HIRANO TECSEED : Sponsored Research Report for the FY2022

Hirano Tecseed (6245 JP)

A Fabless Maker Specialised in Coating Technologies

02 AUGUST 2023

NIPPON INVESTMENT BESPOKE RESEARCH UK LTD

London, UK

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CONTENTS

HT's technology core competences and business model strengths and risks

.............................................................2

Technology core competences

2

Strengths and Risks of HT's business model

2

Strengths

2

Risks

3

Understanding HT's cash flow

3

Recent earnings

3

FY22 results

3

Orders and Order Backlog

4

Performance by Segment

5

Sales by Application

5

FY23 Outlook

6

long-term vision 2030

8

Vision and Target

8

Capital Allocation Policy

8

TSE's PBR1x Argument

8

Financial Summary

9

General disclaimer and copyright

11

HIRANO TECSEED (6245 JP)

02 AUGUST 2023

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HT'S TECHNOLOGY CORE COMPETENCES AND BUSINESS MODEL STRENGTHS AND RISKS Technology core competences

Hirano Tecseed [HT] is a machinery maker specialised in coating, laminating, drying, heat treatment and line control technologies. A coating machine is used to place thin liquid coating on materials such as films, metal foil, paper, and fabric. Once the liquid is dry, the machine then rolls up the coated materials for easy transport. Currently, HT's machinery is mainly used in electrode coating for secondary lithium-ion batteries [LiB], often called rechargeable batteries, used in electric vehicles [EVs], and electronics materials such as multilayered ceramic capacitors [MLCCs] used in various devices such as smartphones.

A primary battery is a portable voltaic cell that is not rechargeable, whereas a secondary battery is a portable voltaic cell that is repeatedly rechargeable. According to the International Energy Agency [IEA], the +65% YoY growth in automotive-use LiB demand - from 330GWh in 2021 to 550GWh in 2022 - was primarily due to growth in electric passenger car sales, with new registrations increasing by +55% YoY in 2022.

The auto industry is shifting away from the use of nickel-metal hydride batteries and lead-acid batteries to LiBs as

HT's technological core competences lie in 1) coating and line control, and 2) heat and circulation technology. The firm has mainly two segments, categorised based on base materials that are processed by its machine. Those are:

Strengths and Risks of HT's business model

Strengths

HIRANO TECSEED (6245 JP)

02 AUGUST 2023

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Risks

Understanding HT's cash flow

The aforementioned delay in the progress of production caused HT's FY22 free cash flow [FCF] to fall to -¥10,159mil from ¥2,300mil in FY21, and the order backlog surged to a historical record level of ¥79,906mil (+16.1% YoY). Whilst a high level of order backlogs suggests stable future cash from operations, frequent changes in customers' requirements will impact cash flow generation.

The problem with HT's business model is an imbalance between the turnover in sales receivable and accounts payable - where the firm pays its supplier and subcontractors within 60days, while HT receives revenue on percentage of progress basis over the course of 2~2.5 years. Hence, sales receivables in the current account on the balance sheet [BS] is not a current asset since nearly 90% of the sales receivable - the fee that HT agrees with a customer at the time of order placement - is a contract asset.

The order process is as follows:

RECENT EARNINGS

FY22 results

Hirano Tecseed reported FY22 OP of ¥3,093mil (-22.4% YoY) on sales of ¥42,423mil (+12.0% YoY). While sales improved, OP fell due to the continued shortage of materials, especially electronics parts, which led to delayed shipments and a surge in material prices. Declines in productivity, together with surging material costs, resulted in HT's gross profit margin [GPM] contracting from 18.6% in FY21 to 15.7% in FY22. SG&A rose +16.8% YoY, due to an increase in sales commission to distributors, leading to OPM declining -3.2ppt YoY to 7.3%.

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Hirano Tecseed (6245 JP): Earnings Summary and Guidance

(¥mil)

FY21

FY22

FY23 CE

1H

FY

1H

FY

YoY (%)

1H CE

FY CE

YoY (%)

Sales

18,605

37,866

18,270

42,423

12.0

19,000

41,000

-3.4

GP

4,155

7,056

3,012

6,679

-5.3

N/A

N/A

N/A

GPM (%)

22.3

18.6

16.5

15.7

-2.9ppt

N/A

N/A

N/A

SG&A

1,434

3,070

1,515

3,585

16.8

N/A

N/A

N/A

SG&A/Sales (%)

7.7

8.1

8.3

8.5

+0.4ppt

N/A

N/A

N/A

OP

2,720

3,986

1,496

3,093

-22.4

1,040

2,920

-5.6

OPM (%)

14.6

10.5

8.2

7.3

-3.2ppt

5.5

7.1

-0.2ppt

RP

2,789

4,122

1,557

3,219

-21.9

1,100

3,000

-6.8

RPM (%)

15.0

10.9

8.5

7.6

-3.3ppt

5.8

7.3

-0.3ppt

NP*

1,988

3,103

1,078

2,243

-27.7

750

2,100

-6.4

EPS (¥)

132.0

206.1

71.6

148.9

-27.8

49.8

139.3

-6.4

Source: Nippon-IBR based on Hirano Tecseed's results presentation material * NP attributed to the parent's shareholders

Orders and Order Backlog

While the overall order trend remained strong, thanks to rising CAPEX in the EV and electronic parts sectors, the fall in productivity led higher order backlogs. This restricted the firm taking more orders, and led to FY22 orders declining -26.3% YoY to ¥53,494mil.

Productivity was also affected by customers changing the shipment location, delivery times, the specification of parts and components. Consequently, HT had to readjust its production schedule and put production lines on hold. As a result, the FY22 order backlog rose +16.1% YoY to ¥79,906mil - during which the order backlog reached a historical record of ¥93,482mil in the Q2.

HIRANO TECSEED (6245 JP)

02 AUGUST 2023

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Disclaimer

HIRANO TECSEED Co. Ltd. published this content on 02 August 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 02 August 2023 06:49:27 UTC.