NANKAI CHEMICAL COMPANY,LIMITED Q2 FY2025 earnings call

• Company Overview & Core Value Proposition

  • Founded in 1906, listed on the Tokyo Stock Exchange Standard Market in 2023, operates 3 manufacturing bases in Japan and 2 in China, with a salt joint venture with Mitsui & Co.
  • Core business areas: Electrolytic products (caustic soda, chlorine, hydrogen made from salt and water, low environmental footprint) and sulfuric acid produced via recycled waste sulfuric acid (unique production model with low environmental impact), supplying products to a wide range of industries and public infrastructure.
  • Core differentiation strategies: Local-focused positioning adjacent to customers to cut high logistics costs, and market leadership in high-value niche products.
  • Unique advantage of combining electrolysis and sulfuric acid production: leverages this to produce sodium hydrosulfide, a key input for PPS resin used in electric vehicles, which benefits from growing EV demand.

• Niche Market Strengths

  • Only two domestic producers of chloropicrin (soil sterilizing agrochemical), critical for Japan's food security.
  • Only one domestic producer of pharmaceutical grade high-test bleaching powder, holds ~40% domestic market share for water treatment disinfection, exported globally.

• 2025/3-2027/3 Mid-Term Management Plan

  • Slogan: "Creating a sustainable tomorrow", with three core priorities:
  1. Strengthening the revenue base: Upgrade existing product quality, reallocate resources from low-margin products, enhance local customer services, expand output capacity for high-test bleaching powder for export, pursue partnership strategies for functional chemicals, explore overseas expansion for agrochemicals, and develop new salt applications beyond deicing.
  2. Expand environmental recycling business: Grow the core waste sulfuric acid recycling business (expected to benefit from domestic semiconductor localization and rising ESG demand), expand desalination services for cement production and incineration ash, and invest in R&D for new recycling businesses including waste sulfur recovery and all-solid-state battery recycling.
  3. Promote sustainable management: Expand human capital investment,推进 DE&I initiatives, and strengthen BCP for natural disasters.
  • Mid-term targets (FY2026 consolidated): 24.0 billion yen revenue, 8% ordinary profit margin (excluding one-time subsidies), ROE of 10% or higher.
  • Total planned capital expenditure over the 3-year plan: 10.0 billion yen (3.0-4.0 billion yen per year), funded primarily by operating cash flow with sufficient borrowing capacity available.

Nankai Chemical divides its business into two main segments: 1. Chemicals Business: Accounts for over 80% of total revenue. It is further split into four sub-segments, with basic chemicals as the largest sub-segment, followed by functional chemicals, agrochemicals, and other chemical products. The environmental recycling business (core: waste sulfuric acid recycling, desalination) is positioned as the future growth driver within this segment. 2. Various Salt Business: Accounts for less than 20% of total revenue. It supplies processed salt for multiple end-uses including food, deicing, soil improvement, and feed. For the 2025/3 interim consolidated period, the company reported 8.788 billion yen in revenue, 0.516 billion yen in operating profit, 0.623 billion yen in ordinary profit, and 0.447 billion yen in net profit attributable to parent company shareholders. Revenue was slightly below plan due to weaker demand for electrolytic products and agrochemicals, but operating profit beat plan by approximately 26% driven by the chemicals business, especially basic chemicals.

• Full-year 2025/3 earnings guidance maintained unchanged from the May 2024 initial announcement.
• 2025/3 full-year shareholder dividend plan maintained at 55 yen per share (up from 50 yen in 2024/3), with the interim dividend increased by 5 yen per share as previously announced.
• Mid-term targets for 2026 (24.0 billion yen revenue, 8% ordinary profit margin, 10%+ ROE) are maintained as planned, with steady sales and profit growth targeted after a temporary margin decline in 2023.
• Management expects demand growth for waste sulfuric acid recycling driven by domestic semiconductor localization and rising environmental awareness, positioning the business as the core long-term growth driver.

• Higher costs from employee wage hikes, increased logistics costs from the 2024 capacity crunch, and elevated energy and raw material prices contributed to lower year-on-year profits in the 2025/3 interim period.
• Weaker demand for electrolytic products, agrochemicals, and salt (driven by poor plum harvest in Wakayama) also negatively impacted interim profits year-on-year.
• Long-term demand for deicing salt is expected to decline due to global warming reducing snowfall in Japan.
• All major production facilities are located in Wakayama and Kochi prefectures, which face potential disruption from large natural disasters such as the anticipated Nankai Trough earthquake.
• Price pass-through of cost increases to customers may face delays due to customer and market conditions, even though the company maintains a policy of passing through costs.

Q: What is Nankai Chemical's strategy for overseas market expansion? / A: The company already operates two factories in China, and will continue expanding by leveraging low-cost Chinese raw materials for production sold to Japan and other global markets. The company's high-quality high-test bleaching powder (brand: Starklon) is already well-received by overseas customers including luxury hotels for pool disinfection and shrimp farms in Asia for water sterilization, exported to Asia, Europe, South America, and the Middle East. Given shrinking domestic demand due to population decline, the company also plans to pursue expansion of agrochemical sales into growing overseas markets, primarily in Southeast Asia.

Q: When does management expect the semiconductor market recovery to lift demand for waste sulfuric acid recycling services? / A: While AI and data communication semiconductor demand has already recovered, general memory semiconductor demand recovery remains sluggish. Most economic forecasts expect broader economic recovery in 2025, and broader recovery in overall economic activity will lift overall semiconductor demand. Management expects that demand will improve significantly by mid-2025.

Q: What are the company's plans to improve its current PBR of ~0.5x? / A: The current share price reflects the market's evaluation of the company's performance and outlook since its 2023 listing. Management believes the core requirement for lifting the share price is to deliver on its growth strategy and steadily increase medium and long-term profits to meet shareholder expectations. The company will also continue prioritizing IR communication including individual investor briefings to improve market understanding of the business.

Q: What supply chain measures has the company taken for natural disasters like the Nankai Trough earthquake? / A: The company recognizes that its Wakayama and Kochi factories will inevitably face some impact from a major Nankai Trough earthquake. The biggest risk is disruption to power supplies, so the company has already moved power infrastructure to locations 3 to 5 meters higher to avoid tsunami flooding. While some impact is unavoidable, this measure enables much faster recovery after an event, and the company has implemented additional preparations to speed up post-disaster operations restoration.