Daido Steel Co., Ltd. (5471)
Initiation Report

A Specialty Steel Maker with Strength in High-end Materials

8 JULY 2022
NIPPON INVESTMENT BESPOKE RESEARCH UK LTD
London, UKP age |1
Contents
Executive Summary – A High-end Specialty Steel Producer.........................................................................................2
1.

Specialty Steel ...............................................................................................................................................22.

High-Performance Materials and Magnetic Materials .................................................................................2

3.

Parts for Automobiles and Industrial Equipment .........................................................................................2

4.

Engineering ...................................................................................................................................................25.

Trading and Service ......................................................................................................................................2

Business Model .............................................................................................................................................................3
Competitive Environment ............................................................................................................................................3
Differentiation Factor – High-end Focus ............................................................................................................... 4
FY21 Earnings Results Summary ...................................................................................................................................5
FY21 Earnings by Segment............................................................................................................................................7
Specialty Steel Segment ........................................................................................................................................7
High Performance Materials & Magnetic Materials Segment ..............................................................................7
Parts for Automobile and Industrial Equipment Segment ....................................................................................7
FY22 Outlook ................................................................................................................................................................ 8
FY22 Outlook by Segment ............................................................................................................................................9
Specialty Steel Segment ........................................................................................................................................9High Performance and Magnetic Materials Segment ........................................................................................... 9Parts for Automobile and Industrial Equipment Segment .................................................................................. 10
FY21-23 Medium-term Plan ....................................................................................................................................... 10
Progress on the Plan............................................................................................................................................ 11
Capital Allocation Policy .............................................................................................................................................12
Financial Summary...................................................................................................................................................... 13
General disclaimer and copyright ............................................................................................................................... 15

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Executive Summary – A High-end Specialty Steel Producer
Daido Steel is one of Japan’s major specialty steel makers. Initially founded in 1916 as Electric Steel ManufacturingCo., Ltd, the firm became Daido Steel in 1976 after a reorganisation and having merged with three companies.
Currently, comprising of the parent company and 62 consolidated subsidiaries, Daido operates five businesses:
1. Specialty Steel,
2. High-Performance Materials and Magnetic Materials,
3. Parts for Automobiles and Industrial Equipment,
4. Engineering, and5. Trading and Service.
Daido Steel’s business portfolio is diverse, offering products in the upstream specialty steel value chain, such as the
production of electric furnace specialty steel, to downstream products, such as parts for autos and industrial
equipment. The firm also provides engineering products and services, such as smelting and refining equipment for
auto parts and machine tools, though comprising just 5% of total sales. The High-Performance Materials andMagnetic Materials segment, with a FY21 operating profit margin [OPM] of 13.5%, is Daido Steel’s most profitablebusiness, offering products such as high-strength stainless steel with anti-corrosion properties and high-alloy steel,which generating OPMs of over 10%.
According to the research conducted by the Japan Metal Daily on FY20 crude steel production volumes, Daido Steelwas ranked 6th overall but was ranked 3rd among electric furnace steel makers. Despite having less production
capacity compared to that of the blast furnace steel makers, Daido is unique as it offers a wider range of customised
products, many of which are co-developed with users, such as OEM makers, to satisfy specific properties that are
now required – e.g., anti-corrosion, heat-resistance, anti-rust etc.
In FY20 and FY21, the firm was not immune to the impact of COVID, especially with supply chain disruptions hitting
automobile production volumes. Because of this, the firm failed to meet its medium-term plan target in FY20, which
was the final year of the plan. Under the new medium-term plan which started in FY21, Daido identifies areas for
growth in mobility, and energy such as CASE (Connectivity, Autonomous, Sharing / Subscription and Electrification),semiconductors and green energy.
Daido Steel is guiding for FY22 1H OP of ¥11,500mil (-40.0% YoY) on sales of ¥280,000mil (+9.7% YoY), and FY22 OPof ¥34,000mil (-8.1% YoY) on sales of ¥600,000mil (+13.3% YoY). The decline in OP forecast assumes 1) some risk
of further supply chain issues through FY22 1H but management expects the situation to gradually resolve from 2H
in the automobile sector, and 2) raw materials and energy price hikes. Scrap and some alloys price rise can bepassed onto customers, but energy price and some alloys are not subject to surcharge fees. These costs will affect
1H OP, but the firm’s guidance assumes negotiations with customers will be successful in accepting the surcharges
later in the year.
Daido Steel released the current Mid-term Management Plan in June 2021, that will cover three years between
FY21~FY23. The firm failed to achieve the previous plan’s target of OP of ¥47,000mil on sales of ¥580,000mil in
FY20, given FY20 OP declined 59.3% YoY to ¥10,070mil on sales of ¥412,722mil (-15.8% YoY) – mainly due to COVID.
The current Plan, on the other hand, is more conservative in its targets. The firm is aiming for OP of ¥40,000mil andROE of 8.0%, compared to the previous plan’s target of 9% but resulted in an ROE of 1.6%.
Daido Steel has two major allocations for its capital: (1) growth investment, including CAPEX and investment related
to achieving a carbon neutral status, and (2) dividend payments. Daido Steel does not currently have any
shareholder return measure other than an annual cash dividend, at 30% of net profit. In FY21, the dividend pay-out
ratio was 28.5% and will likely improve to 30.7% in FY22 – the level targeted under the ongoing Medium-term Plan.

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Business Model
Daido Steel has five businesses of which three, 1) Specialty Steel,2) High Performance Materials and Magnetic
Materials, and 3) Parts for Automobile and Industrial Equipment, earn approx. 94% of the total sales and 92% of
operating profit [OP], respectively.
1. Specialty SteelSpecialty Steel is the foundation of the firm’s business. The segment generated approx. 37% of FY21 sales and
10% of OP. Every specialty steel maker is unique in how they combine steel and alloys – to create properties
such as heat resistance, withstand abrasions, and anti-rust – and they each develop tailored products to meetthe needs of its customers.
Approx. 80% of segment sales are from the auto and industrial machinery sectors. Main products include
specialty steel for auto parts, industrial machinery parts, electrical machinery parts, construction equipment
parts, and tool steel. Due to the high exposure to the auto and industrial machinery sectors, auto production
volumes, especially by Japanese manufacturers, is an important bellwether for Daido’s earnings.
On the cost side, the price of steel scrap impacts segment earnings: The price of alloys affects raw material
costs of the segment; however, core alloy materials are subject to surcharges. Energy and graphite electrodeprices also affect the operating cost of an electric furnace. However, a portion of specialty steel manufactured
in this segment is used internally (discussed further below). In FY21, 26% of segment sales was for internal use.
2. High Performance Materials and Magnetic Materials
Management sees this segment as the core of Daido’s future growth. While 37.3% of FY21 total sales camefrom this segment, it generated 72.0% of total OP. Key products include stainless steel products, rare earthmagnets, high alloys, titanium products, and powder metal products. Main applications are for automotive
motors, semiconductor production equipment [SPE], mobile phones and consumer electronics. Reasons for thesegment’s higher margin are due to 1) a larger number of value-added products, 2) products are more specified
for high performance, 3) more niche products, and 4) a portion of the material cost is internally supplied.
3. Parts for Auto and Industrial Equipment
The segment’s primary business is to process in-house manufactured specialty steel materials for auto andindustrial equipment parts for manufacturers, including Tier 1 makers. There are two sub-segments: (1) die
forging, mainly for autos, and (2) open forging, which is higher margin than die forging and includes nonautomotive customers such as SPE makers and the energy sector.
Daido has a high market share in numerous product categories in this segment, for example, aircraft jet engine
shaft, automobile engine valves and turbine wheels. The segment earned 17.5% of FY21 sales and 13.5% of
total OP. Despite the fact that some materials, including specialty steel, are supplied in-house, the segment
OPM remains in the region of 5~7% as 1) fixed costs are proportionately high, and 2) auto parts, such as
precision casting for turbo engines, for which there is fierce pricing competition as the market is mature.
Competitive Environment
According to the Japan Metal Daily, a newspaper specialises in the steel sector, in FY20, Daido Steel had a 1.5%
market share of Japan’s total crude steel production and is ranked 6th after Nippon Steel (5401 JP, 39.9%), JFE Steel(5411 JP, 27.5%), Kobe Steel (5405 JP, 7.0%), Tokyo Steel (5423 JP, 2.7%), and Kyoei Steel (5440 JP, 1.6%). The top
three steel makers are blast furnace steel makers, while the remaining makers operate electric furnaces.
Market share differs from product to product, but Daido Steel is known to have a high market share in steel bar
and wire products. The firm identifies stainless steel as one of the products that it aims to grow. The survey citesthat as of FY20, Daido Steel’s market share in hot-rolled stainless steel was 6.9% (+0.5ppt YoY), substantially lower
than that of Nippon Steel (57.7%) and JFE Steel (18.3%) but that is because Daido Steel mainly produces steel bars
DAIDO STEEL (5471 JP)

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P age |4but not steel plates, hence the market share figures above, which are based on all shapes of stainless steel, can bemisleading.
According to the Japan Metal Daily, market shares in major steel bar and wire products as of FY20 are as follows:
Market Share in Specialty Steel Products with High Exposure to Steel Bar and Wire Products
Bearing Steel

1
2
3
4
5
6
7

Product Type
Steel Bar
Steel Wire
Rank
Sanyo Spec. Steel
Daido Steel
Kobe Steel
Nippon Steel
Aichi SteelJFE Steel

Tool Steel
% of
total
55.0
32.0
%
36.8
20.2
15.9
13.6
8.5
4.5

Product Type
Steel Bar
Steel Wire
Rank
Nippon SteelJFE Steel
Hitachi Metal
Daido SteelSanyo Spec. SteelFujikoshi

Structural Alloy Steel
% of
total
50.0
%
25.6
24.1
21.2
16.8
5.4
3.7

Top 6 total
99.5 Top 6 total
96.8
Source: Nippon-IBR Based on Japan Metal Daily survey on FY20 steel production

Product Type
Steel Bar
Steel Wire
Rank
Nippon Steel
Aichi Steel
Daido Steel
Kobe SteelSanyo Spec. SteelJFE Steel
Topy Kogyo
Top 7 total

Spring Steel
% of
total
58.0
19.0
%
31.0
15.8
15.6
12.3
9.7
6.8
4.2
95.4

Product Type
Steel Bar
Steel Wire
Rank
Nippon Steel
Kobe Steel
Aichi Steel
Daido SteelJFE Steel

% of
total
66.0
27.0
%
40.5
32.0
15.7
10.1
1.5

Top 5 total

99.8

 Bearing steel: FY20 domestic production volume fell 18.2% YoY to 703,000 tonnes due to a drop in demand fromthe automobile use and inventory adjustment. The top six players comprise 99.5% of the market, which is split
to 55% in bars and 32% in wire. Among the top four, Nippon Steel group companies, including Sanyo (51% owned
by Nippon Steel) and Nippon Steel (13.6%), hold 50% of the market. Sanyo Specialty Steel (5481 JP) has a 36.8%
share, followed by Daido steel with 20.2% of the market.
 Tool Steel: FY20 domestic production volume fell 22.8% YoY to 161,000 tonnes. Steel bar and wire products
combined occupy 50% of the market. Sales by application comprises 47% in alloy tool steel and 46% in carbon
tool steel. The main user is the auto industry – steel sheets used as a raw material for auto components, andsteel bars are used in die casting, jigs, and tools. Daido Steel was ranked 4th with a 16.8% market share after
Nippon Steel (25.6%), JFE (24.1%), and Hitachi Metal (21.2%).
 Structural Alloy Steel (or mechanical constructure steel): Structure steel is also mainly used by the auto industry.
FY20 domestic production volume was approx. 3.0mil tonnes (-19.8% YoY). The split by type of products is 58.0%
in steel bar and 19.0% in steel wire. Daido Steel had 15.6% market share in the structure steel market and isranked 3rd after Nippon Steel (31.0%) and Aichi Steel (5482 JP, 15.8%). Some 99.0% of the market is made up of
the top eight companies, and market shares have not changed much.
 Spring Steel: The total production volume in FY20 was 309,000 tonnes (-16.6% YoY). 70% of the market
comprises of Nippon Steel (40.5%) and Kobe Steel (32.0%), both of which have high market shares in automotive
specialty steel wire. Daido is ranked 4th with a 10.1% market share. 66.0% of the market is steel bar products
and 27.0% is steel wire.
Differentiation Factor – High-end Focus
Daido Steel’s strategy is not to capture higher market share in the high-volume, general-purpose products but
rather, it aims to capture niche, higher-end markets through product co-development with customers (e.g., motors
for EV) and non-automotive applications (e.g., SPE) which are less likely to face pricing pressure.

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Daido Steel's strength lies in its: Capability to develop high-end specialty steel products, such as those in the High-Performance Materials andMagnetic Materials segment. Its competitors, such as Sanyo Specialty Steel (5481 JP), Aichi Steel (5482 JP) and
Nittetsu Stainless (unlisted, JP, 100% subsidiary of Nippon Steel), also have high performance products such asalloy powder and magnetic materials, however, only Daido Steel supplies the high-end materials and has
exposure to the SPE industry (4% of the stainless steel in High Performance Materials).
 Track record in the co-development and customised materials with OEMs and Tier 1 makers.
 Cost competitiveness thanks to its ability to manufacture a variety of high-end and customised products in the
Chita Factory, the firm’s mother factory.
 Being independent of a larger steel company or not solely reliant on just one customer, such as an automobile
company, yet obtains a relatively high market share in steel bars and wires products.
On the other hand, the firm’s weakness lies in that it: Is less cost competitive in manufacturing general-purpose, mass specialty steel products. Therefore, Daido earns
only 1~2% of OPM in the Specialty Steel segment but earns 13~14% segment OPM in the High-Performance
Materials and Magnetic Materials.
 Has a lower overseas sales ratio than some of its competitors whose majority of sales are earned overseas
through acquired overseas subsidiaries. Daido Steel earned approx. 27.6% (+2.7ppt YoY) of its FY21 consolidated
sales overseas. The firm plans to achieve overseas growth mainly through exports. Capturing growth in China,
India, and ASEAN, especially in the field of high-performance materials business, is one of Daido Steel’s midterm growth strategies and challenges.
FY21 Earnings Results Summary
Daido Steel reported FY21 results with OP of ¥36,982mil (+267.2% YoY) on sales of ¥529,667mil (+28.3% YoY).
Demand for specialty steel has recovered from the negative impact on FY20 levels due to COVID, with the firm
reporting a 28.1% YoY improvement in sales volume of steel products to 1.25mil tonnes thanks to:
1) A recovery in orders across all client groups. Although the automobile sector was hit by repeated temporary
production suspensions due to component shortages and the resurgence of COVID, Daido Steel saw steadyorder flows from Tier 1 makers due to stockpiling demand.
2) Demand from the industrial equipment sector improved as manufacturers’ CAPEX recovered.
3) Orders associated with the semiconductor sector saw solid growth, thanks to expansion in demand related to
5G, data centres and automotive applications.
On the other hand, the sharp increase in key raw material prices, particularly during FY21 2H, resulted in raw
materials and energy costs rising ¥51,000mil YoY to FY21 OP, which can be broken down to:1) Higher scrap prices (+¥27,600mil YoY). Scrap prices almost doubled during FY21 (from ¥249,000/t average in
FY20 to ¥476,000/t average in FY21) due to the tight supply in the domestic market and price hikes globally.
2) The surge in crude oil and LNG prices led to a ¥1,900mil rise in energy costs from the year earlier. A $1/bbl.
change in the Dubai Brent oil price impacts OP by approx. ¥200mil.
3) The cost of alloy products such as Nickle surged by ¥21,500mil, due to limited supplies and an increase in global
demand. In the case of Nickle, a $1/lb change in the LME price impacts OP by ¥3,500mil. However, the firm canpass on the rise in some alloy prices (e.g., Nickle, Chrome, Molybdenum etc.) as a surcharge to customers withno lapse – approx. ¥14,500mil in surcharge fees was applied in FY21.

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The raw materials cost increase of ¥51,000mil in FY21 was partially offset by the ¥35,400mil gain from price hikes.
The energy price surcharge is negotiable with customers. Daido had started negotiations before crude oil prices
rose, therefore the impact will start affecting the firm’s cost in nine months’ time. While scrap price hikes are usuallytransferrable to customers, albeit with 3~4-month time lag, for alloy products, Daido Steel can apply a surcharge if
major alloys such as Nickle, Chrome, Molybdenum, and Vanadium prices go up. However, the rise in price ofMangan, Silicon and Phosphorous are not subject to a surcharge. Daido continues to expand the application ofsurcharges to a wider variety of alloy metals. Another ingredient, graphite, used for dissolution (melting) electrodes
in electric furnaces, saw little price change in FY21.
There was also little impact on OP due to FOREX in FY21 due to the sharp yen weakness in Q4, hence the annualised
impact was limited. Furthermore, the weaker yen impact will likely be offset by exporting high value-added
products, which will be more competitive under the weaker yen environment.
FY21 Earnings Results Summary
FY20(¥mil)

FY21

1H

2H

FY

1H

2H

FY

YoY (%)

Steel Products Sales Volume (tonne)

378,000

600,000

978,000

634,000

619,000

1,253,000

28.1

Sales

179,490

233,232

412,722

255,224

274,443

529,667

28.3

COGS

158,495

193,031351,526

209,209228,347

437,556

24.5

88.3

82.8

85.2

82.0

83.2

82.6

-2.6pp20,99440,202

61,19646,01546,096

92,111

50.5

COGS / Sales (%)
GP
GPM (%)

11.7

17.2

14.8

18.0

16.8

17.4

+2.6ppSG&A

24,526

26,60051,126

26,85828,27055,128

7.8

13.7

11.4

12.4

10.5

10.3

10.4

-2.0pp-3,531

13,601

10,07019,156

17,82636,982

267.2

SG&A / Sales (%)
OP
OPM (%)
RP
Extraordinary Profit / Loss
Corporation Tax
NP*

n/a

5.8

2.4

7.5

6.5

7.0

+4.6pp-2,112

14,754

12,642

20,556

18,644

39,200210.1

38-2,615-2,577

-424

1,970

1,546

n/a

-151

-3,946-4,097-5,643-5,477-11,120n/a-2,318

6,834

4,516

12,84014,05426,894495.5

Source: Nippon-IBR based on Daido Steel's earnings results presentation materials* NP attributed to the parent's shareholders

Raw Materials Price Trend

Scrap

H2

¥000/tFactory Bundle

FY20

FY21

ResultResult
24.9

47.6

28.9

53.9

Nickle

LME

$/Lb

6.8

9.3

Crude Oil

Dubai Brent$/bbl.

45.8

76.6

FOREX

TTM

¥/$

107.1

113.4

Source: Daido Steel FY21 Earnings Results Presentation

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FY21 Earnings by Segment
Daido Steel’s business is largely divided into five segments: Specialty Steel, High Performance Materials & Magnetic
Materials, Automobile and Industrial Equipment Parts, Engineering, and Trading and Service. FY21 segment
earnings summary for the major three segments are discussed below:
Specialty Steel Segment
Special Steel generated FY21 segment OP of ¥3,827mil (vs an operating loss of ¥2,632mil in FY20) on sales of¥197,803mil (+35.6% YoY). Despite a series of production closures by OEM makers, which subsequently affected
the entire automobile value chain, Daido orders for structural steel recovered thanks to stockpiling by Tier 1 makers.
A rise in tool steel sales also improved the segment sales mix.
The hit to OP from the rise in raw material prices (+¥33,800mil), however, was almost entirely offset by (1) anincrease in sales volumes (+¥10,700mil) and (2) price hikes (+¥23,600mil). However, the time lag to get the pricerise agreed with customers – referred to as the Slide Gap – had a negative impact of ¥4,500mil on OP. The transfer
of energy prices and surcharge applications on more materials will be the key issue for FY22. Structural steel, whose
main material is scrap, tends to have the Slide Gap during approx. four months between shipment and change inprice.
High Performance Materials & Magnetic Materials Segment
High Performance Materials and Magnetic Materials Segment is the most profitable segment. Daido Steel reported
FY21 OP of ¥26,650mil (+118.9% YoY) on sales of ¥197,604mil (+32.2% YoY), largely in line with the firm’s forecastof OP of ¥26,700mil on sales of ¥198,500mil. Due to a rise in energy costs and alloys that are not subject tosurcharges (-¥13,700mil), OP growth was lower than that of sales and OPM temporarily worsened to 12.4% in 2H,
compared to 14.7% in 1H. Sales volumes of stainless steel and super alloys remained firm thanks to strong CAPEX
momentum in the semiconductor sector. Orders from auto and industrial machinery customers also recovered.
Magnetic materials also enjoyed higher sales thanks to stable demand from the semiconductor and auto sectors.
Alloy powder, another high margin product for Daido, also saw sales improve. The YoY sales growth of thesegment’s main products such as super alloy, magnetic materials and alloy power were +52.6% YoY, +27.8% and+46.0%, respectively.
Parts for Automobile and Industrial Equipment Segment
Parts for Automobile and Industrial Equipment Segment reported FY21 OP of ¥4,979mil (vs an operating loss of¥2,109mil in FY20) on sales of ¥92,504mil (+14.6% YoY). Die forging sales volumes recovered along with a recovery
in automobile parts production. Open die forging saw solid demand from the semiconductor and the heavy
electricity machinery sectors.

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Sales, OP and OPM by Segment
FY19(¥mil)

Specialty Steel

FY

1H

2H

FY

1H

2H

FY

181,674

59,83486,008145,842

93,168104,635

197,803

35.6

OP

5,148

-2,984352-2,632

1,441

2,386

3,827

n/a

2.8

n/a

0.4

n/a

1.5

2.3

1.9

n/a

167,356

64,806

84,614

149,420

94,756

102,848

197,60432.2

OP13,638

2,175

9,997

12,172

13,921

12,72926,650

118.9

8.1

3.4

11.8

8.1

14.7

12.4

13.5

+5.4ppSales

97,34336,05044,70080,75046,521

45,98392,504

14.6

OP

430

-4,096

1,987-2,109

3,127

1,852

4,979

n/a

OPM (%)Engineering

0.4

n/a

4.4

n/a

6.7

4.0

5.4

n/a

Sales

26,583

10,265

9,940

20,205

8,732

9,482

18,214

-9.9

OP

2,960

489

369

858

-709

-568

-1,277n/a

OPM (%)
Trading & Service

Total

YoY (%)Sales

OPM (%)
Parts for Automobile and Industrial
Equipment

FY21

Sales

OPM (%)High Performance Materials &Magnetic Materials

FY20

11.1

4.8

3.7

4.2

n/a

n/a

n/a

n/a

Sales

17,463

8,533

7,971

16,504

12,047

11,49323,540

42.6

OP

2,581

877

909

1,786

1,387

1,447

2,834

58.7

OPM (%)

14.8

10.3

11.4

10.8

11.5

12.6

12.0

+1.2ppSales

490,421

179,490

233,232

412,722

255,224

274,443

529,667

28.3

OP

24,768-3,531

13,601

10,07019,156

17,82636,982

267.2

5.1

n/a

5.8

2.4

7.5

6.5

7.0

+4.6pp

OPM (%)

Source: Nippon-IBR based on FY20 & FY21 Earnings Results Materials published by Daido SteelFY22 Outlook
Daido Steel is guiding for FY22 1H OP of ¥11,500mil (-40.0% YoY) on sales of ¥280,000mil (+9.7% YoY), and for fullyear FY22 OP of ¥34,000mil (-8.1% YoY) on sales of ¥600,000mil (+13.3% YoY). Management’s FY22 outlook is basedon the following assumptions:1) Although automobile production is expected to recover, the firm still anticipates some risk of supply chain
issues throughout FY22 1H but expects the situation to gradually resolve from 2H. The slow recovery of auto
production will give a negative impact of ¥1,100mil to FY22 OP.
2) A ¥72,700mil hit from higher raw material and energy costs, with -¥17,000mil from scrap prices, -¥15,000mil
from a rise in energy prices, and -¥41,000mil from alloy prices. However, 60% of the scrap price rise is subject
to surcharges. Nickle alloy, approx. ¥24,000mil out of the ¥41,000mil increase in alloy prices, is also subject toa surcharge fee. Energy prices and the remaining ¥17,000mil from alloy price hikes are not subject to any
surcharges. The firm’s guidance assumes negotiations with customers to accept the surcharges for thesematerials will succeed.
3) The cost increase will hit 1H OP due to the time required to implement the product price hikes, however, by
2H, the higher costs, including energy price and alloy prices that are not subject to surcharges, will be fully
passed onto customers. Hence, the margin will be back to the 7.0% in 2H.
Daido Steel estimates 2H OP of ¥22,500 (+26.2% YoY / +95.7% HoH) on sales of ¥320,000mil (+16.6% YoY / +14.3%
HoH).

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Raw Materials Price Trend

Scrap

H2

¥000/tFactory Bundle

FY20

FY21

FY22

ResultResultAssumption

YoY (%)

24.9

47.6

61.5

29.2

28.9

53.9

66.5

23.4

Nickle

LME

$/Lb

6.8

9.3

14.0

50.5

Crude Oil

Dubai Brent$/bbl.

45.8

76.6

100.0

30.5

FOREX

TTM

¥/$

107.1

113.4

120.0

5.8

Global Automobile Demand

mil units

78.8

81.9

82.5

0.7

Automobile Production by Japanese Makers

mil units

23.9

24.2

26.6

9.9

Source: Daido Steel FY21 Earnings Results Presentation

Earnings Forecast
FY21(¥mil)

FY22

1H

2H

FY

1H

2H

FY

YoY (%)

Steel Products Sales Volume (tonne)

634,000

619,000

1,253,000

584,000

643,000

1,227,000

-2.1

Sales

255,224

274,443

529,667

280,000

320,000

600,000

13.3

OP

19,156

17,82636,982

11,50022,50034,000

-8.1

7.5

6.5

7.0

4.1

7.0

5.7

-1.3pp20,556

18,644

39,20012,00023,00035,000-10.7

Extraordinary Profit / Loss

-424

1,970

1,546

0

0

0

n/a

Corporation Tax-5,643-5,477-11,120-3,000-7,000-10,000n/a

NP*

12,84014,05426,8949,000

16,00025,000-7.0

OPM (%)
RP

Source: Nippon-IBR based on Daido Steel's earnings results presentation materials* NP attributed to the parent's shareholders

FY22 Outlook by Segment
Specialty Steel Segment
Daido Steel expects the segment will be loss making during 1H due to the surge in raw material and energy prices.
The impact of passing on price hikes, however, will be more apparent in 2H, for which the firm estimates OP of¥3,500mil (+46.7% YoY). The prolonged adjustments in auto production in 1H and a possible inventory adjustment
by Tier 1 makers will also affect specialty steel sales volumes. Daido Steel is estimating the sales volume of 587,000
tonnes in 1H vs 619,000 tonnes in FY21 2H.
Based on these assumptions, the firm is guiding for an operating loss of ¥2,500mil (OP of ¥1,441mil in FY21 1H) in
FY22 1H on sales of ¥102,000mil (+9.5% YoY), and for the full year FY22, OP of ¥1,000mil (-73.9% YoY) on sales of¥222,000mil (+12.2% YoY). Although the segment is forecast to return to profitability in 2H, earning OP of ¥3,500mil(+46.7% YoY), the full-year FY22 segment OPM of 5.7% (-1.3ppt YoY) reflects the impact of the weak 1H.
High Performance and Magnetic Materials Segment
Daido Steel assumes that sales volumes will likely be flattish, given solid stainless-steel sales will be offset byinventory adjustments in magnetic materials, though the auto production cuts in FY21 will start affecting FY22
earnings. The firm is guiding for FY22 1H segment OP of ¥12,000mil (-13.8% YoY) on sales of ¥110,000mil (+16.1%
YoY), and FY22 segment OP of ¥25,500mil (-4.3% YoY) on sales of ¥237,000mil (+19.9% YoY).
DAIDO STEEL (5471 JP)

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While strong semiconductor-related demand should improve the sales mix, the surge in raw materials and energy
price in 1H will take its toll on full-year OP. The firm also estimates a rise in fixed costs, such as a rise in labour costand an increase in travel and subsistence along with a recovery in marketing activities., which will lower segment
OPM by 2.7ppt YoY to 10.8% in FY22.
Parts for Automobile and Industrial Equipment Segment
Management expects solid sales growth; however, segment OP will be affected by an increase in fixed costs suchas labour, travel, and subsistence, as well as the change in the accounting period at its overseas subsidiaries. Daido
Steel is guiding for FY22 1H segment OP of ¥1,000mil (-68.0% YoY) on sales of ¥50,000mil (+7.5% YoY), and FY22 OP¥4,500mil (-9.6% YoY) on sales of ¥103,000mil (+11.3% YoY). The firm assumes that sales volumes of automobile
parts will be flat YoY, but open die forging sales will benefit from strong demand from the semiconductor and heavy
electric machinery sectors.
Sales, OP and OPM by Segment
FY21(¥mil)

Specialty Steel

1H

2H

FY

1HCE

2HCE

FYCE

Sales

93,168104,635

197,803

35.6

102,000

120,000

222,000

12.2

OP

1,441

2,386

3,827

n/a

-2,500

3,500

1,000

-73.9

1.5

2.3

1.9

n/a

-2.5

2.9

0.5

-1.4ppSales

94,756

102,848

197,604

32.2

110,000

127,000

237,000

19.9

OP

13,921

12,72926,650118.9

12,00013,50025,500

-4.3

14.7

12.4

13.5

+5.4pp

10.9

10.6

10.8

-2.7ppSales

46,521

45,98392,50414.6

50,00053,000103,000

11.3

OP

3,127

1,852

4,979

n/a

1,000

3,500

4,500

-9.6

6.7

4.0

5.4

n/a

2.0

6.6

4.4

-1.0pp

Sales

8,732

9,482

18,214

-9.9

9,500

11,00020,500

12.6

OP

-709

-568

-1,277

n/a

0

500

500

n/a

OPM (%)

n/a

n/a

n/a

n/a

n/a

4.5

2.4

n/a

Sales

12,047

11,49323,540

42.6

8,500

9,000

17,500

-25.7

OP

1,387

1,447

2,834

58.7

1,000

1,500

2,500

-11.8

OPM (%)

11.5

12.6

12.0

+1.2pp

11.8

16.7

14.3

+2.3ppSales

255,224

274,443

529,66728.3

280,000

320,000

600,000

13.3

OP

19,156

17,82636,982267.2

11,50022,50034,000

-8.1

7.5

6.5

7.0

+4.6pp

4.1

7.0

5.7

-1.3pp

OPM (%)High Performance Materials & Magnetic
Materials

OPM (%)
Parts for Automobile and Industrial
Equipment

OPM (%)Engineering

Trading & Service

Total

FY22CEOPM (%)YoY (%)YoY (%)

Source: Nippon-IBR based on FY20 & FY21 Earnings Results Materials published by Daido SteelFY21-23 Medium-term Plan
Daido Steel released the current Mid-term Management Plan in June 2021, that will cover three years between
FY21~FY23. The firm failed to achieve the previous plan’s target of OP of ¥47,000mil on sales of ¥580,000mil in
FY20, given FY20 OP declined 59.3% YoY to ¥10,070mil on sales of ¥412,722mil (-15.8% YoY) – mainly due to COVID.
Despite aggressive CAPEX by Daido Steel to enhance production capacity, returns on investment were slow toappear, though the High Performance and Magnetic Materials Segment reported record earnings in FY20.

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The current Plan, on the other hand, appears more conservative than the previous plan’s target. The company isaiming for OP of ¥40,000mil and ROE 8.0%. During the current Plan, the firm will focus on:
1) Expanding business in fast growing fields in the near future such as CASE (Connected, Autonomous/Automated,
Shared, and Electric) in the automobile field. In addition, areas that the firm identifies to be the next growthareas include a) semiconductor-related products such as materials for highly clean valves, which the firm
manufactures using its own production technology such as special melting technology, as well as products thatare difficult to machine, and b) green energy field products such as stainless steel and super alloy that resist
becoming brittle by biomass, hydrogen, and ammonia.
2) Strengthening management’s capability to cope with fast changing business environments.
3) Expanding its overseas business, especially in the high-performance materials (e.g., high-performance stainlesssteel, super alloy, and tool steel business) in East Asia, where the firm sees opportunities to cultivate the market,
especially in high performance stainless steel, super alloy, and tool steel.
4) ESG-based management: Daido Steel plans to 1) reduce CO₂ emissions by 14% vs FY13 levels by FY23 and willplan a staged reduction with the aim to see emissions fall by 38% vs that of FY13 in FY25, by 50% in FY30 andthen to zero in FY50 and b) improve corporate governance: the firm made several decisions, such as scrapping
the poison pill policy, reducing cross-held stocks, encouraging management to speed up their decision-making
across the group and the proposal to increase the external director ratio to 1/3 of the Board.
Over the Plan’s three-year tenure, Daido Steel has pledged a total of ¥85,000mil in CAPEX of which ¥70,000mil ismarked to 1) improve productivity at three of its existing facilities at the Chita Plant, 2) to enhance its competitive
advantage in high performance stainless steel at the Hoshizaki Plant, and 3) reduce costs and improve production
yields at the Shibukawa Factory. The firm, so far, has invested ¥21,000mil (completion base) in FY21 and plants tospend ¥24,600mil (completion base) in FY22. A separate ¥10,000mil will be dedicated to environmental issues suchas achieving the firm’s CO₂ emission targets and meeting environmental regulations. The remaining ¥5,000mil will
be for human resources.

Progress on the Plan
As of FY21, Daido Steel made several progresses on the Medium-term Plan.
1) Expand business in fast growing fields in the near future: Testing equipment to evaluate the newly developedmaterials that have growth potential in areas such as mobility, energy, etc was introduced.
2) Enhance management’s resilience to fast changing environments: An example for this is some ¥2,500mil
invested to (1) improve production efficiency, e.g., stainless melting efficiency, enhancement of VAR (vacuumarc remelting), (2) increase the production capacity of high-performance materials and (3) the digitaltransformation of the Chita factory.
3) ESG efforts: The firm continues to work on reducing its CO₂ emissions (-9% vs FY13’s level). In terms of Scope 1(carbon neutral in fuel emissions), Daido Steel introduced a high efficiency burning technology and hydrogen
combustion technology. In Scope 2 (carbon neutral in electricity), the firm is targeting 20% of the electricity
used in the Nagoya region can be switched to CO₂-free energy in FY22, an improvement from the 10% level
achieved in FY21. The firm will also introduce solar power in the Shibukawa Factory from July 2022.
Daido Steel will also focus on improving Corporate Governance. Important progress made includes the scrappingof the poison pill policy at the Annual General Meeting (AGM) in June 2021. Another was to reduce cross-heldshares, including those owned through the firm’s pension fund, to below 20% of consolidated net assets.

DAIDO STEEL (5471 JP)

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As of the end of FY21, the firm has reduced cross-held shares to approx ¥68,500mil, 18.8% of net assets. Including
shares owned by the pension fund, equity holdings are 25.6% (approx ¥93,300mil) of consolidated net assets. Daido
Steel pledges to use the proceeds from selling cross-held shares on investments to achieve carbon neutral. In FY21,
the firm unwound six stocks (total value of approx ¥7,400mil) out of its portfolio it held with important suppliersand customers such as Nippon Steel, OEM makers and Tier 1 makers, generating income of ¥5,497mil, a significant
increase from ¥94mil in FY20.
Capital Allocation Policy
Daido Steel has two major allocations for its capital: growth investment including CAPEX and investment related toachieving a carbon neutral status, and dividend payments. The firm plans to finance CAPEX via cash flow, bank loans
and the aforementioned proceeds from unwinding some of its investment securities. Daido Steel does not currently
have any shareholder return measure other than annual cash dividend, at 30% of net profit. In FY21, the dividend
pay-out ratio was 28.5% and will likely improve to 30.7% in FY22 – the level targeted under the ongoing Mediumterm Plan.

DAIDO STEEL (5471 JP)

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Appendix – Financial Summary
P&L Summary(¥mil)

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22 ESTFY23 EST

Accounting Standard (Japan)

ConsolConsolConsolConsolConsolConsolConsolConsolConsolSales

460,577445,122505,219543,255

490,421412,722529,667

600,000

650,000

-4.8

-3.4

13.5

7.5

-9.8

-15.9

28.3

13.2

8.3

COGS

386,145366,687

412,712451,755

409,382351,526

437,556

Gross Profit (GP)74,43278,43592,506

91,50081,03961,196

92,111

YoY (%)GPM (%)

16.2

17.6

18.3

16.8

16.5

14.8

17.4

SG&A

50,00052,921

56,287

57,68456,27051,12655,128Operating Profit (OP)24,43225,51336,21833,81524,768

10,07036,982

34,00035,000YoY (%)

19.7

4.4

41.9

-6.7

-26.8

-59.4

267.2

-8.1

2.9

OPM (%)

5.3

5.7

7.1

6.2

5.0

2.4

6.9

5.6

5.3

Interest & dividend received

2,258

1,869

1,936

2,528

2,090

1,629

2,149

Interest payment

1,309

966

941

922

793

823

823

417

811

978

1,134

760

-189

621

25,10826,37336,13034,34324,29812,642

39,20035,00036,000

15.5

5.0

36.9

-5.0

-29.3

-48.0

210.0

-10.8

2.8

5.8

5.5

Investment gains & losses
Recurring Profit (RP)YoY (%)RPM (%)

5.5

5.9

7.2

6.3

5.0

3.1

7.4

Pre-tax Profit

14,98027,35536,831

33,11021,17010,06540,746

Tax costs

5,877

9,091

10,143

10,224

9,095

4,097

11,120Minority shareholder interest-2,357-1,877-2,767-1,703-1,087-1,451-2,730Net Profit (NP)

6,746

16,38623,92021,182

10,987

4,516

26,89425,00025,700YoY (%)

-38.1

142.8

45.9

-11.5

-48.2

-58.9

495.5

-7.1

2.8

-15,21229,65532,9468,871-8,88632,43934,168

FY18

FY19

FY20

FY21CEFY22 ESTFY22 EST

630.94575.40591.50180.00180.00Comprehensive Profit

Source: Nippon-IBR summarised based on Daido Steel's earnings release

Per-share indicators
FY15

FY16

FY17

EPS (¥)

156.20385.90561.08496.88257.76105.96

BPS (¥)

5,452.60

6,672.02

6,697.44

6,417.37

7,111.48

7,734.92

Dividend (¥)

75.00

100.0066.00

130.00

70.00

35.00

180.00Total Dividend Payment (¥mil)

3,236

4,227

5,117

5,543

2,984

1,492

7,675

Source: Nippon-IBR summarised based on Daido Steel's earnings release

Historical Trend of Financial KPIs
FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22 ESTFY23 EST

ConsolConsolConsolConsolConsolConsolConsolConsolConsolROE (%)

2.8

6.3

8.4

7.4

4.0

1.4

8.1

7.3

7.7

ROA (%)

1.0

2.8

3.7

3.2

1.7

0.6

3.6

3.3

3.5

46,88648,78856,95856,98649,43035,982

63,779Financial Leverage (x)

2.3

2.2

2.2

2.2

2.2

2.1

2.2

Net D/E Ratio (x)

0.4

0.4

0.4

0.4

0.4

0.4

Total Asset Turnover (x)

0.8

0.7

0.7

0.8

0.7

0.6

EBITDA (¥mil)

0.7

Source: Nippon-IBR summarised based on Daido Steel's earnings release

DAIDO STEEL (5471 JP)

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Balance Sheet Summary(¥mil)

FY15

FY16

FY17

FY18

FY19

FY20

FY21

Accounting Standard (Japan)

ConsolConsolConsolConsolConsolConsolConsolCurrent Asset

238,467

257,208

301,895

313,081

310,641

319,364

391,686

Fixed Asset

297,208

316,960

343,145337,616

315,257

346,142

336,500

Tangible

188,778

190,915

212,029

226,078

237,492

231,846

223,701

Intangible

2,583

2,193

1,697

1,502

1,619

2,721

3,776

Investment and others

105,846

123,851

129,419

110,035

76,145111,574

109,022

Total Asset

535,675

574,169

645,041

650,697625,899

665,506

728,187

Current Liability

143,486

152,790

212,138

221,091

198,419

181,445

230,104

Fixed Liability

123,843

130,877

116,492

111,465

118,344

144,706

133,078

Net Asset

268,345

290,501

316,409318,140

309,136

339,535

365,004

Capital37,172

37,172

37,172

37,172

37,172

37,172

37,172

Capital Surplus

28,72229,92730,33730,28530,44930,42731,228Retained Earnings

155,250

169,496

187,799

203,299

212,136

216,357

238,443

Treasury Shares-3,560-3,613-3,644-3,651-3,656-3,660-3,663

Minority Interest

35,51330,64931,974

32,63135,57436,21035,290Shareholders' Equity

232,832

259,851

284,435

285,508

273,561

303,143

329,713

43.4

45.2

44.0

43.8

43.7

45.5

45.2

134,685

141,397

159,494

174,273

192,435

197,364

FY17

FY18

FY19

FY20

Shareholders' Equity Ratio (%)
Interest-bearing Debt

Source: Nippon-IBR summarised based on Daido Steel's earnings releaseCash Flow Summary(¥mil / Mar yr-end)

FY15

FY16

FY21

Accounting Standard (Japan)

ConsolConsolConsolConsolConsolConsolConsolOperating Cash Flow

45,731

28,39031,043

28,114

41,03333,766-16,684

Depreciation

22,454

23,27520,74023,171

24,662

25,912

26,797

Goodwill Amortisation

n/a

n/a

n/a

n/a

n/a

n/a

n/a

Change in Sales Receivables

6,102-14,181-20,750

1,258

16,128-7,949-23,896

Change in inventories

12,444-3,479-16,346-17,206

3,109

8,333

-50,893

Change in Accounts Payable-9,9296,795

15,146-3,163-22,242-760-2,817

Investment Cash Flow

-23,164-26,449-30,215-33,707-39,326-29,395-14,568-31,525

Free Cash Flow

22,567

1,941

828-5,593

1,707

4,371

Finance Cash Flow

-20,164-1,843

5,477

5,589

10,526

2,999

19,402

Cash and Cash Equivalent

33,77333,68540,25940,72857,84365,55855,644

Source: Nippon-IBR summarised based on Daido Steel's earnings release

DAIDO STEEL (5471 JP)

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DAIDO STEEL (5471 JP)

8 JULY 2022