Overview of Shikoku Electric Construction Co. Ltd. <1939>

1. Business Overview

The report segments include Electrical Utilities Construction, Leasing Business, and Photovoltaic Technology Business. The Electrical Utilities Construction business is the core business of the company since its establishment, involving construction of electrical equipment for Electric Companies and Transmission and Distribution Companies in the Shikoku Region, along with construction of electrical, air conditioning, and plumbing facilities, information Communications facilities, system control work in office buildings, commercial facilities, logistics facilities, public facilities, and factories, etc. The strength lies in the ability to provide a one-stop service from electrical equipment construction to air conditioning and plumbing construction, backed by technical expertise and high-quality construction and maintenance capabilities. The main role of the company in construction is as a site supervisor, contracting the construction work to partner companies and managing the site. The Leasing Business involves leasing construction machinery, vehicles, and equipment, etc. The Photovoltaic Technology Business involves the sale of electricity generated by Photovoltaic Technology. Additionally, under other businesses, the company engages in CAD development and sales, as well as PFI and designated management services for designing, facility development, and operation management of public facilities.

(1) Construction of Transmission and Distribution Facilities

Transmission and civil engineering work mainly involves construction related to transmission facilities (such as transmission lines and towers) for sending electricity from power plants to various substations. Due to large-scale construction in mountainous areas, the construction period tends to be lengthy. Distribution construction involves work related to distribution facilities (such as power lines and utility poles) necessary for sending electricity reduced in voltage (step-down) at substations to businesses and households. A substantial number of construction projects are carried out daily while moving between sites, based on contracts previously established with Transmission and Distribution Companies. A close collaborative system has been established with dedicated partner companies for the construction work.

(2) Construction of Building Equipment

Electrical, air conditioning, and plumbing facility construction involves electrical and instrumentation work along with air conditioning and piping work for indoor electrical wiring in various buildings such as office buildings, commercial facilities, logistics facilities, public facilities, and factories. In addition to direct orders from clients, orders are also received from general contractors, resulting in significant construction achievements including responses to orders for special facilities such as large factories and operating rooms in Hospitals.

(3) Information Communications Construction

Information and communications construction contributes to Network Infrastructure Construction responding to advancements in communications, including the laying of optical cables by communication providers, construction of mobile phone base stations, and contracts for disaster prevention radio construction or fire department radio construction for local governments, along with maintenance and operation support. Systems control construction involves instrumentation work related to control, such as line efficiency improvement in production factories and automation in logistics warehouses. Utilizing the strength of in-house programming, energy savings and time reduction are achieved through rapid updates corresponding to site conditions after operation.

(4) Lease Business

The lease business is operated by the subsidiary Yonko Business, which leases construction machinery, vehicles, and equipment, among others. Lease trades with the company also exist. While aiming to expand revenue through the development of new business partners, efforts are also being made for cost reduction through thorough credit management.

(5) Photovoltaic Technology Business

The Photovoltaic Technology business is conducted by subsidiaries like Yonko Solar, selling electricity generated from solar power. In December 2023, three companies, Shikoku Chemical Holdings <4099>, Shikoku Chemical Industry Co., Ltd., Shikoku Electric Power, and Yonko Solar, signed a contract regarding offsite corporate PPA (Power Purchase Agreement) for the realization of a Carbon Neutrality society. This will be the first offsite PPA project for the company group. Yonko Solar will become the electricity provider, installing solar power generation equipment in the rice irrigation pond in Miki Town, Kagawa Prefecture, and supplying the generated renewable energy electricity along with environmental value (non-fossil certificates) via Shikoku Electric Power to Shikoku Chemical Industry's Tokushima Factory. The provision of renewable energy electricity will start in December 2024, with a total generation output expected to be 2,035 kW and an estimated CO2 reduction of approximately 1,503 tons annually.

(6) QITABANKUAI Business

The CAD development and sales business develops and sells the company's unique architectural equipment CAD "CADEWA" series and the architectural equipment industry support software "CRAFT DX" series. In February 2024, the new version "V2" of the "CRAFT DX" series was launched. Also, as a new version of the "CADEWA" series, the full 3D architectural equipment CAD "CADEWA Smart V6" is scheduled to be launched in January 2025.

Approximately 90% of the equipment construction business generates stable revenue along with lease and photovoltaic technology businesses.

2. Trends in Performance by Report Segment

The trends in performance by report segment over the past five periods (from the fiscal year ending March 2020 to the fiscal year ending March 2024) are as follows. There are no particularly significant fluctuations in the composition ratio (the proportion of the total before adjustments), with the main Equipment Construction sector accounting for over 90% of revenue and 70-80% of operating profit. The Leasing and Photovoltaic Technology sectors have smaller scales of revenue compared to Equipment Construction, resulting in lower composition ratios, but both have recorded stable earnings. For the fiscal year ending March 2024, the composition ratios are 93.0% for Equipment Construction, 3.2% for Leasing, 2.3% for Photovoltaic Technology, and 1.5% for QITABANKUAI in terms of revenue, and 80.4% for Equipment Construction, 4.6% for Leasing, 11.9% for Photovoltaic Technology, and 3.2% for QITABANKUAI in terms of operating profit. Additionally, for the interim period of the fiscal year ending March 2025, the composition ratios are 93.5% for Equipment Construction, 2.8% for Leasing, 2.5% for Photovoltaic Technology, and 1.2% for QITABANKUAI in terms of revenue, and 81.4% for Equipment Construction, 3.0% for Leasing, 13.2% for Photovoltaic Technology, and 2.4% for QITABANKUAI in terms of operating profit.

3. Trends in Revenue Composition Ratio by Type of Construction and Customer (Standalone Basis)

The trends in the revenue composition ratio by type of construction and customer (standalone basis) over the past five periods (from the fiscal year ending March 2020 to the fiscal year ending March 2024) are as follows. There are no particularly significant fluctuations in the composition ratios by type of construction, with distribution construction accounting for about 40% and electrical/instrumentation construction accounting for about 30%, becoming the core businesses. By customer, the Shikoku Electric Power Group (Shikoku Electric Power, Shikoku Electric Power Transmission and Distribution Co., Ltd.) accounts for about 50%, government agencies for about 10%, and general private sector for about 40%. The government agencies and general private sector fluctuate by period, while the Shikoku Electric Power Group serves as a stable source of revenue.

For the fiscal year ending March 2024, the revenue composition ratios by type of construction are 42.5% for distribution construction, 7.9% for transmission and civil construction, 30.2% for electrical/instrumentation construction, 12.7% for HVAC and plumbing work, 4.9% for information and communications construction, and 1.8% for side businesses. The revenue composition ratios by customer are 51.2% for the Shikoku Electric Power Group, 10.0% for government agencies, and 38.8% for general private sector. Additionally, for the interim period of the fiscal year ending March 2025, the revenue composition ratios by type of construction are 39.4% for distribution construction, 4.6% for transmission and civil construction, 37.4% for electrical/instrumentation construction, 12.6% for HVAC and plumbing work, 4.5% for information and communications construction, and 1.5% for side businesses. The revenue composition ratios by customer are 44.7% for the Shikoku Electric Power Group, 7.7% for government agencies, and 47.6% for general private sector.

The area-based revenue composition ratios (standalone basis) are 87.9% for Shikoku, 9.3% for the metropolitan area, and 2.7% for the Kansai region for the fiscal year ending March 2023, and 89.6% for Shikoku, 7.0% for the metropolitan area, and 3.2% for the Kansai region for the fiscal year ending March 2024.

4. Risk Factors and Challenges/Measures

General risk factors in the construction industry include fluctuations in construction investment due to economic conditions, intensified competition for orders, declining construction profit margins due to rising labor and material costs, constraints in construction capacity due to labor shortages, delays in project timelines due to changes in plans, liabilities arising from construction defects, and delays in responding to environmental regulations and technological innovations.

Regarding construction investment, while there is potential for volatility in general private construction, it is expected to remain stable due to redevelopment projects in major metropolitan areas and the development of regional social infrastructure. In the case of the company, the power transmission and distribution equipment construction for Shikoku Electric Power Group serves as a stable source of revenue, thus the risk of deterioration in performance due to demand fluctuations is considered small. As for the surge in labor costs and material prices, it appears that the industry as a whole is progressing in passing these costs onto order prices.

Regarding the risk of construction capacity constraints due to labor shortages, the impact of the overtime regulations that began to apply in the fiscal year 2024 is recognized as a risk factor not only for the company but for the entire construction industry. On the other hand, due to the current robust demand for construction, there is a situation where construction capacity is not keeping up, so the company is focusing on profitability by selecting orders with a stronger emphasis on profitability (so-called selective orders), thus improving the profitability of the construction projects. Additionally, the company is enhancing cost management, including procurement of materials, improving construction efficiency, and actively hiring and training personnel, with the policy of gradually increasing construction capacity while also utilizing M&A.

(Authored by FISCO guest analyst Masanobu Mizuta)