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Integrated Report (Message from the COO)
The economic environment surrounding the Kaga Electronics Group at home and abroad has been positively affected by modest recovery reflecting the progression of normalizing socio-economic activities in step with the relaxation of movement restrictions aimed at curbing the COVID-19 pandemic, along with the alleviation of semiconductor shortages and supply chain disruptions. On the other hand, the continuing Russia-Ukraine situation resulted in surges in food and energy prices. Furthermore, policy rate hikes aimed at countering inflation led to radical foreign exchange fluctuations and growing instability of the financial system. Taking these and other factors into account, future outlook remains unclear.
In the electronics industry, to which the Kaga Electronics Group belongs, the lingering supply shortage of some semiconductors and electronic parts and their prolonged delivery timeframes have largely been resolved. Moreover, demand remained robust in a broad range of industrial fields.
In the electronic components business—the core business of the Kaga Electronics Group, sales expanded considerably in both the electronic parts and EMS businesses, especially sales of products related to automotive and medical equipment. In the information equipment business, sales of high-end PC products and security software expanded, as did sales from the LED installation business. Meanwhile, the software business has benefitted from recovery in the volume of orders received for smartphone game production and computer graphics production. In the other business, business results for the recycling of PCs and other products were robust.
As a result, sales increased year-on-year for all business segments, with all indicators, ranging from net sales to profit attributable to owners of the parent, hitting an all-time best.
Specifically, consolidated net sales amounted to ¥608,064 million, up 22.6% from the previous fiscal year. Operating income rose 54.2% year-on-year to ¥32,249 million, thanks to higher gross profit backed by increased sales and the improved gross profit margin, which was up 0.7 of a percentage point year-on-year. Ordinary income grew 52.6% year-on-year to ¥32,739 million, while profit attributable to owners of the parent rose 49.8% year-on-year to ¥23,070 million. Thus, the Group achieved record-high net sales for the second consecutive year. Furthermore, operating income and ordinary income both hit an all-time high for the fourth consecutive year, while profit attributable to owners of the parent similarly hit a record high for the third consecutive year.
In the electronics industry, demand for semiconductors and electronic parts is expected to temporarily decline due mainly to a recoil from major growth seen during the COVID-19 pandemic and inventory adjustments undertaken by customers in preparation for the risk of economic recessions. Taking these projections into account, our operating results forecasts for the fiscal year ending March 31, 2024 include decreases in both sales and profit, with consolidated net sales of ¥550.0 billion, operating income of ¥25.0 billion, ordinary income of ¥25.0 billion and profit attributable to owners of the parent of ¥18.0 billion. Based on these forecasts, we expect EPS and ROE to amount to ¥685.42 and 13.3%, respectively.
Looking at the breakdown of the year-on-year increase of ¥11,334 million in operating income recorded in the fiscal year ended March 31, 2023, sales volume and sales mix, spot sales, and foreign exchange translation contributed to increases of ¥17,538 million, ¥429 million and ¥1,782 million, respectively.
After the subtraction of a ¥6,633 million increase in SG&A expenses, operating income thus amounted to ¥33,249 million.With regard to forecasts for the fiscal year ending March 31, 2024, we expect a ¥4,883 million decrease in operating income due to sales volume and sales mix, while anticipating that the absence of spot sales will result in a decrease of ¥4,631 million. However, we will aim to achieve the reduction of SG&A expenses totaling ¥2,265 million, which will, in turn, serve as a profit contributor. We will thus secure operating income of ¥25.0 billion. The factors behind the expected decrease of ¥7,249 million in profit are as listed below.
Spot sales of semiconductors and electronic parts are inherent of the short-term nature and will disappear over time upon improvement in the supply-demand situation. With this in mind, our focus has strongly been on delivering proposals on alternative products and selling them to customers in order to consistently secure profit.
In the fiscal year ended March 31, 2023, we conducted the proposal and sale of such alternative products to a total of 88 clients (comprising 71 existing clients and 17 new clients), achieving net sales of approximately ¥7.0 billion. Now that we are into the fiscal year ending March 31, 2024, we expect these endeavors to yield approximately ¥7.5 billion in net sales, with the number of target customers remaining virtually unchanged.
Looking at breakdown by product, the majority of these sales is accounted for by power semiconductors, FPGA and analog IC. In terms of sector-based breakdown, industrial devices account for the largest proportion, with consumer goods and automotive equipment ranking second and third, respectively.
In the current fiscal year, we expect demand for automotive equipment to grow substantially.
In the fiscal year ended March 31, 2023, we accomplished our operating income and ROE targets under the Medium-Term Management Plan 2024 two years ahead of schedule. Taking this accomplishment into account, as well as upsides and downsides in operating results forecasts for the fiscal year ending March 31, 2024, we have revised management targets under said plan.
The period of this management plan remains unchanged from the three years from April 2022 to March 2025. Similarly, we have not revised consolidated net sales targets for the plan’s final year from ¥750.0 billion, which will mainly consist of ¥600.0 billion to be earned through organic growth and be supplemented by additional sales achieved via new M&A.
On the other hand, we have revised our operating income target to ¥30.0 billion or more while redefining our ROE target to a “stable 10% or more” in line with our latest operating income forecast.
Although operating income is expected to decline in the current fiscal year, this indicator will return to a growth phase in the fiscal year ending March 31, 2025. With this in mind, we have reset our operating income target under the plan at ¥30.0 billion or more.
Factors behind the setting of this target include sales volume, spot sales, EMS business expansion, the effect of post-merger integration (PMI) and human resource-related investment. Here, we present a diagram showing the analysis of how each factor will affect profit on an annual basis, with those contributing to profit depicted in blue arrows, and those negatively affecting profit depicted in red arrows.
The electronic parts business and the EMS business have been main contributors toward the accomplishment of recordhigh operating income for the fourth consecutive year by the close of the fiscal year ended March 31, 2023. However, we expect that, in the current fiscal year, these businesses will see a decrease in profit due primarily to the looming risk of economic recessions, the temporary impact of inventory adjustments, and the absence of spot sales.
From the fiscal year ending March 2025 onward, however, we anticipate a medium-term increase in demand on the back of the popularization of EVs, the adoption of 5G/6G communication infrastructure, the widespread use of IoT and AI, and other factors. This projection is unchanged. Moreover, we forecast that progress in PMI will yield ongoing improvement in the profitability of acquired companies. In addition, we intend to continuously take a proactive approach to investment in human resources in the form of wages, bonuses and other allowances.
Next, I will explain our thought process behind the revision of our ROE target, using a graph showing the breakdown of three components to address the changes in ROE.
The profit attributable to owners of the parent margin is shown at the bottom of the bar graph. Our forecast for this indicator is set at 3.0% to 3.5%, given the estimated operating income margin of around 5.0%. For us to improve ROE, maintaining high profitability is of the utmost importance. With this in mind, we have set our forecast for financial leverage (immediately above the bottom) at 2.0 to 2.5 times, based on our projection that the equity ratio will trend around 40% to 50%. Above the financial leverage, the total asset turnover ratio is set at about 2.0, on par with the current level. Thus, we believe that we will be able to stably achieve an ROE of around 12% to 15%.
Based on the previously discussed calculations, our ROE target is set at “stable 10% or more.” In addition, the Company’s cost of shareholders’ equity is around 7.0% to 8.0%.
Our ROE target also involves the pursuit of a major improvement in this indicator.
We have downsized and reconfigured the membership of the Board of Directors with the aim of securing clearer separation between the Board’s supervisory and executive functions to enhance the transparency of business management as well as further invigorating its discussions and ensuring speedier business execution.
Based on a resolution passed at the Ordinary General Meeting of Shareholders held on June 27, 2023, the composition of the Board of Directors was subsequently changed from a total of 11 members consisting of seven internal and four outside directors, to a total of six members consisting of three internal and three outside directors.
On the other hand, with regard to the promotion of diversity among the Board’s membership, we were unable to propose the appointment of a female director candidate to the aforementioned General Meeting of Shareholders. However, we have proposed the appointment of Ms. Kyoko Oyanagi as an outside auditor, which was approved by said meeting, with an eye to transitioning to a company with an audit committee system.
The full-year dividend for the fiscal year ended March 31, 2023 amounted to a record-high ¥220 per share. Furthermore, we have decided to maintain our full-year dividend forecast for the current fiscal year at ¥220 per share, despite our operating results forecasts including a decrease in profit. This decision is based on the judgment that maintaining the volume of dividends is desirable in terms of serving the interest of shareholders who intend to own our shares over the long term, despite changes in single-year operating results on the back of the radically evolving business environment. Having resumed the overseas IR roadshow in February 2023 for the first time in three years, we were able to engage with investors face to face, with some investors stating that “reducing dividends will have a devastating effect on those willing to own KAGA ELECTRONICS shares over the long term.” These activities thus provided us with a valuable opportunity to directly hear their concerns which will, in turn, inform our business management.
Based on its corporate philosophy, “Everything we do is for our customers,” the Kaga Electronics Group will contribute to the realization of a sustainable society by striking a balance between solving social issues and sustaining growth as a corporation through its business activities.
Progress of the Medium- to Long-Term Sustainability Management Plan
In line with its corporate philosophy, “Everything we do is for our customers,” the Kaga Electronics Group will strive for the realization of both a sustainable society and its own sustainable growth as a corporate group.
To inform our sustainability initiatives, we will also cherish dialogue with customers, business partners, shareholders, investors, employees, local communities, and all other stakeholders based on our Basic CSR Policy, Environmental Policy, and Code of Conduct. In these ways, we will proactively play our part in the realization of a sustainable society while enhancing our corporate value.
