Sangetsu : FY2022 IR Report

Table of Contents

Key Points

1. Company Overview
2. Fiscal Year ended March 2023 Earnings Results
3. Fiscal Year ending March 2024 Earnings Forecasts
4. Medium-termManagement Plan (2023-2025)【BX 2025】
5. Interview with President Yasuda
6. Conclusions

<Reference1: Long-term Vison of Sangetsu Group 【DESIGN 2030】>

Key Points

• In the term ended March 2023, sales grew 17.8% year on year to 176 billion yen and operating income rose 154.8% year on year to 20.2 billion yen. Through the third price hike in October 2022 following the first price hike in September 2021 and the second price hike in April 2022, the profitability of the interior business improved considerably. The loss in the overseas segment shrank. Sales and profit exceeded the earnings forecast that was revised upwardly twice and announced in February 2023, and hit a record high.
• For the term ending March 2024, sales are expected to rise 4.0% year on year to 183 billion yen and operating income is projected to drop 26.0% year on year to 15 billion yen. While sales are forecast to grow thanks to the recovery of sales quantities and the improvement in the overseas business, profit is projected to decline due to the augmentation of costs, including procurement prices, distribution costs, and personnel expenses. The reflection of the rise in costs in prices is not assumed as of now. The company plans to pay a dividend of 130.00 yen/share, up 25.00 yen/share from the previous term, increasing the dividend amount for the 10th consecutive term. The expected payout ratio is 72.7%.
• In the term ended March 2023, which is the final fiscal year of the Medium-term Business Plan (2020-2022) "D.C. 2022," sales and profit significantly exceeded the goals set in the long-term vision "DESIGN 2030." In the past 3 years, the COVID-19 affected the company's business, but the business base and earning capacity of the Sangetsu Group have expanded and improved. On the other hand, the future economic environment remains uncertain. Considering this situation, the Sangetsu Group reviewed the long-term vision "DESIGN 2030" and formulated a new Medium-term Business Plan "BX 2025" for long-term growth.
• In "DESIGN 2030," the image of a Space Creation Company was clarified, future businesses were discussed, and the quantitative goals for the term ending March 2030 were raised from "sales of 225 billion yen and an operating income of 18.5 billion yen" to "sales of 250 billion yen and an operating income of 27 billion yen."
• "BX 2025" is recognized as the 3 years for preparing for the next leap to "improve the solution providing capability as a strategy for further growth" while taking into account current issues. The priority measures are the following five: (1) Supporting expansion, advancement, and active utilization of human capital, (2) Accumulation, analysis, and utilization of digital capital, (3) strengthening the ability to provide solutions, (4) exterior and overseas businesses, and (5) enhancing social value. In particular, they consider that the enhancement of human capital is the most important.
• We interviewed President Shosuke Yasuda about the review of the results for the term ended March 2023 and "D.C. 2022," the major points of "BX 2025," his message toward shareholders and investors, etc. The theme of "BX 2025" was set as "3 years for preparing for the next leap." He said, "we will steadily proceed with the most important mission of strengthening human capital and implement measures for attaining 'sales of 250 billion yen and an operating income of 27 billion yen' in the term ending March 2030. We would appreciate your continued support from the medium/long-term viewpoint."
• The results of the previous Medium-term Business Plan "D.C. 2022" were almost perfect. The company considers the three years as the investment phase mainly for enhancing human capital, and forecasts that sales will achieve a single-digit growth and operating income will decline by double digits in the term ending March 2024. Share price is relatively healthy, increasing investors' expectations. We would like to pay attention to the progress of their business toward the forecast for this term, as well as the trends of measures looking ahead to the year 2030.

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1. Company Overview

Sangetsu Corporation is the largest among all Japanese trading companies specializing in wallcoverings, flooring materials, curtains and other interior decorating products. Being a trading firm, the company also operates as a "fabless company" that plans and develops interior decorating products except for some products. Sangetsu boasts of a business model that is able to produce stable earnings and top market share in its main product realms.

As of the end of March 2023, the group is composed of nine companies including "Sangetsu Okinawa Corporation," which sells interior merchandise in the Okinawa area, "Sangetsu Vosne Corporation", a distributor specializing in curtains "Sungreen Co., Ltd.", a dedicated distributor of exterior products, "Goodrich Global Limited", the company responsible for business in China and Hong Kong, "Koroseal Interior Products Holdings, Inc.," the United States company conducting sales of wallcovering materials for non-residential applications, "Goodrich Global Holdings Pte., Ltd.," the company selling interior merchandise in Southeast Asia, and "Fairtone Co., Ltd.", which seeks to grow orders on the back of enhanced installation capabilities, Japan's largest manufacturer of vinyl wallcovering, CREANATE Inc, "Kurosukikaku Corporation (incorporated in April 2023)," which is a leading delivery firm in the Kyushu area.

【1-1 Corporate History】

Sangetsu was founded in 1849 under the original name of "Sangetsudo" to sell various traditional Japanese interior decorating products including scrolls, wall scrolls, folding screens, sliding doors, partitioning screens, and other products made of cloth and paper. Sangetsu Corporation was incorporated in 1953 by the founding family. From the latter half of the 1970s onwards, the business was expanded into Tokyo, Osaka, Fukuoka and other parts of Japan. In 1980, Sangetsu was listed on the Second Section of the Nagoya Stock Exchange, and later in 1996 its shares were also listed on the First Section of the Tokyo Stock Exchange. Currently, Sangetsu is expanding its operations into overseas markets and has established itself as a large total interior decorating product provider.

Shosuke Yasuda was appointed as the first President who is not from the founding family of Sangetsu in April 2014. He will direct the company during its third stage of growth entitled "Our Third Founding Phase," following on the heels of the original first phase of founding and the second phase when the company became a publicly listed corporation.

In April 2022, through the restructuring of stock markets, the company got listed on the Prime Market of Tokyo Stock Exchange and the Premier Market of Nagoya Stock Exchange.

【1-2 Corporate Philosophy】

In Sangetsu Group's Long-term Vision "DESIGN 2030," which was formulated in 2020, the company set its ideal state as "a Space Creation Company." However, as mentioned in Section 4 "Medium-term Business Plan (2023-2025) 'BX 2025'," the company revised the long-term vision "DESIGN 2030" while considering the results until the previous term, the future environment surrounding the company, etc., and formulated a new Medium-term Business Plan "BX 2025" for long-term growth.

Accordingly, the task force composed of mainly employees of the Sangetsu Group is revising the corporate philosophy.

【1-3 Market Environment】

• Overview

The market environment for the main wallcoverings and flooring materials is strongly influenced by trends in the Japanese construction market. Declines in new housing start arising from declining population and changing family structures within Japan, and deflationary trends have depressed sales of the interior products market as shown in the graph below.

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（Source: the company）

At the same time, the graph below shows the correlation between net sales of Sangetsu relative to net sales of the Japanese interior market and new housing starts (Ministry of Land, Infrastructure, Transport, and Tourism data).

The company's net sales and trends in the domestic interior market have been largely linked to the number of new housing starts, but following the collapse of Lehman Brothers, while the overall market and new housing starts have remained at low levels, the company's net sales have been at record highs continuously until March 2020. In the term ended March 2021, sales dropped for the first time in 11 terms due to the novel coronavirus, but in the term ended March 2022, sales grew, and in the term ended March 2023, sales hit a record high.

Besides M&A, this strong recovery can be attributed to Sangetsu's efforts to cultivate business in the non-residential realm in addition to private housing.

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According to the "Outlook for investment in construction in FY2021" released by the Ministry of Land, Infrastructure, Transport and Tourism, both private-sector residential construction investment and private-sectornon-residential construction investment were on the way to recovery after the collapse of Lehman Brothers, but private-sector residential construction investment has been reaching peaks since FY2017, and private-sectornon-residential construction investment, which had been above the 2000 level, has been flat.

The total floor areas of offices and (newly built) stores had been declining, but in FY 2021, the total floor areas of both offices and stores increased from the previous fiscal year.

In addition, according to "Outlook for investment in construction based on a construction economy model" released by Research Institute of Construction and Economy on April 12, 2023, nominal private investment in non-housing construction increased steadily through fiscal 2019, then declined considerably by 9.2% (estimated) in fiscal 2020 due to the coronavirus pandemic, but is expected to grow 3.0% (estimated) in fiscal 2021. 11.3% (forecast) in fiscal 2022, and 4.7% (forecast) in fiscal 2023 showing a recovery.

Floor areas of facilities to be constructed *Offices

The floor area of offices to be constructed expanded 34.6% year on year in FY 2021, showing a significant recovery from the previous year, in which there was the impact of the coronavirus pandemic, but in FY 2022, it is projected to decline significantly by 20.5%, showing a reactionary drop. In FY 2023, the floor area of new housing is expected to be healthy, increasing 3.7% year on year. They mentioned, "While there are concerns over the impact of the skyrocketing of prices of building materials, etc., investors' willingness to invest is strong and they keep investing in mainly large-scale redevelopment projects in the Tokyo Metropolitan Area, so the floor area of new housing is expected to remain healthy for the foreseeable future."

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