The medium-term management plan and growth strategy of Kyokuto Trading <8093>

(2) Development and nurturing of new business

The biggest highlight of the medium-term management plan is the new business (including M&A). Efforts are being made in five growth areas as projects directly under the president, strengthening the allocation of management resources. The five growth areas are: 1) Renewable Energy, 2) Hydrogen & Battery, 3) Environmental Health, 4) Bioproducts, 5) Industrial DX & IoT. The company has been involved in these fields in some way before, leveraging market and technical knowledge and experience. From among these, the company is planning multiple business launches. An important point to note is that the company has expertise and know-how for the success of M&A. From the fiscal year ending March 2023, the company is focusing on the five main new businesses: "Offshore Wind Power Related Business," "Self-Driving System Related Business," "Bioproducts," "India Business," and "New Business of USA Corporation". The progress of the key five new businesses is reported to the Management Planning Department sequentially. As a president-led matter, the company steers new business decisions by assessing collaboration, M&A, resource allocation, etc., from a holistic company perspective.

1) Field of Renewable Energy: Offshore Wind Power Related Business

The offshore wind power related business is the most focused area for the company and a promising business that also contributes to carbon neutrality. Leveraging its experience and knowledge in resource development-related businesses such as seabed exploration and drilling, the company is focusing on offshore wind power projects. As part of this, they have formed a strategic alliance with TWD B.V. from the Netherlands. TWD specializes in designing specialized large fixtures (Pile Gripper, Lifting Tools, various platforms, Anti-Corrosion Template for Jackets, etc.) for offshore wind turbine construction. In this field, TWD is a leading company with high industry recognition domestically and internationally. In January 2022, TWD Japan was established. The company is not only involved in design but also participates in fabrication based on that design, with future plans to expand into maintenance services. By being involved from the design and fabrication stages to operation and maintenance, the company believes it can accumulate experience and know-how related to offshore wind turbines. In addition to TWD Japan, they are expanding their product lineup from offshore wind power field research to maintenance products (special offshore tarps, maintenance underwater exploration/operational robots), and there seems to be interest from potential customers.

In the offshore wind power related business, they are progressing with order activities in collaboration with domestic Marine Contractors and Construction Companies in promising projects such as the "Project on the Use of Renewable Energy Utilization Law Sea Areas" and "Port Projects".

※ "Maricon" is an abbreviation for Marine Contractors, including famous companies like Goyo Kensetsu <1893> and Toa Construction Industries <1885>.

The "Port Project" involves constructing small-scale offshore wind power generation within ports. The company has already secured a project in "Toyama Prefecture Nyuzen Town" for the fiscal year ending March 2023. They are also actively pursuing design and fabrication orders for other projects (such as within Kitakyushu Port in Fukuoka Prefecture and Kashima Port in Ibaraki Prefecture). While the wind turbine scale in "Port Projects" is small, there are expectations for quick order placements and short-term prospects.

The 'Project for the Utilization of Renewable Energy Laws in Offshore Areas' is a large-scale offshore wind power generation project. It involves a diverse and complex group of stakeholders, requiring time for coordination with local residents and fisheries-related parties, resulting in a lengthy process until the project is awarded. The goal is to accumulate achievements while reliably securing 'Port Projects' and aim to win large projects related to the 'Project for the Utilization of Renewable Energy Laws in Offshore Areas'. In the 'Project for the Utilization of Renewable Energy Laws in Offshore Areas', the selection of offshore wind power generation operators has been ongoing. In Round 1 (off the coast of Noshiro City, Mitane Town, and Oga City in Akita Prefecture, off the coast of Yurihonjo City in Akita Prefecture, and off the coast of Choshi City in Chiba Prefecture where the bidding took place, announced in December 2021), the Mitsubishi Corporation <8058> Group overwhelmingly won the bid with extremely low prices. In Round 2※ (bidding for four areas including Yawatahama Town and Noshiro City in Akita Prefecture, Oga City in Akita Prefecture, Kashiwazaki City and Akita City, Murakami City and Tainai City in Niigata Prefecture, and off Eshima in Saikai City, Nagasaki Prefecture, announced in March 2024), amongst 12 applicants, 4 entities with the 'earliest start time' were selected.

※ As a reflection of the 'total acquisition' winning result in the first round, a limit on the power generation and transmission capacity per entity was set at a total of 1 million kW to prevent a single entity from acquiring the majority of the target areas. As a result, despite conducting environmental impact assessments in advance, several entities have decided to forgo participating in the bidding process.

In such an uncertain business environment, the offshore wind power generation-related business is predicted to experience significant market growth domestically and internationally, presenting an excellent business opportunity for the company. Although delayed by two years from the initial business plan, a revenue of 0.5 billion yen is expected by the end of March 2026.

TWD Japan's business area will initially focus on Japan and East Asia (Taiwan), with plans to strengthen its business foundation in Japan first. Besides TWD, various initiatives in the offshore wind power generation-related business are being pursued, and attention should be given to future business scenarios beyond the second and third rounds.

2) Industrial DX & IoT Sector: Self-driving system-related business

In response to a request from a major iron & steel manufacturer to explore the possibility of autonomously operating special vehicles within a steelmaking facility, the company embarked on commercializing an autonomous driving system for on-site special vehicles at steel plants. Leveraging past experiences in developing IoT devices for factories and on-site self-driving locomotives, the company has entered into a partnership agreement with UK's AB Dynamics Group, a leading supplier of automotive test systems, to develop a collision detection embedded autonomous driving system tailored for existing special vehicles. Currently, the focus is on commercializing autonomous (unmanned) modifications of existing vehicles.

The real-driving tests for the on-site special vehicle autonomous driving system in the UK and domestic demonstrations have been highly praised by customers, resulting in anticipated early orders. Initially designed for use within steel mills and chemical plant facilities, there seems to be interest from mining sites as well. Ongoing verification experiments are being conducted at customer companies. While the technical challenges have been addressed, difficulties persist regarding safety operation rules and standards, indicating a need for additional time before practical implementation.

It is estimated by a major iron & steel manufacturer that it will take another 5 to 6 years to achieve 'fully automatic operation' of on-site special vehicles. The company believes that add-on (modified) type autonomous driving systems will remain a viable business for the foreseeable future (10-15 years). Due to the large and costly nature of special vehicles, existing operational vehicles still have a significant remaining depreciation period, making a simultaneous transition to fully autonomous special vehicles unlikely. The company aims to acquire expertise in fully autonomous special vehicles during this period and lead the market by the time the switch to fully automatic operations becomes viable.

The self-driving system related business for special vehicles for in-house use aims to fully commercialize within 3 years. The company expects that the demand for self-driving due to the aging of drivers for special vehicles will continue to increase in the future.

(Written by: Fisco guest analyst Keiji Shimizu)