE 1: 8136), the company developed an original character Poponen to step up information delivery and promote usage across generations.

Core system enhancement

To alleviate the operational burden shouldered by employees and create an IT systems environment that allows for teleworking and diverse work styles, the company switched from an on-premise core system (on-premise servers operated and managed in-house) to a cloud-based system. According to the company, with the introduction of the cloud-based IT infrastructure, various operations were moved online. This has ensured smooth telecommunications during teleworking and busy seasons, and in turn improved operational efficiency. The company looks to utilize AI, IoT, and big data, establish links with other cloud services, and pursue operational improvements at each of its businesses by building a next-generation IT infrastructure.

Improvement of corporate culture/work style reforms

To improve its corporate culture, Sinanen HD has worked to raise awareness of individuals and of the organization as a whole. It is also promoting work style reforms. The company believes corporate growth hinges on the growth of its employees, especially in a period of dramatic societal changes; hence, the key to successful growth lies in changing the mindsets and conducts of the employees. In April 2020, the company kicked off a corporate culture reform project, and in November 2020, established the group reform promotion office to accelerate the initiative under direct leadership of President Yamazaki.

Surveys on corporate culture and executive training sessions (to encourage awareness reforms among member of the management) were conducted in FY03/21, albeit intermittently due to the pandemic. President Yamazaki visited each operating company and met with the employees to understand the issues at hand and to relay his strong commitment to the project. From FY03/22 onward, the company says it will focus on building a free and open-minded corporate environment and foster entrepreneur-minded employees who can help improve the existing businesses and build new ventures.

Key initiatives

There are no changes to the business strategy to date. The company will continue to implement the measures as planned, while also focusing on new business development, group-wide cooperation, and digital transformation.

New businesses

The company has been planting multiple seeds for new businesses, and says that a new biomass project may develop into a prospective business. It plans to make an announcement when it is ready to present the details.

Group-wide cooperation

The Sinanen group comprises 39 companies (including Sinanen Holdings). Since the establishment of the holding company structure, each company has thus far managed to operate with speed by autonomously making management decisions. Going forward, however, the company plans to strengthen ties among the group companies, foster group synergies, and pursue overall earnings growth and operational efficiency. To this end, it established the group coordination promotion office in April 2021 to promptly develop an overarching framework for cooperation (e.g., the sharing of knowledge and customer information, centralized procurement, etc.). For example, the Melife companies (B2C) and Sinanen Co., Ltd. (B2B), all operating in the energy domain, will share their knowledge and work to improve procurement. The company will also begin providing building maintenance and management services in the energy business-centered B2C segment. It expects to create synergies by promoting logically sound cooperation among the group companies.

Digital transformation (DX)

Sinanen HD plans to step up DX-related investments in FY03/22. In the second medium-term management plan, it has positioned digital transformation as a key initiative for strengthening business foundation and operational efficiency of the group to ultimately drive changes in the corporate culture and the business model. From FY03/22 onward, the company plans to modify its current passive approach to DX (achievement of operational efficiency) and also take on a more aggressive stance (DX to create high-value-added services). It will continue to pursue “passive DX,” identifying and reviewing on-site operational processes at each business, standardizing these processes, and improving operational efficiency through introduction of a new core system. As for the aggressive stance, the company believes entrepreneur-minded employees (emerging from changes in the corporate culture) and shared knowledge from group-wide cooperation will improve existing operations and create new businesses down the road. It intends to digitally support this process by promoting “aggressive DX.”

Initial company forecasts and results

Results vs. Initial Est.		FY03/17	FY03/18	FY03/19	FY03/20	FY03/21
(JPYmn)		Cons.	Cons.	Cons.	Cons.	Cons.
	Sales (Initial Est.)	250,000	256,000	260,000	245,000	226,000
	Sales (Results)	218,242	244,370	244,567	237,036	217,122
Results vs. Initial Est.		-12.7%	-4.5%	-5.9%	-3.3%	-3.9%
	Operating profit (Initial Est.)	3,100	3,600	3,300	2,600	2,200
	Operating profit (Results)	2,934	3,348	1,771	2,454	2,935
Results vs. Initial Est.		-5.4%	-7.0%	-46.3%	-5.6%	33.4%
	Recurring profit (Initial Est.)	3,900	3,800	3,500	2,900	1,800
	Recurring profit (Results)	3,424	3,948	2,158	2,203	3,023
Results vs. Initial Est.		-12.2%	3.9%	-38.3%	-24.0%	67.9%
	Net income (Initial Est.)	2,200	2,300	2,600	2,200	1,500
	Net income (Results)	2,584	2,867	1,588	2,989	2,717
Results vs. Initial Est.		17.5%	24.7%	-38.9%	35.9%	81.1%

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.

Since its announcement in May 2020, the company has been negotiating with the local government and related parties to obtain a series of permits relating to wind power generation. However, the acquisition of the necessary permits is considerably behind schedule due to the COVID-19 pandemic, opposition from local residents and partial design changes. As a result, overall business development has come to a standstill.

Under these circumstances, the company has continued to review the implementation of all business development planning processes, including the acquisition of permits and construction work. It now recognizes that it will be difficult to recover the schedule on a number of processes, and so has made the decision to carry out sweeping revisions to the plan. In revising its plan, the company made the decision to ask a third party to evaluate the probability of the plan and review the business plan. It also decided to change the date for the start of commercial operations from 2H FY03/22 to undetermined.

* 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.

In addition to the pilot program in Saitama, the company is planning to roll out a number of programs to test different types of climates, including one in Sapporo. 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

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*.

*Indess Co., Ltd. (Machida, 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.

In October 2020, Indess merged with Yutecs Co., Ltd. (Setagaya-ku, Tokyo; equipment installation business). Yutecs 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.

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