2-3-1 Nihonbashi-Muromachi, Chuo-ku, Tokyo 103-0022, Japan
Public Relations Tel: +81-3-3510-3579
URL: www.khneochem.co.jp/en/

Creating a Sustainable Future
KH Neochem Integrated ReportOur Basic Principles
Corporate Policy

Basic Management Policy

Corporate Mission
Realizing a brighter tomorrowfor society through the powerof chemistry.

Corporate Mission

Realizinga brighter
tomorrow forsociety throughthe power ofchemistry.

2

KH Neochem Report 2021 (Integrated Report)

VISION 2030
A Leading Global Specialty
Chemical Company

Corporate
MissionManagement Approach
Making our dream a reality
through reliable technology
and new inventions.

3rd Medium-TermBusiness Plan
Taking on New Challenges

Management
Approach

Basic Behavior
Taking the first step toovercoming barriers
and issues we face.

Principles of Corporate
Behavior
Compliance Code and Policy

VISION
2030
Principles ofCorporate Behavior
3rd Medium-TermBusiness Plan

Basic
Behavior

5C Credo

Challenge

Curiosity

5C Credo

Communication

Courtesy

Compliance

INDEX
02

KH Neochem at a Glance

26

R&D and Business Creation

46

Responsible Care04

KH Neochem Strengths

29

Production Technology

53

Social Contribution Activities

06

KH Neochem’s Value
Creation Story30

Human Resources
and Corporate Culture

54

Community-based Measures
Taken at Plants

08

VISION 2030

34

56

09

Message fromthe President and CEO

Special Feature:
Roundtable Discussion
on Progress in Corporate
GovernanceDialog with Shareholders
and Investors

57

Management’s Discussion
and Analysis

59

Consolidated Financial
Statements

63

Corporate Overview

14

Financial and Capital Strategy

16

Financial and
Non-Financial Highlights

18

Business Strategy

37

Sustainable Management38

Corporate Governance44

Members of the Board

Editorial Policy

Scope of Report

Note on Forecasts

In this report, by demonstrating our
medium- to long-term value, vision,
strengths and drivers, and thefoundation of our value creation, we aim
to engage in dialogue with our
stakeholders to further advance ourvalue creation activities.
We referred to the Ministry of
Economy, Trade and Industry’s Guidance
for Value Co-creation in preparing thisdocument.

Reporting period:
January 1, to December 31, 2020**However, environmental report data andother statutory information is for theperiod from April 1, 2020 to March 31,
2021. Some portions of the report also
include activities for 2021.
Organization covered:
KH Neochem Co., Ltd. (nonconsolidated)(Some portions also include consolidated
information.)
Date of publication: July 2021

Among the information contained in thisreport, information aside from historicalfacts includes forecasts that are based on
certain assumptions and rely on
judgments made by KH Neochem’s
management using the information
available at that time.
For this reason, actual business results
may differ, depending on various factors.

KH Neochem Report 2021 (Integrated Report)01

KH Neochem at a Glance
Area of Use

Business lines

Performance Materials

Electronic Materials

Basic Chemicals

Our performance materials have unique structuresand properties. We are helping to preserve the global
environment through performance materials used as
raw materials for lubricants that are highly compatible
with refrigerants having low global warming potential(GWP). The raw materials used in our cosmetics andhousehold detergents also have a strong reputation.

Manufacturing processes for semiconductors and
LCDs require extremely high-purity solvents. Our
solvents have significantly low levels of impurities(dust and metal fragments), achieved through a
combination of our high-level purification technologies(distillation) and excellent quality management, and someet the ever-evolving needs of the electronicmaterials market.

We have put together an extensive product lineup ofbasic chemicals. Solvents are used in construction andautomobiles, as well as in smartphone coatings,
adhesives, and cleaning agents. Plasticizer raw
materials are essential for the production of plastic
products. We have captured a leading share indomestic markets for many of our products.

Operatingincome:Net sales:

77.3

5.6

billion yen

billion yen(fiscal year 2020)(fiscal year 2020)

Performance Materials

Market Share (the Company’s estimate)of KH Neochem Products in Japan

Electronic Materials

Market capitalization:

Basic chemicals

Others95.8 billion yen(as of June 30, 2021)

Number of employees:

829

Isononanoic
acid(as of December 31, 2020)2-ethylhexanoic
acid

Product name:
KYOWANOIC-N(Refrigeration lubricant
raw material)(Refrigeration lubricant
raw material)

External assessments

Air conditioners

Air conditioners Automobiles

Cosmetics

High-purity
solvents

Cosmetics(Cosmetic ingredient)*The inclusion of KH Neochem Co., Ltd. in any MSCI index, and the use of MSCI logos,
trademarks, service marks or index names herein, do not constitute a sponsorship,endorsement or promotion of KH Neochem Co., Ltd. by MSCI or any of its affiliates. The MSCI
indexes are the exclusive property of MSCI. MSCI and the MSCI index names and logos aretrademarks or service marks of MSCI or its affiliates.

Cosmetics

Isodecylalcohol

Product name:
OXOCOL 900

Product name:
DECANOL(Plasticizer raw
material)(Plasticizer raw
material)

Automobiles

1,3-butylene
glycolSemiconductors

Isononylalcohol

Houses

Butyl alcohol

Butyl acetate(Solvent)(Solvent)

Displays*As well as supplying high-purity solvents, we are also contract
manufacturing electronics materials at Kurogane Kasei Co., Ltd.,a Group company.

Automobiles

HousesFood packages

Note: Figures for business performance and number of employees are presented on a consolidated basis.

Expansion of
our businesses

History of KH
NeochemBegan basic chemicals

Our startup businesses provide products for fields close to our daily
lives, such as houses, automobiles, and food packaging.

Began performancematerials

Entering the market for high value-added products that are more friendly topeople and the environment.
Providing products used for environmentally friendly air conditioners and cosmetics.

Began electronicmaterials

Developing the products that meet the demands of the advanced electronics
industry, such as high-purity solvents with extremely low impurities.

We intend to create innovation from non-conventional perspectives
by working on collaborative technical innovation with external
partners using cross-industry exchanges, business matching, andother approaches.

Aiming to create new
businesses

1948

1961

1988

2008

2011—2012

2016

2018

Began as Japan’s first massproducer of acetone and butyl
alcohol by fermentation

Converted topetrochemical
manufacturing methods

Established a two-plantsystem: the Yokkaichi
and Chiba Plants

Extended accident-freerecord: the Yokkaichi
Plant

Became independentand changed name to KH
Neochem

Listed on the First
Section of the Tokyo
Stock Exchange

Announced VISION
2030

Provided new value by looking
beyond the times

Transformed the Company tomeet the changing times

Expanded our product lineup,
creating a system that can copewith diverse needs

Our proud safety and stability
record: accident free for 23.95
million man-hours*

Became independent from Kyowa
Hakko Kirin Group (at that time),
marking the start of KH Neochem

Took new steps forward
as a listed company

The vision of KH Neochem
for continuing to create
new value and striving forsustainable growth

Benzaburo Kato,
founder of our business

02

KH Neochem Report 2021 (Integrated Report)*Total working hours without lost
workdays and accidents

KH Neochem Report 2021 (Integrated Report)

03

KH Neochem Strengths

World’s Leading
Manufacturing
PlantsKH Neochem has been building up unique strengths since
being founded in 1948.

Oxo synthesis
technologies

We intend to provide greater value by maximizing andfurther refining these strengths.

Rich and Unique
Technologies

Quality control
technologies

Operations/equipment
management
technologies

High purification

Also known as hydroformylation, our core technology, oxo synthesis, is a(refining)process where carbon monoxide and hydrogen react with raw materials, suchtechnologies
as olefins, to synthesize aldehydes. This extremely rare technology uses carbon
dioxide (CO2) as a raw material to produce carbon monoxide and hydrogen. KH
Neochem has two types of oxo technologies: high pressure and low pressure. Bymaking the best use of their respective features, we manufacture a wide range of
products based on our operations and equipment management technologies cultivated over
our long history. Recently, we have been working to further improve productivity in manufacturing plants
by introducing advanced control systems that use AI technology (see page 29).
Our technologies—aside from obtaining highly pure target compounds from a mixture—are also used
to produce products under strict quality control that have a consistent quality with extremely low
impurities. These technologies are highly valued by customers in Japan and overseas.
By combining these unique technologies, we are helping to provide many of the specialty chemicals
that are essential for people’s lives.

Major Products with
Large Market Shares

KH Neochem’s Share* of Domestic
Production Capacity

Synthetic
fatty acids

High-purity
solvents(refrigeration
lubricant raw
materials)

Air conditioners

Cosmetics(electronicmaterials)

Semiconductors

Automobiles

Displays

Oxo alcohol
for plasticizers(basic chemicals)

Automobiles

04

HousesKH Neochem Report 2021 (Integrated Report)

Medical care

* Estimated by KH Neochem

KH Neochem has many major products with leading shares.
For example, our synthetic fatty acids are the raw material for
lubricating oil (refrigerating lubricants) used in environmentallyfriendly air conditioners that help protect the ozone layer andprevent global warming. This underscores our strong
international presence. Further, our high-purity solvents, usedin manufacturing semiconductors and displays, are highly
evaluated for their quality due to extremely low levels of
impurities (contamination and metal content). Oxo alcohol,
produced with oxo technologies, is a raw material used in thesubstance (plasticizer) that is added to soften polyvinyl chloride.
This raw material is used in products that support our lives,
such as in electric cables, wallpaper, flooring, and medicaltransfusion bags, and is another example of a product with aleading share.

KH Neochem has plants in Yokkaichi City, Mie Prefecture
and in Ichihara City, Chiba Prefecture. The Yokkaichi Plant
has two sections for oxo-related products with a production
scale and product lineup at a high level domestically. Our
Chiba Plant has a high-pressure oxo reaction processcapable of supplying specialty alcohols and synthetic fatty
acids, such as isononyl alcohol, isodecyl alcohol, andisononanoic acid. In VISION 2030, we have plans forlarge-scale investments in production facilities, with theaim of further increasing our production capacity andimproving productivity.

The Yokkaichi Plant (top) and Chiba Plant (bottom)

A Wide-ranging
Customer Network
KH Neochem provides products to customers in a wide
range of manufacturing industries, including manufacturersof refrigerating lubricants, cosmetics, photoresists, paints,
and ink. Moreover, many of our main clients are leading
companies with a strong presence in their respective
industries; we have created new value together with thembased on solid, long-standing relationships of trust. Goingforward, we will continue to strengthen the network andrelationship of trust with our customers. By quickly andmeticulously understanding their needs and demands, wewill work to further grow sales, while developing new
products and businesses.

KH Neochem Report 2021 (Integrated Report)

05

KH Neochem’s Value Creation Story

Through the power of chemistry, KH Neochem has contributed to resolving social issues by providing products thatare beneficial both for the environment and people’s lives.
Going forward, we aspire to continue contributing to a sustainable society by providing value through ourbusiness to achieve an environmentally conscious world and a richer life for people based on the foundations ofsafety, security, and trust.
We will promote sustainable management by continuing to work openly on the seven promises (see page 37)
that we have made to our stakeholders in order to achieve sustainable growth together with society.

Rich and Unique
Technologies

p. 04

Increasing interest in
improving QoL*

Progress of an advanced
information society

Increasing corporate
responsibility for sustainability

Major Products with
Large Market SharesWorld’s Leading
Manufacturing Plants

Financial Capital

Financial structure andprofitability to enableagile investments( Equity ratio 45% /ROE 10%)

Human Capital

Diverse skills
and values( 829 employees(consolidated) )Management Approach

Making our dream a reality throughreliable technology and new inventions

Our Ambitions

p. 08

An
environmentallyconscious world

Developing
unique new
products andtechnologies

Contributing to resolvingsocial and environmental
issues with ourunique products

Open
innovation

Sustainable Management

Environment

Healthcare

Electronics

Fundamental
business

Creating
value

Contributing to
global warming
prevention

Contributing to
improved QoLContributing toan advanced
informationsociety

Contributing toeveryday living

Current,
main
product
lines

Refrigeration
lubricant raw
materials, etc.

Cosmetic
ingredients, etc.

Electronicmaterials

Basic chemicals

Domainp. 26 +

Human
resources
p. 30 +

Rapidly expanding
supply capacity
in line with growthin global demand

Performing safe andstable operations
Strengthening
relationships of trustwith clients
Proposing new value
through partnerships

Use of CO2
as a raw material
Use of biomaterials
Basic Behavior

Taking the first step to overcoming barriers and issues we face

A richer life
for people

Business that contributes to an environmentallyconscious world and a richer life for people

Technology
and Information

Natural Capital*The above are actual figures for fiscal year 2020

OUTPUT / OUTCOME*quality of life

A Wide-ranging
Customer Network

INPUT

Realizing a brighter tomorrow for society
through the power of chemistry.

Expected Changes in Society and the Environment
Worsening climate change*

Continual creation of new businesses

A Leading Global Specialty
Chemical Company

KH Neochem Strengths

Corporate Mission

Safe, secure,andtrustworthy

Seven promises to promotesustainable managementp. 37*The Sustainable Development Goals (SDGs) are a collection of 17 global goals
and 169 targets. The SDGs were published in September 2015 by the United
Nations General Assembly and are intended to be achieved by the year 2030.

06

KH Neochem Report 2021 (Integrated Report)

KH Neochem Report 2021 (Integrated Report)

07

Message fromthe President and CEO

Our Ambitions

The vision of KH Neochem for continuing to create new value and striving for sustainable growth.
We aim to achieve sustainable growth and increase corporate value by making strategic investments to meet thedemands of society.

A Leading Global Specialty
Chemical Company

Our
Ambitions	Providing specialty chemicals that contribute to the reduction of global warming
and a better quality of life	Expansion of products with the largest global share and new businesses inthree strategic domains
Top-class profitability in the chemical industry
Michio Takahashi
Representative Director, President & CEO
KH Neochem Co., Ltd.

Net sales

Financial
Targets*

Operating income

180.0 bnJPY

OverCorporate growth at
5% annually on
averageExpansion of profits at
7% annually on
averageROE

25.0 bnJPY

Over

Equity ratio

12%

Maintaining highcapital efficiency

50%Construction of afinancial structure thatis immune to theexternal environment(Consolidated basis)

Growth Image

Strategy Overview

Operating income
Strategic
businesses
Fundamental
business+5.0bnJPY(billion yen)
25

GreaterNewbusinesses

Strategic
businesses

20

Healthcare

Electronics+8.0bnJPY Environment

Environment
Fundamental
business

2018

08

KH Neochem Report 2021 (Integrated Report)

15

10

5

Fundamental
business

2030(VISION 2030)

0Market Growth

Electronics

Healthcare

Helping to resolve environmental and social
issues through our business activities, andgrowing sustainably together with society

Actively investing in growthareas to further develop
businesses, including new
businesses

Fundamental
businessStrengthening
competitiveness andsecuring stable earnings bycontinually improving
productivity

Enabling capital
investment instrategic businesses
to support growth

Invested Capital

Fiscal year 2020
performanceassessment andfiscal year 2021
market environment

In fiscal year 2020, the spread of COVID-19 had a significant impact on the global
economy. At KH Neochem, we took countermeasures, such as cost reductions
through zero-based budgeting, but with demand at home and overseas dropping
sharply, it was a very tough year, all in all.
However, demand for basic chemical products recovered moderately from thethird quarter, mainly for the automotive industry. Looking at performancematerials, with higher air conditioner sales a recovery in demand for raw materials
for refrigeration lubricants became clear from the fourth quarter. Cosmetic
ingredients continued to face challenges throughout the year due in large part tothe near-zero demand from overseas tourists. The business environment forelectronic materials, on the other hand, remained favorable throughout the year as
remote working spread and the transition to 5G move ahead.
In fiscal year 2021, the business environment has been improving rapidly,
especially since the supply-demand balance remained tight for many chemical
products due to the recovery of the global economy, particularly in the UnitedStates and China. So, we revised our earnings forecast upward in May. We are
expecting record-high performance throughout the year.

BiggerKH Neochem Report 2021 (Integrated Report)09

Message from the President and CEO

Progress on focused
initiatives in our
Third Medium-TermBusiness Plan

Power generation equipment at the Chiba Plant

In our three-year Third Medium-Term Business Plan that began in fiscal year 2019,
we committed to taking on new challenges with a view to achieving our goals under
VISION 2030. These challenges have inspired the initiatives that contribute to our
medium- to long-term growth. In fiscal year 2020, the second year of the plan, theeffects of COVID-19, as described earlier, had a severe impact on earnings. On theother hand, I believe that we made steady progress on the major initiatives set out inthe Medium-Term Business Plan.
Construction was completed as planned in the first quarter of 2020 for a new
production line for refrigeration lubricant raw materials at the Yokkaichi Plant, ourlargest capital investment project under the Third Medium-Term Business Plan. We
are now ready to respond to medium- to long-term market growth following the
anticipated recovery in demand, and we expect to significantly contribute toprotecting the ozone layer and to helping reduce global warming through ourrefrigeration lubricant raw materials, which are well-suited to environmentallyfriendly air conditioners. Regarding electronic materials, a new facility for materials
for next-generation semiconductors started operations in the fourth quarter of2020 at Kurogane Kasei, a Group company. As a result, we believe that we havebeen able to prepare equipment that can handle the cutting-edge fields of thesemiconductor and display market as the advanced information society progresses.
In the area of research and development, we are putting open innovation initiatives
into full swing. Our KH Neochem innovation hub established in 2019, KH i-Lab, started
personnel exchanges with other industries in 2020, and in April 2021, open labs werelaunched as places for joint research with venture companies and universities.
For production technology, we have been working on introducing an advanced
process control system that uses AI technology to improve productivity and energy
savings in plant equipment. In 2020, we steadily increased the introduction of thissystem, as we will continue to do in 2021 and beyond. In addition, in March 2021, westarted operating inhouse power generation equipment that reduces CO2 emissions
by about 15% at our Chiba Plant. At our Yokkaichi Plant, we began constructing aquality control building equipped with the highest-standard clean room, aiming forcompletion in March 2022, with a view to further developments in the field of electronicmaterials. In this way, we are steadily implementing our plan’s major initiatives.
Fiscal 2021 is the final year of the Third Medium-Term Business Plan, and we are
currently working on formulating our Fourth Medium-Term Business Plan. The period
from fiscal 2022 on is the time for an important second step toward realizing VISION
2030. Now, we are considering the next medium-term business plan through discussions
with project teams, mainly the next-generation staff who will lead us to our future.

Initiatives in fiscal 2021 under the Third Medium-Term Business Plan
Strategy

Profit Increase by New Facilities

Strategy
Active Investment for
the Future Expansion of
Performance Chemical Business*2

Strategy

Improvement ofbusiness framework

Strategies of 3rd Mid-term Plan

Strategies of 3rd Mid-term Plan

Strategies of 3rd Mid-term PlanS tart up of new facilities for refrigeration
lubricant raw materials and marketing of
new products
Operate new facilities for next generation
semiconductor materialsF urther increase in production capacity
for performance chemicals
Creation of new business through the newresearch hub

F urther introduction of facility control
system with latest technologies (AI and IoT)
Improvement of work environment andencouragement of diverse work styles

Initiatives

Initiatives

Initiatives

 eet increasing demand, supported by aM
new plant for refrigeration lubricant raw
materials
Put into operation facilities for nextgeneration semiconductor materials
Construction of new quality control building
with the highest level clean roomImplementing debottlenecking*1 forcosmetic ingredients
Increasing capacity utilization, particularly forbasic chemicals, and capturing strong demand ontinue the feasibility study forC
investment in Performance Materials
Propose new business plans from a newresearch hub (KH i-Lab)

 ontinue to expand the advanced plantC
control system
Continue to reform personnel system
Initiatives to improve the workplaceenvironment at our plants
Introduce a new ERP system

Recognizing thefuture issues anddirection of eachbusiness for growth

For refrigeration lubricant materials, efforts are being made to reduce
chlorofluorocarbon (CFC) substitutes through an international treaty. For example,
developed nations are required to make an 85% reduction in CO2 equivalent values
by 2036. The US did not initially ratify the treaty, but with the new Democratic
administration, a federal law was enacted that stipulated an 85% reduction in CFC
substitutes over the next 15 years. With this goal, the US began drafting new
regulations. In China, the revised national standards that came into effect in July
2020 have tightened regulations on air conditioners that are not energy efficient.
Given this global trend, we predict that the shift to more environmentally friendly air
conditioners will accelerate. Since our refrigeration lubricant raw materials are
perfect for environmentally friendly air conditioners, I believe that we can expect
significant growth. We are a top manufacturer of refrigeration lubricant raw
materials. To avoid significant impact to our competitive advantage, we will continue
to assess demand trends and invest at the appropriate time, in this way achieving
steady growth.
In electronic materials, we are finding many opportunities for the developmentof an advanced information society. For example, in high-purity solvents, quality
control with extremely fine precision is required, and we are also introducing
equipment and brushing up on the technology to meet this requirement. As thehurdles for refinement increase year by year, we will continue to make timely
necessary investments to meet the needs of our customers. As mentioned, at Group
company Kurogane Kasei, materials equipment for next-generation semiconductorsthat can handle cutting-edge fields was completed in fall 2020. We will make themost of this equipment to build a new business.
Basic chemicals are our fundamental business; we focus on a lineup of productsthat use oxo technology, our core technology. Many of our products in this businessenjoy a high market share, and with them we will continue to respond firmly to theneeds of society.
To achieve the goals set out in VISION 2030, I believe it is important to focus
on creating new businesses in addition to seeking organic growth from existing
businesses. We will not try to do everything on our own; we will use open innovation
through collaborations with venture companies and research institutes, and we willkeep an eye out for M&A opportunities. Making full use of these and other methods,
we will work to create new businesses and expand existing businesses in our threestrategic fields: the environment, healthcare, and electronics.

*1 Debottlenecking is identifying specific areas that prevent efficiency improvement in existing manufacturing processes, then making improvements to strengthen production efficiency.
*2 Performance materials and electronic materials

10

KH Neochem Report 2021 (Integrated Report)

KH Neochem Report 2021 (Integrated Report)

11

Message from the President and CEO

Our ambitions andadded value under
VISION 2030

Anenvironmentallyconscious world

A richer life
for people

Safe, secure,andtrustworthy

Society 

The concept of VISION 2030 is for us to become a leading global specialty chemicalcompany. To create the value needed to achieve this goal, we will promotesustainable management.
We believe it is important to address sustainability from two angles. The first is
to contribute to the realization of a sustainable society by providing solutions
through our business for global environmental and social issues, such as thoseoutlined in the UN’s SDGs. The second is to sustainably improve our corporate
value by providing value to society and our stakeholders. Our refrigeration
lubricant raw materials help to protect the ozone layer and reduce global warming.
Our basic chemicals, cosmetic ingredients, and electronic materials help to improve
the quality of life (QoL) and contribute to progress for the advanced informationsociety. While growing these businesses further and creating new businesses, wewill provide value that helps to produce an environmentally conscious world and aricher life for people. In this way, we will achieve sustainable growth together withsociety. On the other hand, for us to be sustainable, it is essential that stakeholders
recognize us as a safe, secure, and trustworthy company. We will work hard on
corporate governance, including compliance and risk management, and aim to bea highly transparent company.
We have been working on CSR since our listing. In recent years we have added
the perspective of sustainability and are further deepening our efforts. Since 2019,
we have invited Kunio Ito, Professor Emeritus at Hitotsubashi University and
Hidemitsu Sasaya, Professor at Chiba University of Commerce to discuss their fields
of expertise, ESG and the SDGs, with our officers. Since last year, key officers
gathered many times to discuss our value creation story and material issues, andwe established the Seven Promises to promote sustainable management (see page37). Going forward, we will further enhance our efforts under the Fourth MediumTerm Business Plan and actively disclose information.

As mentioned, it is important to improve the value we deliver through business via
solutions for environmental and social issues throughout the supply chain. For thatreason, human resources and corporate culture are important driving forces.
Looking in particular at human resources, we have been working on organizing
our training programs as well as introducing a job-based personnel system built on
clearly defined performance objectives for managers and a revised evaluation
system. Also, as a result of continually recruiting new graduates and throughmid-career recruitment, the number of employees who joined the company since
we became independent in 2011 has already reached about half of our total
employees, improving the diversity of our workforce. Going forward, we will domore to improve employee engagement so that we create a corporate culture
where diverse employees can reach their full potential and achieve maximum results.

Governance 
We are continuing to strengthen our governance system in order to practicetransparent management with high ethical standards. In fiscal year 2020, while we
increased the number of independent outside directors and female members of
the board, all members of the Board of Directors discussed how to increase theBoard’s effectiveness, based on the improvements that were made. In addition, asa basic management policy, we worked on establishing the Compliance Code,which is the Group's principle of conduct, and the formulation and penetration ofpolicies that classify and embody this into each item.
Also, in April 2021, we reviewed our management structure to further clarify
the separation of management from business execution in order to strengthen
governance and speed up decision-making. Today, directors focus on theirsupervisory function and their role in clarifying the medium- to long-term strategy.
At the same time, they delegated more responsibility and gave more authority than
before for the execution of daily business to executive officers and the heads ofoperating departments. I believe this has put in place a system for efficient andprompt decision-making related to business operations.
As a chemical manufacturer rooted in the local community, we will continue tofocus on safe and stable operations to gain the trust of our stakeholders.

Environment Specific initiatives
to promotesustainable
management

12

KH Neochem Report 2021 (Integrated Report)

While increasing our ability to supply refrigeration lubricant raw materials used inenvironmentally friendly air conditioners, we have continued to practice
Responsible Care and take energy-saving initiatives to reduce the environmental
impact of our business activities. As mentioned above, we are pursuing energy
savings by upgrading to energy-efficient in-house power generation andintroducing an advanced process control system. As the momentum for carbon
neutrality continues to grow, we will formulate a strategy in the Fourth MediumTerm Business Plan specifying how we can do our part to further reduce emissions
while promoting collaboration with other companies, such as through industry
associations and with other companies with petrochemical refineries.
Further, we believe it is important to pursue the understanding of stakeholders
by disclosing how we are working to contribute to the environment through ourbusiness. For example, oxo reactions, one of our core technologies, uses CO2 as araw material. In addition to procuring CO2 externally, we are also working tocapture and consume the CO2 emitted during production inside our own plants.
Also, by supplying refrigeration lubricant raw materials to meet the growing
demand for environmentally friendly air conditioners, we are significantly
contributing to the protection of the ozone layer and helping to reduce global
warming, as we consider society as a whole. In this way, we will do our best toshow as clearly as possible that our technologies and products contribute toprotecting the environment throughout the supply chain.

Message to
stakeholders

It is still uncertain when COVID-19 will come to an end. Nevertheless, we will
flexibly respond to rapid changes in the external environment and overcome
challenges one by one, as we recognize that continuing to maximize periodic profit
in this way is an important role for our management team.
On the other hand, to further improve our corporate value, it is necessary todevelop a growth strategy, such as expanding production for our core products
based on a medium- to long-term strategy. Along with this, there may be cases
where expenses take priority, such as a temporary increase in amortization
expenses, but we believe that this is necessary for the Company to achievesustainable growth.
To our valued investors and other stakeholders, thank you very much for yourcontinued support as we pursue sustainable growth.

Michio Takahashi
Representative Director
President & CEO
KH Neochem Co., Ltd.

KH Neochem Report 2021 (Integrated Report)

13

Financial and Capital Strategy

Basic investment policy and strategy
During the first two years of the 3rd Medium-term Business
Plan, especially in 2020, we faced with a difficult
environment with sluggish demand due to the spread of
COVID-19. Even under such circumstances, we have steadily
implemented not only strategic investments but also
investments to reinforce and rationalize our business base.
These will contribute to medium- to long-term growth.
In 2020, we completed a new plant for refrigeration
lubricant raw materials at our Yokkaichi Plant. This product is

Masaya Hamamoto
Board Director
Senior Corporate Officer & CFO
KH Neochem Co., Ltd.

Building for quality control in Yokkaichi Plant, completion image

Aiming to increase corporate value over the mediumto long-term by improving capital efficiency throughappropriate allocation of management capital
In order to realize our VISION 2030, we aim to build a well-balanced financial structure that is lesssusceptible to changes in the external environment while maintaining a high level of capital efficiency.
To that end, we will implement measures based on our three-year Medium-Term Business Plan.

Balancing improving capital efficiency
and strengthening our financial base
ROE is one of the important numerical targets in our 3rd
Medium-term Business Plan (2019 - 2021), and we have set
a target for ROE of 18% for 2021. In addition, by setting
the equity ratio management standard of 40 to 50%, weare striving to balance capital efficiency and financial
soundness. By achieving this balance we will further allocate
resources to our strategic domains—the environment,
healthcare, and electronics—which are expected to maintainmarket growth in the future, aiming for sustainable growth
while continuing to improve profitability.

Shareholder returns
We set shareholder returns as one of our most importantmanagement issues. Under the 3rd Medium-term Business
Plan, our basic policy is to provide stable shareholder returns
in proportion to corporate growth, aiming for a dividend
payout ratio of 30%. In 2020, both domestic and overseas
demand decreased due to the spread of COVID-19, causing aslump in our business performance. Nevertheless, we paid anannual dividend of 60 yen per share as originally planned,
taking into consideration our shareholder return policy andfinancial situation.

essential for air conditioners that contribute to the reductionof global warming, and we expect further demand growth in
the future as efforts to reduce CO2 emissions are acceleratingaround the world. In the Electronics domain, we are making
forward-looking investments, such as starting operation of
new equipment for materials for next-generation
semiconductors at our Group company and deciding toconstruct a quality control building with the highest-levelclean room at the Yokkaichi Plant. In 2021, we are making
investments with a view to 2030, such as the establishmentof an open lab at KH i-Lab, our open innovation hub, and thestartup of inhouse power generation facilities that reduce
CO2 emissions through conversion to energy with lower
environmental impact. On top of this, we are continuing tofocus on investments in more advanced plant control systems
and to improve the workplace environment at our plants.
On the other hand, we thoroughly reviewed thenecessity, timing, and content of each investment project.
As a result, capital expenditures over these three years will
be approx. 20% more efficient than originally planned.

Dividend payout ratio
(%)

55.0

60

40

28.8

20

0

2016

Environment

Strategic
Domains

Electronics

Under VISION 2030, we are aiming to build a financial basethat is immune to the external environment while
maintaining high capital efficiency, with net sales of 180
billion yen and operating income over 25 billion yen. Ourfinancial targets for 2030 are an ROE of over 12% and an
equity ratio of 50%. In 2020, our business performance
temporarily declined due to the spread of COVID-19, but our
medium- to long-term growth strategy remained unchanged,
and we steadily recovered business performance by capitalizing
on improvements in the external environment.
However, the business environment is changing rapidly
and having a greater impact than anticipated. To achieve

2018

2019

2020

(fiscal year)

sustainable corporate value, we will optimize our productportfolio and bolster our financial base.

Equity ratio/ROE
(%)

50

39

40

28

30
20

28

33

38

40

20

18

10
0

45

29

20

10
2015

Equity ratio

KH Neochem Report 2021 (Integrated Report)

2017

VISION 2030 progress and future initiatives

Healthcare

14

32.1

29.5

24.3

2016

2017

2018

2019

2020

(fiscal year)

ROE

KH Neochem Report 2021 (Integrated Report)

15

Financial and Non-Financial Highlights
The figures on page 16 are consolidated and those on page 17 are non-consolidated.
Data with no explanatory notes indicate the period from January 1 to December 31, each year.

Net sales

Operating income(billion yen)(billion yen)

120

103.5

94.7

101.2

(1,000 kL)

10.9

9.0

77.3

80.2

11.5

12

94.2

Energy consumption and specific consumption

6.3

5.6

6
40

0

2016

2017

2018

2019

2020

(fiscal year)

0

2015

2016

200

400

150

300

100

100

200

50

50

100

2020 (fiscal year) 0

0

150

3
2015

(kt)

500

216.8

202.3

199.5

210.0

207.2

222.4

200

9

80

(L/t)

250

250

9.6

2017

2018

2019

2020

(fiscal year)

CO2 emissions volume

0

205.0

2015

206.5

2016

218.7

2017

208.7

2018

204.6

2019

194.2

442.4

448.2

2015

2016

473.6

2017

448.9

440.2

2018

2019

Net interest-bearing debt (except lease obligations)(billion yen)(billion yen)

10.0

20

8.2

7.7
7.5

6.7

6.0

6.9

19.0

15

4.0

5.0

19.0

11.9

2.5
2016

2017

2018

2019

2020

1.00

150

(fiscal year)

0

2015

2016

2017

2018

2019

2020

(fiscal year)

124

136

0.75 0.81

133

84

100

5
2015

(frequency rate)

10

5.6

0

(t)

140

50

27

0

2015

0.04

2017

2018

2019

2020 (fiscal year)*April 1 to March 31, each year

Equity ratio/ROE
(%)

50

39

40

28

30
20

28

33

38

40

29

20

Equity ratio

2016

2017

Number of employees(billion yen)(persons)

10.0

800

7.0

5.0

20

2.4

18

2018

2019

2020

2.4

2.5

10
2015

CAPEX

7.5

10
0

45

(fiscal year)

0

2015

2016

601

6.0

2018

2019

2020

(fiscal year)

0(billion yen)

(%)

1.5

20

3.5

3.9
3.4

3.3

1.0

3.3
1.0

3

2015

2

0.9

0.9

2016

2017

2018

0.8

0.8

2019

2020

2017

2018

2019

2020

(fiscal year)

0

13.0
10.0

8.7

11.4

5
2015

2016

2017

2018

2019

2020

(fiscal year)

0

2015

2016

2017

2018

2019

2020

(fiscal year)*Only full-time workers

16

KH Neochem Report 2021 (Integrated Report)

0.02

0.03

0.050
0.025

0

0

0

0

0

2016

2017

2018

2019

2020 (fiscal year) 0.000

Frequency rate and Severity rate:KH Neochem
Frequency rate:Chemical industry average (Ministry of Health, Labour and Welfare statistics)
Severity rate:Chemical industry average (Ministry of Health, Labour and Welfare statistics)(fiscal year)

2015

2016

2017

2018

2019

2020

New
graduates

14

18

8

21

27

22

Mid-career

8

5

14

19

50

13

Total

22

23

22

40

77

35

(fiscal year)

4.5

1
2016

0.03

0.100
0.075

0.06

*Only workers who have signed a labor contract with no fixed termYears of service and gender differences

13.6

15

0.9

0.5

2015

0.00 2015

673

New female employees

10

0

0

*As of December 31, each year

(billion yen)

4

611

ROE

R&D expenses

4.0

0.81

0.93

200

Depreciation
5

600

659

400

1.6

0.88

0.94

0.90

Number of new employees

600

2.9

2017

599

(severity rate)

0.09

0.50
0.25

2016

(fiscal year)

Frequency rate (accidents resulting in lost workdays)/Severity rate

250
200

12.1

10.9

Disposed of as landfill

2020*April 1 to March 31, each year

Energy consumption (crude oil equivalent) (1,000 kL)*April 1 to March 31, each year
Specific energy consumption (L/t)

Profit attributable to owners of parent

404.2(fiscal year)

2016

2017

2018

2019

2020

2021

Years of service
17.1(male)

16.5

16.0

14.6

13.5

13.7

Years of service
16.9(female)

16.9

16.3

14.3

14.3

15.0

Difference(female – male)

0.4

0.3

-0.3

0.8

1.3

-0.2

*Only full-time workers *As of April 1, each year

KH Neochem Report 2021 (Integrated Report)

17

Business
Strategy

Performance
Materials

Refrigeration lubricant
raw materials,
Cosmetic Ingredients

Key Points in the Third Medium-Term Business Plan

In the three strategic domains that we have established,
Performance Materials supports two of them: the environmentand healthcare.
Refrigeration lubricant raw materials used inenvironmentally friendly air conditioners have contributed to
global warming prevention. Cosmetic ingredients, used inhigh-end skincare cosmetics such as skin toner, have helped
improve the quality of life (QoL) of people all over the world.

Proportion of total
operating profit

Operating income(2020)(consolidated, hundred million yen)

81

79

S tart up of new facilities for refrigeration lubricant raw materials
and marketing of new productsF urther increase in production capacity for performance chemicals(refrigeration lubricant raw materials, etc.)

51

2018

2019

2020

Progress in the Medium-Term Business
Plan and Outlook for the Future(fiscal year)

Note: In the Business Strategy section, when calculating operating profit inresults by business field, administrative expenses, etc., which arecommon to the entire company, are not allocated.

Refrigeration Lubricant
Raw Materials

Strategic Domains

Environment

Main Areas of Use

Main Product
Synthetic fatty acids
Base oils

Air conditioners

Regarding , we began operating the new refrigeration
lubricant raw materials production line at the Yokkaichi Plant
in Q1 2020. The COVID-19 pandemic and other factors
depressed demand in 2020, but accelerating moves aroundthe world to curb global warming have led to increased
demand for more environmentally friendly air conditioners
that use low GWP refrigerants. We therefore expect thisnew manufacturing plants to allow us to further contributeto this market.
Regarding , we are still conducting a feasibility study on
improvements at the Chiba Plant. We will make anappropriate investment decision to meet strict economic
constraints in light of major changes in the businessenvironment, such as the rising cost of plant construction.
Over the medium to long term, we forecast growth indemand for more environmentally friendly air conditioners

and consequently for our refrigeration lubricant raw
materials. We will make every effort to implement our
growth strategy, taking the best course of action for
immediate management issues and prioritizing the mediumand long-term perspectives.

etc.

New facility for refrigeration lubricant raw
materials at the Yokkaichi Plant

Value chain example
We manufacture and market refrigeration lubricant raw materials for use in air conditioners, employing synthesis technologies
that include the oxo technologies that we have developed over our long history.
KH Neochem
Procured raw materials• Propylene• Various olefins

Technology

Product

Synthetic technologies
including oxo
Quality control
technologies

Refrigeration
lubricant raw
materials

Process toward final productRefrigeration
lubricantmanufacturers

Compressor
manufacturers

Final productCreating new value

Environmentallyfriendly air
conditioners

Contributing to
global warming
prevention

Global expansion ofenvironmentally friendly air
conditioners

Strength

Global expansion in the environmentallyfriendly air conditioner market

Large share of global market

Population expansion in emerging nations

Tightening international environmental
regulations for refrigerants

18

KH Neochem Report 2021 (Integrated Report)

Construction was completed in Q1 2020 and the new line provide a 50% increase inproduction capacity for each product.

Creating value that helps to resolve social issues

Refrigeration lubricant raw materials that help curb
global warming

External Environment

Worldwide increase in the size of middle-income groups

As discussed above with respect to , we installed a new production line forrefrigeration lubricant raw materials at our Yokkaichi Plant.

Located in Asia,
the region with the world’s highest demand
R&D system in cooperation with customers

Markets for air conditioners are growing as developing nations make more
economic progress. Most of the air conditioners in developing nations use oldtechnologies that contribute to the destruction of the ozone layer and lead to
global warming. However, in recent years, China and many other countries havestarted to use more environmentally friendly air conditioners. We manufacture
refrigeration lubricant raw materials that are compatible with moreenvironmentally friendly air conditioners. As part of our initiative to help curb
global warming, we are working to ensure stable supplies in response to
growing demand.
(See pages 20 and 21 for more details.)

KH Neochem Report 2021 (Integrated Report)

19

01

Refrigeration lubricant raw materials

Market Prospects for Refrigeration
Lubricant Raw Materials
One of KH Neochem’s main products is refrigeration lubricant raw materials. In this special feature, welook at the prospects for these ingredients, while reflecting on the global trend for increasing concern
for the environment.

International Regulations on Refrigerants Concerning Climate Change ( Kigali Amendment )and the Future of Refrigeration Lubricant Raw Materials

What are refrigeration lubricant raw materials?

Advanced Nations

Emerging Nations

Obliged to Reduce the CO2 Equivalent Value, basedon the Kigali Amendment and Growing Demand forSynthetic Refrigeration Lubricant Raw Materials

Different Reduction Schedules for Advancedand Emerging Nations

Market Position of
KH Neochem

Air Conditioner Mechanism
Refrigerant
carrying heat

Raw materials

Indoor unit

LubricantOutdoorunit

Cool refrigerant
Indoors

Refrigeration lubricant raw materials

Hot refrigerant

Outdoors

Isononanoic acid

Base oils

Compressor

Discharge heat

Cooled air

2-ethyl hexanoic acid

Compressors/air conditioners

Transition to Refrigerants and Refrigeration Lubricants Raw Materials
with Low Environmental Impact
From Controlled CFCs to CFC Substitutes

Shift to Low GWP*1 Refrigerants

In 1987 the Montreal Protocol was adopted, establishing theregulatory measures for CFCs, including the gradual reduction
and ultimate elimination of controlled CFCs, which cause ozone
layer depletion. As a result of this Protocol being enacted, aglobal shift to CFC substitutes that do not harm the ozone layer
has developed rapidly since around 2000.

Since its adoption, the Montreal Protocol has undergone several
revisions, as they are required. In the 2016 Kigali Amendment,*2
it was agreed to gradually reduce refrigerants with high GWP tosuppress global warming. This is accelerating the shift to newrefrigerants such as R32, a CFC substitute with low GWP.

Although CFC substitutes do not harm the ozone layer,
18 types of CFC substitutes with high GWP were added as
regulated substances in the Kigali Amendment, with a view
toward preventing global warming.
The gradual reduction of CFC substitutes outlined in the
Kigali Amendment uses CO2 equivalent values obtained bymultiplying the quantities of CFC substitutes by GWP as anindex. Average values for the production and consumption of
CFC substitutes from 2011 to 2013, among other data wereused as standard values.*4 For advanced nations, including
Japan,*5 a gradual reduction in CO2 emissions from the standard
values is required from 2019 to 2036, with the ultimate targetof an 85% reduction by 2036.
As a result, this regulation is expected to further raise demand
for air conditioners that use low GWP refrigerants, such as R32.

Advanced Nations and Refrigerant GWP Reduction Schedule*4

CO2 equivalent value

Air conditioners make rooms cool by taking in hot indoor air and moving just the heat to the outside. Moving the heat to the outside
is performed by a refrigerant, which functions by being compressed in a compressor inside an air conditioner’s outdoor unit. The
compressor needs a lubricant, specifically refrigeration lubricant raw materials to operate efficiently and smoothly, without breaking
down over a long working life.
Currently, the shift toward environmentally friendly air conditioners is accelerating, and demand for refrigeration lubricant raw
materials that are compatible with the refrigerants used in these air conditioners is also growing. KH Neochem holds an extremely highshare globally for the raw materials used in refrigeration lubricant raw materials.

1987 Montreal Protocol

1997 Kyoto Protocol

2016 Kigali Amendment

Global trends

Requirement to reduce andeliminate controlled CFCs

Greenhouse gas emission
regulations

Requirement to reduce CFC
substitutes

From around 2000

Transition in
refrigeration lubricant
raw materials(controlled CFCs)

From 2012

Current refrigerant: R410A

New refrigerant: R32(CFC substitute)(CFC substitute)

SubstituteSubstitute

Ozone layer – causes depletion

Ozone layer – no depletion

Ozone layer – no depletion

Global warming impact– large (GWP–1,810)

Global warming impact–large (GWP– 2,090)

Global warming impact– low (GWP– 675)

Petroleum-based

Synthetic

Using raw materials produced by KH Neochem

From 20XX
Substitute

Next-generation
refrigerant

KH Neochem Report 2021 (Integrated Report)

Petroleum-based (compatible with old refrigerants)
Synthetic (compatible with current and new refrigerants)

Global market for air conditioners using synthetic
refrigeration lubricant raw materials is growing.

140

million units*4 For more details, please refer to the Montreal Protocol on Substances that Deplete the
Ozone Layer on the website of the Ministry of Economy, Trade and Industry. (Japanese
documents only)
https://www.meti.go.jp/policy/chemical_management/ozone/law_ozone_laws.html*5 Regulatory measures differ in some advanced nations, such as Belarus and Russia.

CAGR: 5 %

2018

2025
Source: KH Neochem forecasts based on JARN data

(currently under development)

KH Neochem’s Strategy
Under development*1 GWP (global warming potential): the greenhouse effect of a refrigerant, expressed as a value with carbon dioxide standardized at 1.
*2 Kigali Amendment: A new international agreement reached at the 28th Montreal Protocol Conference (MOP28) held in Kigali, Rwanda on October 15, 2016.
*3 In the case of household air conditioners

20

Global Air Conditioner Sales Forecasts

100

International agreement on global
environmental regulations

Old refrigerants: R22*6 The standard value is calculated based on the average values for production andconsumption of CFC substitutes from 2020 to 2022, among other data. The schedule
is more gradual in India, Pakistan, Iran, Iraq, and the Gulf States. For more detail,please see the graph below.

million units

Transition in Refrigerant and the Raw Materials for Refrigeration Lubricant

Transition in
refrigerants*3

Under the Montreal Protocol, advanced nations are required toeliminate ozone layer-depleting controlled CFCs by 2020, while
emerging nations are required to eliminate it by 2030.
In the measures against global warming laid out in the Kigali
Amendment, emerging nations*6 are obliged to reduce the CO2
equivalent value by 10% of the standard value by 2029. The
regulations become stricter in steps, ultimately reaching therequirement for an 80% reduction by 2045.
In addition to the above, we expect further growth indemand for more environmentally friendly air conditioners as
the economies of developing nations strengthen and regulations
against air conditioners with low energy efficiency come into
effect in China (see figure below).

Due to the Kigali Amendment and the growing economic strength of emerging nations, we foresee an increase in demand for
air conditioners using low GWP refrigerants, such as R32. We will further strengthen our capacity to supply refrigeration lubricant
raw materials used in these air conditioners. With an eye on the future, we will also conduct research and development into
refrigeration lubricant raw materials that will be compatible with next-generation refrigerants for extremely low GWP.

KH Neochem Report 2021 (Integrated Report)

21

Business Strategy

Cosmetic Ingredients

Strategic Domains

Key Points in the Third Medium-Term Business Plan

Healthcare roduction capacity growth for skincare products (1,3-butylene glycol)Pin response to expanding markets for skincare products in Asia
Quality improvement by creating near-odorless products, etc.
Main Areas of Use

Main Product

Progress in the Medium-Term Business
Plan and Outlook for the Future

Diols
Face masks

Synthetic fatty acids
etc.

Skin toners /beauty serums

Value chain example
We manufacture and sell cosmetic ingredients mainly for skincare products and have received a strong reputation for product quality.
KH Neochem
Procured raw materials

Technology

Product

Process toward final product

Final productCreating new value

Ethylene

Synthetic
technologies
Quality control
technologies

Cosmetic
Ingredients

Cosmetics manufacturer

High-quality
cosmetic product(skincare product)

Contributing to
improvements in
QoL*

To meet increasing customer
requirements for high-end
products and diversification

Strength

Global expansion of
middle-income groups

Spread of e-commerce

Growth in the men’s
cosmetics market

Increasing interest in highend and natural products

What is 1,3-butylene glycol?

Integrated system for production
from raw materials
Located close other growing Asian countries

Increasing global sales channels focused on Asian markets
We are selling our cosmetic ingredients in Japan and Korea, where people have high awareness of beauty and skincare, as wellas to China, Southeast Asia, and India, markets with rapidly increasing demand.

The annual number of purchasesof skincare products (per person)

Korea($) 150

China

120

Japan

90
60

India

30

Southeast Asia*D ebottlenecking is identifying specific areas that prevent efficiency
improvement in existing manufacturing processes, then making
improvements to strengthen production efficiency.

*quality of life

External Environment
Growth in the skin care market

Regarding , we began production debottlenecking* with aminor investment in 2019. In 2021, we carried out further
debottlenecking, increasing supply capacity by approximately
10% compared with before.
Regarding , we are studying ways to reduce odors andexpand our product lineup in collaboration with research
institutes.
The difficult business environment continues due to thedrop in demand from tourism into Japan and a fall incosmetics sales caused by fewer people leaving their homes
due to the COVID-19 pandemic. However, we expect anincrease in demand for skincare products, mainly in Asia,
over the medium to long term. For cosmetic ingredients, we
intend to steadily implement growth strategies from a
medium- to long-term perspective.

0

142
123

Huge potential
demand25

7

5

1,3-butylene glycol (1,3-BG) is a cosmetic ingredient that produces a moist texture whenusing skin toners, face masks, or beauty serums, etc. It is an indispensable ingredient forskincare products that come into direct contact with the skin due to its strong
moisturizing properties and antibacterial properties, as well as its reduced odor andamount of skin irritation.

Creating value that helps to resolve social issues

Supporting the healthy lives and beauty of people
around the world
We are one of a handful of companies worldwide that are capable ofmanufacturing cosmetic grade 1,3-BG.
Every cosmetic has an ingredients label. If it says BG or 1,3-butylene glycol,
there is a good chance our materials have been used. Our high-quality 1,3-BG,
often used in high-end skincare cosmetics and sunscreens, is supporting thehealthy lives and beauty of people around the world.

2

Source: The Company’s estimate (2019)22

KH Neochem Report 2021 (Integrated Report)

KH Neochem Report 2021 (Integrated Report)

23

Electronic
Materials

Business
Strategy(consolidated, hundred million yen)

18

16

Electronics

Proportion of total
operating profit

Operating income(consolidated, hundred million yen)

Main Areas of Use

Main Areas of Use

2019

2020

Semiconductors

Displaysetc.

Note: In the Business Strategy section, when calculating operating profit in results bybusiness field, administrative expenses, etc., which are common to the entire
company, are not allocated.

Oxo alcohols
13

Glycol ethers(electronic materials grade)(fiscal year)

2018

2019

EstersCoatings / inks

2020

(fiscal year)

Note: In the Business Strategy section, when calculating operating profit in results bybusiness field, administrative expenses, etc., which are common to the entire
company, are not allocated.

Glycol ethers
etc.

Wire harnesses

Value chain example

Value chain example

We sell products such as high-purity solvents with an extremely low impurities (foreign substances and metal content) used for the
manufacturing process of displays and semiconductors. These solvents are manufactured by utilizing the technologies that wehave cultivated over many years, such as high purification, synthesis and quality control technologies.

These products are manufactured using our core technologies, and are sold for many uses, including coatings, inks, and electric
cables in industrial fields such as automobiles, houses, and electrical machinery.
KH Neochem

KH Neochem
Procured raw materials

Technology

PMHigh purification
technologies
Synthesis technologies
Quality control technologies

Product

Process toward final productHigh-purity
solvents

Photoresist
manufacturers

Display andsemiconductor
manufacturers

Final productCreating new value

Electronicequipment

Contributing toan advanced
informationoriented society

Procured raw materials• Propylene• Various olefins

Technology

Product

Synthetic technologies
including oxo
Quality control
technologies

Solvents
Resin raw materials
Plasticizer raw
materials

Process toward final product

External Environment

Strength

External Environment

Growing electronic materials market associatedwith development of IT and electronics industries

Technological expertise in high purification
technologies accumulated over many years

Stabilized market in Japan andexpanding market in the rest of Asia

Spread and development of AI & IoT
Improvements in the speed andfunctionality of electronic equipment

Varied product lineups and supply system

Increased demand for cutting-edge semiconductors
due to the spread of 5G technologies

Advanced quality control systems that
accommodate customer requirements

Key Points in the Third Medium-Term Business Plan perate new facilities for the nextOgeneration semiconductor materials
Further improvement in the quality ofhigh-purity solvents in response to
greater miniaturization ofsemiconductors

Regarding , in our Group company Kurogane Kasei Co., Ltd. a contract
manufacturer of electronic material products, we built a new facility forthe next-generation semiconductor materials in the last year. This plant canalso be used for the current generation of semiconductor materials andwill allow us to optimize our manufacturing and marketing strategy in linewith market trends, responding to continued growth in existing markets
and with a view to market growth in cutting-edge fields.
Regarding , with the ever-increasing miniaturization of semiconductors,
there is more demand for improvements in product quality. We are
steadily strengthening our systems for quality assurance and supply chain
systems to ensure even higher levels of quality in our high-purity solvents.

Creating value that helps to resolve social issues
Responding to semiconductor miniaturization needs
to contribute to an advanced information-oriented
society
The development of 5G, AI, and IoT applications and progress in digital transformation (DX) are driving
increased demand for higher performance semiconductors with microcircuitry. Semiconductors also help
to improve the energy efficiency of electronic equipment. We are further improving our technologicalstrengths to respond to the need for more semiconductor miniaturization and to support an advanced
information-oriented society.

KH Neochem Report 2021 (Integrated Report)

Creating new value

Industrial
products

Contributing to
comfortable
lifestyles(automobiles, houses,
beverage cans, etc.)

Strength

Stable domestic market
Population growth in emerging nations

Progress in the Medium-Term Business
Plan and Outlook for the Future

Coatings, inks, resin
manufacturers, etc.

Final productRequired to combine
raw materials foreach application

Higher performance semiconductors
and advanced innovations invarious IoT technologies

24

Main Product25

Esters(electronic materials grade)2018(2020)

38

Main ProductFundamental
business

Proportion of total
operating profit

Operating income(2020)

18

Basic
Chemicals

Business
Strategy

Strategic Domains

Economic growth centered in Asia

Key Points in the Third Medium-Term Business Plan perating an effective pricing policyOand higher sales figures
Further introduction of facility control
system with latest technologies (AIand IoT)

The largest production
capacity for oxo alcoholin Japan

Extensive range of
products supported by an
expanded lineup ofderivatives

Trusting relationship andstable trade with top
manufacturers in eachmarketLocated close othergrowing Asian countries

Progress in the Medium-Term Business
Plan and Outlook for the Future
Regarding , although demand has gradually recovered since Q3 2020,
particularly in our automotive-related operations, business conditions arestill difficult as the recovery has not been strong enough to completely
offset the negative impact of the pandemic. In the future, we will
accurately capture the steady demand and connect this demand to sales.
Regarding , we have been introducing the system mainly into plants for
Basic Chemicals. This system had been introduced into around 40% of ourplants in 2020 and around 50% of plants as of 2021, contributing to
productivity improvements and reduced workloads. We are trying to
introduce this system into most of our plants by 2023.

Creating value that helps to resolve social issues
 xtensive product lineup contributing to aE
better quality of life
We have an extensive lineup of basic chemical products that are used in coatings, inks, andpharmaceuticals, as well as electric cables, wallpapers, floorings, plastic food wraps, and medicaltransfusion bags, all of which contribute to a better quality of life in a wide range of settings.

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The Source of Our Competitive Advantage: Technology and Information

R&D and Business Creation

Organization

Human resources
VISION 2030

Strengthening strategic
functions throughorganizational integration
To achieve VISION 2030, we established theBusiness Development Division in April 2021 andintegrated the functions to involve in businessstrategy formulation. We can accelerate thepromotion of commercialization by planning abusiness strategy that reflects management
policies and by making efficient and quick
decisions. The R&D Center, overall in charge of theresearch and development strategy, is intended toprovide technological solutions as well as ongoingdevelopment of the core technologies that support
our business operations.The Innovation Strategy
Office, which was established to create new
businesses, renamed the Innovation Strategy
Division and has now been expanded
organizationally. Through these organizationalchanges, we are working to create new
businesses in addition to strengthening andgrowing existing businesses.

Environment

Business
Development
Division• Planning andpromoting businessstrategy focused on
existing businesses.

Sales and marketing
department
Manufacturing
department

Healthcare

R&D Center
Based in Yokkaichi
and Ichihara• Contributing to plant
productivity improvements• From research tocommercialization applying
core technology• Responding to market needs
through development of newtechnology

Existing
businesses

Diversification of values and expansionof development potential throughhuman resource exchanges
Electronics

Innovation
Strategy Division
Based in KH i-Lab(Kawasaki)• Development andpromotion of new
business models• Acquiring potential
customers by clarifyingsocial issues• Value creation in interindustry fields

Newbusinesses

Drivers for value creation
The R&D Center and the Innovation Strategy Division are
working to create new value for KH Neochem’s technologies.
The R&D Center is improving core technologies—to put KH
Neochem in an even stronger position—and supporting
competitive strategies for existing businesses, while also
creating technologies for developing new businesses for the
future. We are also managing the intellectual property strategy

for KH Neochem as a whole to build an optimal intellectual
property portfolio. The Innovation Strategy Division is using theKH i-Lab as a collaborative technology hub for open innovation
with outside organizations, while working to speedily acquire
new technologies and create new businesses.

Personnel exchanges with external organizations, whichstarted in 2020, have fostered our development capabilities
that incorporate new perspectives. One example: With NGKSPARK PLUG CO., LTD., we exchanged one employee fromeach company. This experience is prompting us to reflect
different industry perspectives in our development programs.
We are working together for proof of concept on themes
where we both have strengths, such as chemical plant
equipment inspections using sensing technologies. We can
expand the approach for our new development throughactivities such as collaborative brainstorming sessions
involving both companies to address social issues on a global
scale. Looking ahead, we intend to grow our development
potential further through collaborative innovation with otherorganizations.

Personnel exchanges with NGK SPARK PLUG CO., LTD. (a plant tour at our
Chiba Plant)

Further advances beyond the existing technology
We aim to grow our market share in existing fields anddevelop business in different fields by increasing our productand technology expertise. We are working to promote evencloser coordination among the staff in our plants and to
improve further understanding of our existing technologies.
This leads to foster the development of human resources
which can increase productivity and product quality throughtechnology improvements. In addition, we are building
fundamental technologies by creating platforms in new fields
to propose innovative ideas and open up new markets forour products. We are also working to improve ourtechnological strengths through more joint research with
universities, allowing us to develop new products andacquire new technologies that utilize our existing
technologies and equipment.

Technology

26

R&D that utilizes our strengths

Developing new technologies to respond to diversifying market needs

To adapt to changes in the social environment, including
policy changes by governments to address global
environmental issues and growth in the scale of electronics
markets, we are exploring new markets where we can rollout our unique technologies and products. We are collecting
information and researching trends through joint researchwith universities, as well as through introduction of ourdevelopment products at exhibitions and participation ininternational conferences. To respond the new trends
obtained from these initiatives, we are working to maintainand strengthen the competitive advantage of our products.
Furthermore, we will do by developing new materials thatutilize our core technologies and by creating new value by
acquiring technologies that improve quality.

The world is becoming more complex and diverse, making it
increasingly difficult to accurately respond to customer needs.
Given this situation, we are working to develop technologies
that contribute to common global-scale targets, such as theSustainable Development Goals (SDGs), in order to respond tomarket needs over the long term. By utilizing our coretechnologies in oxo reaction and purification technologies
built up over our long history and our manufacturing expertisein quality control, we aim to acquire new technologies thatwill allow us to work with a wide range of materials, such as
natural raw materials that have been rapidly increasing in use
over the past few years. Through these initiatives, we aim to
move into high-value-added businesses and expand the scopeof our business through collaborations with other companies.

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The Source of Our Competitive Advantage: Technology and Information
The Source of Our Competitive Advantage: Technology and Information
R&D and Business Creation

Production Technology

Collaborative innovation

Evolution of production technology

Developing new approaches to social issues at KH i-Lab

Introduction of an advanced process control system for plants

Operation with Curiosity or WROC. Among the issues
targeted, some have already occurred; some can be
discovered by exploration; and some can be uncovered byinvestigating deeply into phenomena, then repeatedly
proposing and testing temporary hypotheses. Through our
research activities, we are working to uncover a wide rangeof social issues and to create forms of business that help toresolve them.

KH i-Lab aims to innovate based on the three strategic
domains set out in VISION 2030: the environment,
healthcare and electronics. We categorize and target social
issues that could arise in the future, from global-scale issues(megatrends) to niche issues that customers have. In
addition, we advocate exploratory activities that emphasize
the characteristics of each member, such as their own
interests and specialties. We call this strategy Wide Range

WROC strategy: research activities that are sparked from individual curiosity
Building networks

KH i-Lab

Improving skills

Future changes that arehighly certainTeam
strengths
Developing
hypotheses

Deepening curiosity andexpanding awarenessBusiness resources

Use the PDCA cycle in a short time frame
employing KPI management for all steps, fromgenerating ideas to building hypotheses

Future changes that arehighly uncertain

Proof of concept

Scaling up andcommercialization

Knowledge management of
exploratory activities using IT

A chemical plant is a maze of pipework, and safe plant
operations are ensured through continual, precise
adjustments in the flow rates of raw materials and products.
It takes a lot of experience and advanced expertise to master
plant operations, and the problem with adjusting themanual flow rate is losses.
To minimize these manufacturing losses, an advanced
process control system, or a state-of-the-art system that
employs technologies such as AI, controls the plant byautomatically estimating the appropriate settings, based on
temperature, pressure, and other conditions. The
introduction of this system, which automatically adjusts
settings to the right values, has allowed us to minimize
manufacturing losses. Reducing the operator workload also
makes it possible to further improve operational efficiency.
As of 2021, we have completed the introduction of thissystem in around 50% of our plants.
By introducing this advanced process control system
across the whole company, KH Neochem intends todramatically improve production efficiency as well as tackle
several manufacturing issues, such as quality stabilization.

Role of the open lab and our future plan
The KH i-Lab started operating an open lab in April 2021.
This open lab can be used for experiments, for example inbiotechnology, that previously would have been difficult to
do with our existing labs. A number of themes are currently
at the hypothesis testing stage in joint R&D with venturecompanies and universities, and we will then use the open
lab to look into commercialization. In the future, we will
make greater use of the open lab for collaborative
innovation with outside parties with the goal of translatingthese activities into new business developments.

Using intellectual property to strategically increase
corporate value: technology platforms
We are working to develop and use intellectual property using our technology
platforms. We aim to maintain and evolve the competitive strengths of existing
businesses and create entirely new businesses. The technology platform is thecore of our intellectual property so that we can visualize our technology andextract and systematize of competitive points. As well as the role technology
platforms play in visualizing a technology and supporting technology transfer,they also help to increase corporate value from several perspectives including
through the discovery of new inventions and the creation of new technology fields.

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KH Neochem Report 2021 (Integrated Report)

Restructuring business processes related to equipment management
As a petrochemical manufacturer, maintaining safe and stableproduction is one of our biggest targets. Effectively repairingand upgrading our plants and equipment that deteriorate overtime is a vital role of our equipment management department.
For this reason, we are restructuring our business processes forequipment management to prevent potential drops in thequality of equipment management work, such as a
generational change of employees due to the retirement ofveteran staff. First, we are focused on evaluating ways toenable more stable production based on risk assessments,
regularly obtaining estimates of the frequency rate and theimpact of breakdowns in advance as well as performing
preventive maintenance. We are also working on
standardizing operations and redoing the equipment ledger,
so that younger employees can do the same work as moreexperienced employees. After completing regular maintenancein 2022, we will be implementing redesigned operational
processes. These processes will include developing
maintenance and testing plans, making repairs and updates,and evaluating maintenance results. Through these activities,
we aim to effectively direct our limited management resources(human resources and financial resources), helping to reduce
missed manufacturing opportunities as much as possible.

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The Source of Our Competitive Advantage

Human Resources and Corporate Culture
Message from the corporate officer in charge of human resources

Position

Fostering a corporate
culture that has diverse
human resources and thatmaximizes results

Position-specific education
Management skills

Human skills

Solution skills

Management skills training

Ideal type of person for 2030

“Speed“ in outperforming competitors

Logical writingYoung
employees

Required training
Basic

Objective thinking
New employee training

Skillsdevelopment
meetingin the environment“Professionalism” to gain competitive advantages

Bolstering managers’ management skills“Networking” to further develop strengths

To forge ahead with reforming the corporate culture andimprove employee engagement, it is necessary to havecompany-wide themes to work on. More important,however, is how managers take on day-to-day workplace
management. People’s values and attitude to work havediversified. So, compared with the conventional Japanesestyle management of a uniform group where people
anticipate and react to others’ unspoken wishes, moreadvanced workplace management skills are needed to leadhuman resources with varied lifestyles and to maximizeorganizational results toward business goals. Moreover,while managers are required to wear many hats, if we look

Securing diverse human resources and promoting employees’ full participation
developed to accelerate growth. We are not only securing
diverse human resources; To enable everyone to reach theirfull potential and contribute to our business operations, wehave also developed several initiatives: an HR placement andpersonnel evaluation system that puts the right people in theright places based on merit (as opposed to seniority);
systems for flexible working styles; and support for careerdevelopment by expanding our education and training (seeEducation System on page 31, next page).

Reforming corporate culture and improving employee engagement

KH Neochem Report 2021 (Integrated Report)

Presentations (basic)“Innovations” responding to changes

Human resources (HR) strategy

30

Logical thinking

Self-development support system

MentoringWorkshop for new employees’ trainers

Required training
Fundamental

Problem-solving
knowledge

New employees’
trainer system

Leadership

Planning and management

Presentations (advanced)

Required training
Advanced

Sales

Worker-manager fostering training
Production technologies, engineering

Leaders

Humandevelopment
meeting

New managers’ training

Human resources strategy needed to achieve VISION 2030

These initiatives have outwardly made our lineup of humanresources more diverse. On the other hand, to translateparticipation by diverse human resources into value creationand to establish a competitive advantage, I feel that we must
foster an organizational culture that sees differences as
strengths and makes the most of them, and we need to
improve employee engagement. Looking at these themes,

Languagetraining

Language training and learning support for instructor dispatch

Managers

Mid-level
employees

Considering that the full participation of employees withdiverse values is essential for the sustainable growth ofcompanies, we have been hiring mid-career recruits over the
past few years. To secure unique added value and achievesignificant growth in a tough environment, it is necessary tohave a continuous stream of innovation in every area. With
the participation and collaboration of many employees withmultifaceted backgrounds, experience, and skills, I feel thata wide range of ideas and options have been generated
recently within the company, and initiatives are being

On-the-job training andcareer development

Executive candidate
fostering

Director & Corporate Officer
KH Neochem Co., Ltd.,To achieve VISION 2030’s challenging goals, in the future
we must dramatically improve productivity, and thefoundation for doing that is our human resources. At KH
Neochem, as we set “ideal type of person” (shown on theright), we believe that it is necessary to foster a corporate
culture that has diverse people and that maximizes results.
Based on this idea, we have selected themes to strengthen
every part of human resources, and we are working on avariety of HR initiatives and corporate culture reforms.

Specialized skills training

R&D

Yukihiro Isogai

Education Systemwe implemented the One Word Makes a Difference
campaign to encourage company-wide communication, as afirst step, with a view to creating workplaces where people
can work with respect for one another. We have also been
holding annual discussions to improve team engagement at
every workplace. Little by little, changes are taking place inour departments.

at reality, they are managing under the constant pressure of
having to deliver at a high level for both short-term results—
such as the steady execution of plans and achieving
performance goals—and medium-term results, such as
training of subordinates and promoting reforms. To addressthese issues, we have been training to reinforce
management skills (management basics and understandingroles) for managers from 2018. In this way, we provide
learning opportunities so that our managers can learn andapply the basic cycle of training subordinates according to
the situation and achieving results through their personal
growth, which is the essence of management.

Future challenges and initiatives
As I mentioned earlier, we have introduced a range of HR
systems and initiatives to “foster a corporate culture that has
diverse people and that maximizes results.” To realize
VISION 2030, I believe it is important to go beyond
superficial diversity and create human resource andmanagement systems that enable people to truly
demonstrate their diverse capabilities. For this reason, wemust thoroughly promote workstyle reform, revise thepersonnel evaluation system, and reform managers’
awareness. These are all important topics, and none can beachieved overnight. I think it is therefore essential for
executives to deepen employees’ understanding by clearly

explaining, in a way that makes it easy to imagine, whysomething is necessary and what kind of world can be
opened up by doing something.

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The Source of Our Competitive Advantage
Human Resources and Corporate Culture

Initiatives to improve engagement

Engagement training (conducted in 2019)Engagement survey results

3.09
2.99

First year
( 2018 )3.13
0.14 points higher

Second year
( 2019 )Third year
( 2020 )We have been conducting engagement surveys for all
employees since 2018.
The third engagement survey, conducted in fiscal 2020,
confirmed a 0.14-point increase over two years.
To improve employee engagement, we interviewed
people in departments with high levels of engagement about
initiatives that have led to increased engagement, and thenrolled these out internally as best practices. We also trained
managers to bolster their management skills andimplemented the One Word Makes a Difference campaignthat all officers and employees can practice immediately, asa first step toward encouraging communication andcreating workplaces where people can work with respectfor each other.
The One Word Makes a Difference campaign was
something new for us. We hope that it will lead to moreengagement by encouraging people to actively convey
gratitude every day and to offer praise for good behavior,by adding a word of appreciation in email exchanges,
for example.
We will continue to roll out measures so that each
employee will gain a solid sense of the effect of initiatives
such as this, resulting in an improved engagement score for
the Company.

Promoting diversity

Promoting understanding of VISION 2030

We foster a corporate culture in which employees recognize
each other’s diverse values and everyone is able to play anactive role and fulfill his or her potential. As part of thoseefforts, we are eagerly rolling out measures to promote
active participation by women.
We have set two goals in our general business action
plan related to promoting the participation of women:(1) Raise the percentage of female managers to at least 7%(2) Establish a system for both men and women that allows
them to continue working while raising children or
taking care of family members(Planning period: from May 2019 to March 2022)
To achieve these goals, we are introducing skill
development meetings and establishing a system to support
flexible workstyles according to a woman’s stage in life.
Flexible workstyles are designed to select candidates for
management positions at an early stage, to make themaware of their expected role, and to systematically train
them. We will foster a climate of providing support for evenmore participation by female employees, while raisingawareness of effective evaluation and flexible workstyles,
not only for female employees. We will enable every
employee to realize his or her full potential according totheir skills, capabilities, and experience, and to play an activerole in a range of ways.

If we are to achieve VISION 2030, each individual employee
must deeply understand his or her own role, and everyone
must get on the same page as we take up the challenge.
So far, we have held workplace briefings conducted by
top management, distributed to all employees the booklet
Vision Book, which clearly explains VISION 2030, andformed workplace groups centered on managers andworkplace leaders.
In addition, while discussing different opinions, every
workplace has put together a declaration that includes
workplace ideals, the 5C Credo,* and actions to be taken.
Digital posters were made for each department and areavailable on the Company’s intranet. The posters were
updated in February 2021.
*See Our Basic Principles on page 01.

Company intranet(Viewers can click the icons to seeeach workplace’s poster.)

VISIONBOOK

Creating workplaces where it is easy to work
We are also working on developing an environment that is easy
to work in and respects the work-life balance of each individual.
In addition to days of no overtime, a flextime system anda paid leave system that allows half-days, we have put
together systems that allow flexible workstyles according toemployees’ life stage. For example, the system of shorter
work hours for employees rearing children had previously
been limited to 48 months, but we abolished that limit, now
allowing more employees take advantage of the system. We
also introduced remote working for employees rearing
children or caring for family members, creating anenvironment that allows employees with limited time towork due to parenting or caregiving responsibilities tobalance their life with their work.
Also, to build even better labor-management relations,
we regularly hold meetings of the Joint Management Council
that includes executives and worker representatives todiscuss workplace issues, such as business conditions andcompany policies.
For the physical infrastructure, we have improved theworking environment by relocating our head office.
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KH Neochem Report 2021 (Integrated Report)

In addition, we are improving health and safety with
employee participation, such as holding health and athletics
events, conducting stress checks and interviews withindustrial physicians for promoting mental health, and weare enforcing the practice of “pointing out and calling out”
at the plants as well as predicting risk, as safety initiatives.

Initiatives to prevent the spread of COVID-19
With a view to preventing the spread of COVID-19, we
have implemented the following measures for ensuring
the safety of local communities, business partners, andour employees and their families, and to maintainbusiness continuity.
1. Work system

Head Office and Osaka Branch Office aking maximum use of remote working
MFor employees that need to come to the office,
we recommend off-peak commuting by using a
flextime system (no core time) to avoid
congestion on public transportation.

Other sites

 work system is specified at each site, bearingAin mind the local circumstances.

2. Business trips

In principle, overseas business trips are prohibited.
In principle, employees should refrain from going on
business trips in Japan and instead use videoconferencing, Web conferencing, conference calls, etc.

3. Meetings,
seminars, etc.

In principle, employees should avoid face-to-faceconversations as much as possible and make themost of Web conferencing, conference calls, etc.

Going forward, we will respond flexibly according to thesituation, such as whether or not a state of emergency has
been declared and the situation of infections in the region.
The Basic Policies for Novel Coronavirus Disease Control
issued by the Government of Japan have positioned KH
Neochem, a company in the petrochemical business, as abusiness operator that is required to continue business
operations during a state of emergency. We are proud tomanufacture and sell products that are essential to the livesof people in and outside of Japan. To fulfill this mission, we
will take effective measures to prevent the spread of
infection, and continue our business activities to ensure astable supply of products.

4. Implementation We strive to systematically implementof measures tocountermeasures to prevent infection and theprevent the
spread of infection.
spread of disease

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Special Feature

Roundtable Discussion on Progressin Corporate Governance

Evolution of
Corporate Governance

ProfilesUnder VISION 2030, we have been working to further strengthen our corporate governance.
This time, we have asked our independent outside directors to have a frank discussion about the status ofoperations and any issues in the Board of Directors, which is the key to corporate governance.

Independent Outside Director

Independent Outside Director

Independent Outside Director

Sayoko Miyairi

Jun Tsuchiya

Yuji Kikuchi

Appointed in March 2019. Based on her work
experience at a consulting firm and her extensive
experience and insight as a university professor,
she provides opinions and recommendations,especially for human resource development andways to improve employee engagement.

Appointed in March 2020. He has management
know-how cultivated at global companies andadvanced technical knowledge in the chemicalindustry, and he provides opinions andrecommendations for our entire business.

Appointed in March 2020. Attorney. He has
experience working for the Securities andExchange Surveillance Commission and expertisein corporate law and corporate governance. He
gives opinions and recommendations tomanagement that help to strengthen
governance in particular.

What is your impression of theCompany’s Board of Directors?
Miyairi I feel that the Board of Directors has established aplace for constructive discussions. A big part of that is
because careful explanations are provided in advance.
Formerly, there were times when questions had to be
confirmed on the day of a Board meeting, but now that
happens less often.
Kikuchi I feel the same way. After all, for the Board of
Directors to function, preparation by the proposers and thesecretariat is of the highest importance. Since that is
thoroughly taken care of, the Board of Directors is able tofocus on discussions.
Tsuchiya The groundwork certainly makes it easy to havediscussions. This is probably because the secretariat’s
preparations, centered on the concept of corporate
governance, are reflected in the Board’s operations. Also, I
think that the reorganization in April 2021 has beensuccessful. To build an efficient and rapid decision-making
framework, we abolished the divisional structure to create aflatter organization. By making it clear that full-time directors

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KH Neochem Report 2021 (Integrated Report)

are supposed to supervise management, all Board members
now have a strong awareness of overall optimization.
Miyairi I also think that the reorganization has made it
possible for full-time directors and outside directors to havemore equal discussions. Before now, there may have been
an atmosphere that kept full-time directors from treading oneach other’s domains, but I think that has also gone.
Tsuchiya I think that full-time directors tend to view things
along the same lines as how business has been done in thepast, but the strength of outside directors is that they cantake an objective view of any business model. In general,
there are many cases where outside directors are asked toapprove an agenda for which there is a certain level ofconsensus, but I think it is a good idea to also haveopportunities to seek the opinions of outside directors before
proposals are set. The question is whether we can havediscussions that allow us to make use of our specialized
knowledge and have it well-received; that would be a good
way to use outside directors.
Kikuchi My impression is that it is easy to exchange opinions
in the current Board of Directors. To make Board discussions
more productive, it is very important to share diverse

opinions. Sometimes we have to voice critical opinions, but I
think that is our role as outside directors.

What do you think of theevaluation of Board of Director’s
effectiveness in fiscal 2020?
Miyairi I know that the effectiveness of the Board of
Directors was evaluated positively and that the Board’s
effectiveness was confirmed based on a questionnaire
given to directors and Audit & Supervisory Board members.
However, we needed to focus more on discussing
significant issues, and we also discussed the necessarychanges to further improve the Board’s effectiveness. Notlong ago, we, the outside directors, held an informal
meeting online among ourselves, and we found that we
had a shared understanding that there needs to be morediscussions on medium- to long-term strategies.
In addition, the subsequent development of importantmatters decided by the Board of Directors, such as
investment projects, should be effectively monitored. Also,
since the risks that were assumed at the time of approval
could change over time, we must also look at how to deal
with these risks, if adjustments are needed. I think it isessential to continually strengthen monitoring to improve
our ability to supervise.
Kikuchi Discussions of medium- to long-term strategies areimportant, but that is very difficult. If we suddenly go into
the whole picture, the discussion will lack focus. It might
be better to discuss things broken down a bit. So, forexample, what should we do about the HR strategy or thefinancial strategy? How about the sales strategy? We could
reexamine ordinary operations from the perspective ofstrategy and try to put the current strategy and associatedproblems into writing. From there, we could discusscompany-wide strategy and then go back to the HR
strategy and reconsider it in terms of the overallmanagement strategy. I think that it is very important to go
back and forth several times in this way. Also, looking at
continually strengthening our monitoring, it is important tocreate an organization that effectively sends information up
to the Board of Directors as a basic precondition. Whenpeople create materials for the Board of Directors, they end
up trying to summarize things nicely. But that can mean
issues and risks are not seen in perspective. So, I think it isalso important for materials to frankly list the issues, theconcerns, and the problems.
Miyairi Medium- to long-term strategies are monitored
annually in reference to the VISION 2030, set out in 2018.
However, the environment has changed rapidly, such as

Key Agenda Items at Board Meetings in Fiscal Year 2020
Resolutions
Issues related to establishing fundamental
management policies (compliance code, information
security policy, procurement policy, personal
information protection policy, etc.)
Review of executive compensation
Large-scale capital investment projects (construction ofa new quality control building, etc.)
Items reported
 esponses to COVID-19
R
Monitoring of the Third Medium-Term Business PlanPeriodic compliance reportingStatus of risk management operations
Nomination and Compensation Committee activities
Issues related to improving the effectiveness of theBoard of Directors
Engagement survey results
Progress in constructing new facilities by Group
companies

with the worldwide spread of COVID-19, so it is necessary
to have the courage to be unafraid of making revisions orcorrections in some cases, such as if we are approaching
the indicators set in VISION 2030 or if we see another path
as we go ahead. I think it is important to discuss not only
numerical goals, but also strategic goals for our ambitions,as well as their direction and the sense of speed.
Tsuchiya For evaluating the effectiveness of the Board of
Directors, in some cases, the impact of analyses andevaluations might not be felt over the short term. In thatsense, we are still a developing company. After all, it often
takes five or 10 years before some things become visible.
Since it is not easy to draw conclusions, I think we should
continue to evaluate effectiveness while improving themethod for doing this.

How do you see your role as an outside
director and what challenges would
you like to address in the future?
Tsuchiya Having been involved in the chemical industry for along time and having experience in European and US
companies, I try to make comments with awareness ofoverseas perspectives in addition to my outside perspective.
For example, the Corporate Governance Code is fairly
conscious of the cost of capital, but while US companies
have been aware of this for 20 years or so, Japanese

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35

Special Feature:
Roundtable Discussion on Progress in Corporate Governance

Sustainable Managementcompanies are still lagging behind. And European companies
have made progress with mechanisms to reflect theintentions of their headquarters in group companies, but I
feel that Japanese companies tend not to place as muchweight on this. I believe that proposals based on overseas
perspectives are useful. An especially important issue is tocreate an environment that allows effective risk-taking. In
Japan, if people take on challenges that entail some risk,
there are still many cases where they are told to takeresponsibility if they fail, so no one is willing take on risks
under these conditions. I think it is important to create asystem that supports effective risk-taking by identifying thescope of responsibility and incentives in advance.
Kikuchi I want to help foster a corporate culture that values
the law and ethics. I feel that this is my main mission. The
topic of risk just came up, and I believe it is my responsibility,from a legal perspective, to support the creation of anenvironment where risks can be taken boldly, and I hope to
improve the prospects for management. Also, it is very
important to ensure full compliance, and this is greatly
influenced by the attitude of top management. In thatregard, we have established a compliance code, and I believe
President Takahashi is demonstrating strong leadership.
Tsuchiya Corporate governance is a key part of corporate
management because if compliance problems occur, thebrand image immediately falls to zero. There is legal
compliance, of course, but there are also many social norms
that, while not legally binding, should be observed. On theother hand, free and bold ideas are needed to create
innovation. Hard law, soft law—obviously we must observe
all of these. However, I think it is important to make gooduse of the law as a solid basis for allowing the generation ofthese free ideas.
In addition, there are two things I think are important for
improving the effectiveness of governance. One is to use
hypothetical thinking. It is effective to make a hypothesis,
verify it, and then extend it. Imagine, for example, that weincorporate hypothetical thinking into the review of ourbusiness portfolio and verify it based on multiple scenarios. If
the hypothesis is wrong, I think we should be flexible
enough to modify and reverify it. The other thing is that I
would like to stimulate what I call ITS: ideas, telling, andKH Neochem’s Corporate Mission is “Realizing a brighter tomorrow for society through the power of chemistry.” With ourbusiness activities, we focus on initiatives that contribute to the environment and society, responsible care, and corporate
governance. We will continue to develop our value creation story (see page 06), systematizing our initiatives to promotesustainable management.

Seven promises to promote sustainable management

speaking. Among these, I think that speaking is the mostdifficult. Speaking has the power to persuade people andmake them want to try something, depending on the
speaker’s manner of breathing, level of commitment, andauthority. I would like to jump start discussions on thisthrough trial and error.
Kikuchi Good point. Today, as a result of Japanese companies
adopting various factors for governance, such as the
Corporate Governance Code and compliance, it is clear that
their goals are becoming increasingly vague. It’s the samewith ESG, but the most important thing is how to increase
corporate value and earn money. I want to evolve so that I
don’t forget that perspective.
Miyairi The Corporate Governance Code is a guiding
principle, and I believe that in order to make governanceeffective, the Board of Directors must make judgements
based on thorough discussions. Mr. Tsuchiya said that
hypothetical thinking is important, and in addition to that,
I think we should also make use of goal thinking. A
hypothesis-based methodology will produce a number of
options, but it is difficult to determine which ones are
best and to prioritize them without solid thinking about
the end goal.
Tsuchiya As an organization, the level of acceptance for how tohandle diverse perspectives is important as a barometer ofcorporate culture. I think that’s possible for us.
Miyairi I specialize in creating corporate and organizational
cultures, so I would like to be helpful on that front. It is
important for a company’s senior management to bemonolithic (have a single purpose), but rather thanmonolithic in the sense of sharing the same view, it is crucial
to head toward the same big goal and to create relationshipsthat make it possible to have constructive discussions basedon relationships of trust. In the future, even if done remotely,
I think we need to directly reflect voices from the frontlines
together with the general feeling of the group. I want tomake the Board of Directors a body where we can all havedetailed discussions from a management perspective while
venturing into each other’s domains in a healthy way.
*This roundtable discussion was held online in May 2021 with the view of
preventing the spread of COVID-19.

36

KH Neochem Report 2021 (Integrated Report)

Through our business operations, KH Neochem creates value for society that supports the development of an environmentallyconscious world and a richer life for people based on the foundations of safety, security, and trust. We have made sevenpromises to our stakeholders that contribute to sustainable societies and continued growth for our Company. By honoringthese seven promises, we intend to promote sustainable management.

Seven Promises
We will develop businesses that help resolve social issues

An
environmentallyconscious world

 e will conduct business conscious of reducing our impact
W
on the environment

A richer life
for people

 e will strive to secure trust through safe and stableW
operations
 e will practice management transparency with highWethical standards
Safe, secure,andtrustworthy

 e will provide a lively work environment that motivatesW
and rewards diverse human resources.
We will promote responsible supply chain management
We will strengthen our earning power

Practicing sustainable management
To date, we have held CSR Promotion Meetings twice ayear—attended by full-time officers and managers of related
divisions—to discuss our approach toward CSR across theentire Company. We also invited experts in ESG and theSDGs to give us their frank and honest opinions.
Since 2019, we have increased discussions among
officers on establishing our value creation story. In addition,
for formulating the Fourth Medium-Term Business Plan
(FY2022–2024), we established a working group on ESG and
the SDGs, employee engagement, and DX to accelerate
discussions, with an eye to practicing sustainable
management.
In the future, we will set out materiality (key issues) inline with our seven promises, incorporating materiality into

the Fourth Medium-Term Business Plan to steadily tackle allof the issues. We will also consider a system for promoting
sustainable management.

A meeting with Professor Hidemitsu
Sasaya of Chiba University of Commerce

Officers discussing
our value creation story

Specific roadmap on materiality (key issues) for formulating the Fourth Medium-Term Business Plan

Understand andorganize issues
 larify the issues based on
Cmegatrends

ExamineappropriatenessExamine priorities

E xamine issues from theperspective of stakeholders

 ap out priority matters forMreportingE xamine issues for eachvalue chain

 ap out materialityMcandidates and discuss
priorities

Specify materiality iscuss at the Board ofD
Directors

Specific initiatives related
to materiality will beincorporated into the
Fourth Medium-TermBusiness Plan
(fiscal years 2022 to 2024).

KH Neochem Report 2021 (Integrated Report)

37Corporate GovernanceCorporate Governance

Basic conceptual approach

Number of Directors

Number of Audit & Supervisory
Board Members

Number of the Board of
Directors Meetings Held in
Fiscal Year 2020:

Internal

Independent outside

3

8

Internal

Outside

5

1

3

16

2

Number of Directors and Audit &Supervisory Board Members

Nomination and Compensation
Committee (Number of members)

FemaleInternal

2

11

3

9

1

4

OutsideMale

Number of Meetings of Audit& Supervisory Board Meetings
Held in Fiscal Year 2020:

12

Chaired by outside director

See the KH Neochem website for details on corporate governance and internal control.

https://www.khneochem.co.jp/en/ir/governance/*Note: The numbers for the Board of Directors, Audit & Supervisory Board, and Nomination and Compensation Committee are as of June 30, 2021.

Overview of Corporate Governance Structure
General Meeting of Shareholders
Appointment& dismissal

Appointment
Reporting& dismissal
Supervision

Board of Directors

Nomination andCompensation Committee

Audit & Supervisory Board(one-half or more outside members)(one-third of the members are outside directors)

Consultation Proposal

Appointment/dismissal/supervision Reporting

Supervision and instruction

Management
Committee

ReportingCorporate Officers

Cooperating

Accounting Auditors
Evaluation& dismissal
Accounting
auditSupervision
Cooperating(More than half of the membershipcomposed of outside directors)

President and Chief Executive Officer

Appointment& dismissal

Cooperating

Executive Board directors
Supervision
Supervision Reporting

Business
Coordination Board

Auditing Division
Environmental
and Safety Committee
Quality AssuranceCommittee
Advice & guidance

Division Heads
Operating DepartmentsT o strive for substantive assurance of the rights and equality of
our shareholders and engage in constructive dialogue
with them.
To disclose accurate financial information and non-financial
information that is useful in constructive dialogues with ourshareholders and other similar purposes, with appropriate
timing and in a readily understandable format.
To strive toward appropriate cooperation with stakeholders
other than our shareholders.
For corporate executives and the Board of Directors to provide
leadership for building a corporate culture of respect for therights and perspectives of our various stakeholders and for
ethics in business activities.
For the Board of Directors to the its responsibility to exercise
effective supervision from an independent perspective over the
execution of duties by corporate executives, to make every
effort to develop an environment that supports corporate
management risk-taking, and so on.

Board of Directors
The Board of Directors of KH Neochem promotes sustainablegrowth and improvement of medium- to long-term corporate
value and works to build and operate an appropriate corporate
governance structure while functioning as an operational
decision-making body on items in laws, regulations, and the
Articles of Incorporation, as well as important management
matters. It also functions as a supervisory body over the
execution of duties by the executive directors. As a rule, theBoard of Directors meets regularly (once a month). Extraordinary
meetings of the Board of Directors can be convened as necessary
to deal with urgent management issues.

Composition of the Board of Directors

Directions
Reporting

Guided by the Corporate Mission “Realizing a brighter
tomorrow for society through the power of chemistry,” the KH
Neochem Group is committed to realizing sustained growth;
medium- to long-term increases in corporate value; and soundmanagement that assures transparency and fairness. To achievethese goals, we are building and improving a corporate
governance structure that reflects the points outlined below.

Internal
audit

The Board of Directors at KH Neochem comprises eightexecutive directors, including three outside directors (one isfemale) who are independent officers. We believe this is anappropriate size for promoting diversity, including gender issues,and for swift decision-making. We have developed a skills matrix
to ensure that all of the capabilities that contribute to the
management of our business are provided by Board members,
including company management; knowledge of our industry;
manufacturing, R&D, and innovation; finance and accounting;sales and marketing; governance, compliance, and risk
management; and HR development and diversity. We are also
monitoring the composition of the Board as a whole so that
there is a well-balanced and diverse representation of experienceand expertise.

Audit & Supervisory Board and Audit& Supervisory Board Members
Audit & Supervisory Board members meet with the Board of
Directors, Management Committee, and other important
committees, where they audit the execution of duties by executive
directors with the performance, including, but not limited to,stating their views as required, examining important documents
under consideration for approval. They also take steps for mutual
coordination with the Auditing Department (see page 38) andaccounting auditors by regularly exchanging views and information,
holding discussions with them, and so on.
The KH Neochem Audit & Supervisory Board has three members,
including two outside members. As a rule, the Audit & Supervisory
Board holds regular meetings once a month and also holds
extraordinary meetings as necessary. They take steps for mutual
information sharing with Audit & Supervisory Board members,
formulating auditing plans, examining audit implementation status
and audit results, and engaging in related activities.

Nomination and Compensation Committee
KH Neochem has established a discretionary Nomination andCompensation Committee with an outside director as the chairand more than half of the members are outside directors. This
committee acts as an advisory body to the Board of Directors to
reinforce the independence, objectivity, and transparency of
directors’ actions and deliberations on the nomination andcompensation of executive directors and executive officers.
Discussions in 2020 focused on the following three points:(1) Policy on decision-making for compensation, etc., for individual
Board members and changes to the compensation plan withmore weight on performance-linked share-based compensationfor Board directors (excluding outside directors). (2) Changes tocontract formats for corporate officers (from employment
contracts to service agreements). (3) Introduction of a new
performance-linked share-based compensation plan forcorporate officers. (Reports on all of these points are tabled at
Board of Directors meetings for decision-making.)

Outside Directors and Outside Audit & Supervisory Board members
All outside directors and outside Audit & Supervisory Board
members satisfy the requirements for independence set out by
the Tokyo Stock Exchange.The outside directors make use of theirabundant work experience and high level of professionalism toexpress their views actively and directly from an objective andbroad standpoint to ensure that management judgments are notbiased by internal points of view. They also offer constructive
advice and oversight.Outside Audit & Supervisory Board members
have rich experience, broad insight, and considerable expertise,
and they conduct audits fairly and objectively.

Board of Directors and Audit & Supervisory Board Members

38

KH Neochem Report 2021 (Integrated Report)

KH Neochem Report 2021 (Integrated Report)

39

Corporate GovernanceInitiatives to Increase the Effectiveness of the Board of Directors

Officers’ Compensation

Strengthening the Governance Structure

KH Neochem has established a discretionary Nomination andCompensation Committee. This committee deliberates on thepolicy and standards of officers’ compensation, etc. as well as
performance evaluation from the standpoint of ensuring theappropriateness of compensation levels and transparency. It also
checks everything up to the calculation of individualcompensation for each officer. Compensation for directors(excluding outside directors) includes monetary compensationand performance-linked, share-based compensation, and thebasic policy is as follows:

Measures

Objectives

2021

Transfer operational execution authority and changes tocontracts for corporate officers
Enlarge applicable areas in performance-linked stockcompensation system and introduce this for corporate officers

Accelerate decision-making in business execution
Reviews in directors’ remuneration

2020

Added one independent outside director
Appointed a female Audit & Supervisory Board member

Strengthened the supervisory functions of the Board of Directors
Enhancing diversity within the Board of Directors

2019

Appointed a female Board director

Enhancing diversity within the Board of Directors

2018Introduction of performance-linked stock compensation system

Directors’ remuneration review

2017Starting evaluations of effectiveness of the Board of Directors
Added one independent outside director

Continually improved the effectiveness of the Board of Directors
Strengthened the supervisory functions of the Board of Directors

2016Issued corporate governance reportAppointed one independent outside director
Establishment of Nomination and Compensation Committee

Improved transparency
Strengthening the supervisory function of the Board of Directors

Indicator for Performance-linked Compensation2014

Voluntarily setting up a Compensation Committee

Strengthening the supervisory function of the board of directors
and improving transparency

2013Introduction of executive officer system

Separation of management and business execution

KH Neochem has introduced performance-linked
compensation for directors (excluding outside directors), bothmonetary and share-based, and uses consolidated EBITDA*
as the indicator based on the characteristics of our business.

Evaluation of Effectiveness of the Board of Directors
The effectiveness of the Board of Directors is evaluated once a year with advice from an external agency. The members of the Board of
Directors consider specific improvements based on the results, and ongoing efforts are made to improve the functioning of the Boardby implementing those measures.

Process

1. Conduct questionnaire survey of all members of Board of Directors and Audit & Supervisory Board
2. Outside agency collates results
3. Members of the Board of Directors conduct analysis, discussion, and assessment
4. Brainstorm necessary improvements and implementation of countermeasures
The roles, composition, and status of operations of the Board of Directors have earned a mostly positive
assessment, and we recognize that overall effectiveness has been secured.
One of the strengths of our Board of Directors is the diversity of our members, including the gender balance;
this allows the Board to have vigorous discussions that draw on each member’s wide-ranging skills, extensive
experience, and different specialties.
However, the officers have discussed countermeasures to address the following three issues from the standpointof further reinforcing the effectiveness of the Board of Directors:

Assessment
results andcountermeasuresfor
improvements

Agenda setting for discussions on medium- and long-term strategy
Agenda setting to improve supervisory functions
Leveraging more strengths of the Board of Directors
Based on the identified issues, the officers made the following operational improvements:(1) Hold planned discussions in Board of Directors’ meetings and other forums on key themes related to theconstant improvement of corporate value, including basic policies for business management (medium- andlong-term business strategies and policies)(2) The Board of Directors regularly reports on the progress of important investment projects until they arecompleted, confirms the operational status of the internal control system, systematically sets agenda items
such as compliance and risk management, and continues implementing and strengthening managementmonitoring(3) Clarify the expected roles of Board members by using a skills matrix, provide on-going executive educationthat reflects changing social needs, and establish executive training programs, especially for outside directors,
that can be implemented even under special circumstances like a pandemic40

KH Neochem Report 2021 (Integrated Report)

Provide sufficient incentive to improve medium- to long-term performanceand increase corporate value
Ensure competitiveness to secure diverse and outstanding human resources
Share interests with shareholders and other stakeholders

Monetary Compensation
Around 30% of all monetary compensation is performancelinked, and it is calculated using the rate at which planned
earnings are achieved and the average achievement rate overthe past five years.

Performance-linked, Share-based Compensation
Performance-linked, share-based compensation is calculatedusing the rate at which planned earnings are achieved on thecondition that consolidated operating income is in the black.
While putting more priority on performance, this compensation
system clarifies the link with the stock price, providing directors
with both benefit from increases in the stock price and the riskof decreases in the stock price with shareholders, thereby
increasing awareness of contributing to improvement of
medium- to long-term performance and increasing ofcorporate value.
Outside directors and Audit & Supervisory Board members
receive only monetary compensation (fixed monthly amount)based on their roles and to ensure independence.

* EBITDA is calculated using the following formula: EBITDA = Operating income + depreciation and amortization + amortization of goodwill(the amount from the consolidated statement of income is used for operating income, while the amount from the consolidated statement of cash flows is used
for amortization of goodwill).

Total Amount of Compensation by Officer Classification, Total Amount of Compensation by Category,and Number of Officers Subject to Compensation (2020)
Officer classification

Total amount ofcompensation(million yen)

Total amount of compensation by category (million yen)
Share-based
Monetary compensationcompensation
Fixed
Performance-linked Performance-linked

Number of officers
subject tocompensation

Directors (excluding outside directors)

135

88

37

9

6

Audit & Supervisory Board members(excluding outside members)

19

19

–

–

1

Outside directors

21

21

–

–

4

Outside Audit & Supervisory Board
members

13

13

–

–

4

Notes: 1. The amount of directors’ compensation was resolved at 200 million yen or less annually (excluding the employee portion of salary for directors who are also employees) at theExtraordinary General Meeting of Shareholders on March 31, 2011.
2. A performance-linked, a “Board Benefit Trust (BBT)” share-based compensation plan was introduced for directors (excluding outside directors) at the 8th Ordinary General Meeting of
Shareholders on March 27, 2018. The resolution provides that every three fiscal years, a maximum monetary amount of 110 million yen will be contributed to the trust as funds foracquiring the Company’s shares paid to eligible directors. In addition, at the 11th Ordinary General Meeting of Shareholders on March 23, 2021, a resolution was passed to continue
the performance-linked share-based compensation plan, including details on the maximum number of shares granted (up to 35,000 shares in a single business year).
3.The amount of annual compensation for Audit & Supervisory Board members was resolved at 50 million yen or less at the Extraordinary General Meeting of Shareholders on March 31, 2011.
4.The amount of share-based compensation is recorded as an expense during the fiscal year.
5. This amount of recorded compensation is rounded down to the nearest million yen.

Cross shareholdings
To improve corporate value, KH Neochem owns shares incompanies considered important for maintaining medium- andlong-term business connections and synergies that are based onan understanding of the importance of each other’s
management policies, business lines, and business dealings.
Approximately 50% of investment shares on the balance sheet
are unlisted shares, of these approximately 90% are shares inaffiliated companies acquired through joint investments in key
materials manufacturers and in management companies forjoint industrial complexes. For shares in listed companies, KH
Neochem reviews the rationale for each shareholding, including
appraisal losses and gains, compliance status, and businessdealings with the Company. Decisions are made based on an
effective balance between the cost of capital and contributions
to KH Neochem earnings, or from comprehensive and mediumor long-term perspectives, including access to market
information or R&D initiatives. These decisions are verified by
the Board of Directors every year.
KH Neochem Report 2021 (Integrated Report)

41

Corporate GovernanceRisk Management
Risk Management System

Business Continuity Management (BCM)

All of our business divisions engage in risk assessment byidentifying risks that could affect business activities of the KH
Neochem Group as a whole, calculating the risk level based on
the impact and probability of occurrence, and conducting anassessment.
Consequently, those business divisions discusscountermeasures to prevent any occurrence and to reduce theimpact of risks at the highest level. Meanwhile, management
reviews the appropriateness of risk assessments and thecountermeasures, and identifies material business risks to discussand determine what action to take. In these and other ways, we
are working to ensure thorough risk management.

KH Neochem supplies many customers with products that are
essential for production in a wide range of industries and thesocial lives of citizens.
For that reason, we believe that we have a very important
responsibility to maintain and continue our business activities
and achieve an early recovery in the event of a large-scaledisaster. Each of our workplaces has formulated a business
continuity plan (BCP), and we steadily implement advancemeasures and carry out employee education and training toensure that these BCPs will function effectively in the event ofan emergency. We also inspect and revise the BCPs as part ofour business continuity activities.

Identify
risks

Implementationof countermeasures

KH Neochem has formulated a Compliance Code that provides shared principles of corporate behavior
for the whole Group. The purpose of this code of conduct is to fulfill our corporate policy obligations,achieve management targets, and support sustainable growth.
Through our work to build and improve the systems and organizational structures needed to
implement the Compliance Code, we have expanded our systems of governance, taken a highly ethicalperspective, and strived to act as a company that meets the needs and expectations of all stakeholders.
The goal is to continually improve our corporate value.

As a member of society igh ethical standards
HRespect for human rights
Contribute to society andenvironmental conservation

 igh quality
HProhibition of bribery

Management

Full version

Compliance CodeToward our shareholders and investors

 aintain and improve safe andMstable operation
Contribute to local community
No relationship with anti-social
forcesProhibition of insider tradingConstructive
dialogue and appropriate
information disclosure

Toward our customers

Discuss
and report

Particular risks specific toeach business division

Formulation of a Compliance CodeAs a member of KH Neochem GroupSuitable management of information assets

F air tradeAppropriate management ofintellectual property

 aintenance and improvement of aM
comfortable workplace environment

Directions

Policy Formulation

Compliance

In order to ensure the implementation of theCompliance Code, we will formulate a policy thatclarifies specific actions in each field and the content tobe observed, and will comply with the rules based on
the policy.

Regulations/manuals, etc.

Compliance Structure

Hotlines
KH Neochem has established confidential and anonymous
hotlines for executives and employees to be able to discuss andreport problems or concerns with compliance.
Specifically, we have set up the Compliance Hotline, theCompliance Officer Hotline, and the Full-time Corporate Auditor
Hotline for employees, and have established the Attorney
Hotline outside the Company. We have also set up a point ofcontact on our corporate website that can be used by thegeneral public.

42

KH Neochem Report 2021 (Integrated Report)

Further clarificationof content to ensure
proper practice of theCompliance Code.

Policies

Measures for Compliance
KH Neochem has revised compliance rules and established thecompliance structure shown on the right to both strengthen the
structure and further increase the effectiveness of theimplementation.
The position of compliance officer has been established toassign responsibility for these matters, including swift
investigation and preparing appropriate countermeasures.
At compliance promotion meetings, compliance officers
encourage compliance, carry out educational activities, andconduct training, etc.

Our principles ofCorporate Behavior

Compliance Code
Bribery Prevention

In the workshop, formulating a BCP (in 2019)

Procurement

Selection of material
business risks

Privacy

Formulatecountermeasures

Information Security

Evaluaterisks

Chief Compliance Officer
President
Supervisionand instruction

Supervision

Cooperating

Activities for Dissemination

Board ofDirectors

ReportCompliance Officer
Convocationand management

ReportAudit &
Supervisory
Board Members

Implementation ofpromotion measures/
reportingCompliance Promotion
Meeting
Compliance StructureInternal and External Disclosure

Compliance Book

The Compliance Code is available on
our corporate website. Internally, theCode has been widely distributed on
our intranet and via in-housenewsletters, so that the Code content
can be accessed at any time.

To ensure employees have a fullunderstanding, we have produced theCompliance Book with visual images
plus specific examples. From July 2021,
the Compliance Book will be used for
education and discussions across all
workplaces to ensure that every
employee puts the Code into practice.

Compliance Promotion Meeting
Compliance promotion meetings areheld to talk over compliance concernsand how to address them, to discuss
action plans for the coming year, andto conduct training. In fiscal year 2020,
meetings were held to achieve a
deeper understanding of theCompliance Code through discussions
on how to effectively publicize theCode for implementation in all
workplaces.

KH Neochem Report 2021 (Integrated Report)

43

Members of the Board (as of June 30, 2021)

Directors
Representative Director President & CEO
Chief Executive Officer

Board Director
Senior Corporate Officer

14Michio Takahashi

Independent Outside Director

Masaya Hamamoto

Apr. 1985	Joined The Industrial Bank of Japan, Limited. (nowMizuho Bank, Ltd.)
Apr. 2011	General Manager of Osaka Corporate Banking Division
No. 1 of Mizuho Corporate Bank, Ltd. (now Mizuho
Bank, Ltd.)
Apr. 2014	Executive Officer and General Manager of Corporate
Banking Division No. 5 of Mizuho Bank, Ltd. (retired in
March 2015)
Apr. 2015	Executive Officer of IBJ Leasing Company, Limited. (nowMizuho Leasing Company, Limited)
June 2015	Director, Executive Officer and General Manager ofCorporate Planning Department of IBJ Leasing
Company, Limited.
Apr. 2016	Managing Director, Managing Executive Officer andGeneral Manager of Corporate Planning Departmentof IBJ Leasing Company, Limited. (retired in May 2019)
June 2019	Joined the Company
Sept.2019	Senior Executive Officer of the Company
Mar. 2020	Board Director & Senior Corporate Officer & Chief
Financial Officer of the Company (to present)

Apr. 1987 Joined Kyowa Hakko Kogyo Co., Ltd.
July 2011	President of Basic Chemicals Division of
Kyowa Hakko Chemical Co., Ltd. (now the
Company)
Mar. 2013	Director and Executive Officer of theCompany
Mar. 2016	Managing Director and Executive Officerof the Company
Mar. 2017	Executive Vice President & Executive
Officer of the Company
Mar. 2019	Representative Director, President andExecutive Officer of the Company
Mar. 2020	Representative Director, President andChief Executive Officer of the Company (topresent)

Board Director
Senior Corporate Officer

Board Director
Corporate Officer

2

5

Toshihiro Matsuoka

Apr. 1987	Joined Kyowa Hakko Kogyo Co., Ltd.
Apr. 2008	General Manager of Production
Administration Division of Kyowa Hakko
Chemical Co., Ltd. (now the Company)
June 2011	General Manager of Yokkaichi Plant of theCompany
Apr. 2013	Executive Officer of the Company
Mar. 2014	Director and Executive Officer of theCompany
Mar. 2018	Managing Director and Executive Officerof the Company
Mar. 2020	Board Director & Senior Corporate Officerof the Company (to present)

Audit & Supervisory
Board Members

6

Sayoko Miyairi

9Apr. 1979	Joined Hitachi, Ltd.
July 1982	Joined Bank of America, N.A., Asia Headquarters
Mar. 1986	Joined Pasona Inc. and seconded and then transferred to Edu Consult Co.,
Ltd. (now Scholar Consult Co., Ltd.)
Apr. 2000	Partner of Scholar Consult Co., ltd. (to present)
Apr. 2000	Assistant Professor of Nihonbashi Gakkan University (now Kaichi
International University)
Jan. 2005	Director of Scholar Consult Co., ltd.
Apr. 2008	Professor of Nihonbashi Gakkan University (now Kaichi International
University) (to present)
Mar. 2019	Outside Director of the Company (to present)
Aug. 2020	Outside Director of Toyo Engineering Corporation (to present)

10

Kazuhiro Kawai

Audit & Supervisory Board Member(Independent Auditor)
11

Keiko Tamura

Audit & Supervisory Board Member(Independent Auditor)

Seiji Saito
7

Apr. 1987	Joined Toaboshoku Co., Ltd.
Aug. 2000	Joined YIC Co., Ltd.
Oct. 2001	Joined Kyowa Hakko Kogyo Co., Ltd.
Jan. 2016	General Manager of Yokkaichi Research Laboratories,
R&D Office of the Company
Dec. 2017	General Manager of R&D Office andGeneral Manager of Yokkaichi Research Laboratories,
R&D Office of the Company
Jan. 2018	Executive Officer of the Company
Mar. 2019	Director & Executive Officer of the Company

Audit & Supervisory Board Member

Corporate Officers
General Manager, Yokkaichi Plant

Independent Outside Director

Yukihiro Isogai

Tokuo Oodo

Toshiaki Ogata

Jun Tsuchiya

Apr. 1981	Joined Argonne National Laboratory, U.S.A.
May 1983	Joined Lawrence Berkeley National Laboratory, U.S.A.
Feb. 1984	Joined Mitsubishi Chemical Industries Limited (now Mitsubishi Chemical
Corporation)
Jan. 1999	Seconded as President to Verbatim Corporation, U.S.A. subsidiary of
Mitsubishi Chemical Limited (now Mitsubishi Chemical Corporation) as asecondment
Apr. 2001	General Manager of Corporate Planning Office of Mitsubishi Chemical
Industries Limited (now Mitsubishi Chemical Corporation) (retired in
January 2002)
Feb. 2002	Director of Rohm & Haas Japan K.K. (now Dow Chemical Japan Limited)(retired in December 2006)
Jan. 2007	Representative Director and President of Heraeus K.K. (retired in
September 2018)
Oct. 2018	CEO of Tsuchiya International Consulting Corp. (to present)
June 2019	Outside Director of Soken Chemical & Engineering Co., Ltd.
Mar. 2020	Outside Director of the Company (to present)

President of Kurogane Kasei Co., Ltd.

Akio Nakahashi

General Manager, Chiba Plant

Yoshiaki Kondo

Head of Environment, Safety
and Quality Assurance

Hideki Shimizu

Head of Corporate Planning

Isao Takahashi

Head of Corporate Administration,
Public Relations, Legal and Compliance
Board Director
Senior Corporate Officer
3

Independent Outside Director
8

Tatsuro Niiya

Skills matrix:

Specialties and experience provided by the Board directors and Audit & Supervisory Board members

Directors
Audit &
Supervisory
Board Members

44

1Michio Takahashi

2

Toshihiro Matsuoka

3

Tatsuro Niiya

4

Masaya Hamamoto

5

Yukihiro Isogai

6

Sayoko Miyairi

7

Jun Tsuchiya

8

Yuji Kikuchi

9Tokuo Oodo

Company
management

10 Kazuhiro Kawai

Knowledge ofindustry

Manufacturing
R&D
Innovation

Head of Accounting, FP&A, Finance and IR

Apr. 1992	Registered as an attorney at law Entered Sakano, Seo & Hashimoto Law
Office (now Tokyo Hatchobori Law Office)Apr. 2002	Partner of Tokyo Hatchobori Law Office
Mar. 2003	Joined the Securities and Exchange Surveillance Commission (Coordination
and Inspection Division, Executive Bureau)
Mar. 2005	Returned to being a partner at Tokyo Hatchobori Law Office (to present)
June 2010 	Outside Audit & Supervisory Board Member of Inui Warehouse Co., Ltd.
(now Inui Global Logistics Co., Ltd.)
June 2014	Outside Audit & Supervisory Board Member of NEC Networks & System
Integration Corporation (to present)
Mar. 2020	Outside Director of the Company (to present)

Apr. 1988	Joined Kyowa Hakko Kogyo Co., Ltd.
July 2013	General Manager of Chemical Sales &Marketing Division, Business Headquarters
Office of the Company
Jan. 2016	Executive Officer of the Company
Mar. 2017	Director & Executive Officer of theCompany
Mar. 2019	Managing Director & Executive Officer of
the Company
Mar. 2020	Board Director & Senior Corporate Officerof the Company (to present)

Name

Akira Kamimura

Yuji Kikuchi

Finance andaccounting

Sales andmarketingGovernanceCompliance
Risk management

HRdevelopment
Diversity

Atsushi Tokumitsu
Head of Procurement

Katsunori Sato

Head of Sales & Marketing

Training members of the Board of Directors/Audit & Supervisory Board

We have continually provided training opportunities for
Board directors and Audit & Supervisory Board
members. In 2020, we invited Professor Emeritus Kunio
Ito of Hitotsubashi University and Professor Hidemitsu
Sasaya of Chiba University of Commerce, both
specialists in ESG and SDGs, to hold a frank discussion.
We also arranged for a legal expert to provide executive
compliance training and give a more in-depth
understanding of compliance risk.

Professor Emeritus Kunio Ito of Hitotsubashi University at the discussion

11 Keiko Tamura

KH Neochem Report 2021 (Integrated Report)

KH Neochem Report 2021 (Integrated Report)

45

Responsible Care

Action plan for industrial safety and responsible care-related data for our plant are available on our website: https://www.khneochem.co.jp/en/csr/rc/

Fiscal Year 2020 RC Program Objectives and Results together with Fiscal Year
2021 Objectives

Basic conceptual approach: Achieved

Responsible Care (RC) refers to the autonomous management activities thatbusiness operators who manufacture or handle chemicals carry out to implement
and take steps to improve environmental, safety, and health measures throughout
all processes involving chemicals, from development through manufacturing,
physical distribution and use, to final consumption and disposal.
KH Neochem has adopted an RC Program Policy and is implementing
Responsible Care.

: Almost achieved

Fiscal year 2020

RC codeObjective: Unachieved

Fiscal year 2021

Actual results

Evaluation

Objective

Environmental
conservation

Environmental accidents: 0

Environmental accidents: 0

Environmental accidents: 0

Safety anddisasterprevention

Safety-related accidents: 0

Safety-related accidents: 4

Safety-related accidents: 0

Employee accidents resulting in lost workdays: 0
Occupationalsafety andhealthRC Program Policy and System
RC Program System

KH Neochem has established the RC Program Policy and pursues
business activities with commitment first and foremost to fulfilling
responsibility to society as a corporation. We do this in order tocontinue being a chemical manufacturer that provides distinctive
products in a variety of sectors and that supports the global
environment, as well as comfortable lives for people aroundthe world. What is required of chemical manufacturers, above all,is to operate their plants safely, and so we have formulated theFundamental Policy for Safety Management to implement athoroughgoing response to that requirement, and we are making
every effort to assure the security and safety of our operations.

KH Neochem has established an Environmental and Safety
Committee with the president as chair and the executive
officer in charge of safety management as vice chair, and theCompany is implementing an RC program. Activities are being
pursued at every operating facility in accordance with the RC
Program Policy and the Fundamental Policy for Safety
Management determined by the Environmental and Safety
Committee.

Chair: President

RC program policy	In addition to international regulations and domestic laws andregulations, we will comply with KH Neochem rules and regulations.

Corporate Headquarters
Osaka Branch Office
Yokkaichi Plant

Vice chair: Executive officer in chargeof safety management

Compliance

Secretariat: Environment Safety& Quality Assurance Division

Environmental conservation

Chiba Plant
Sakai Logistics Center
KH i-Lab	We will make every effort to reduce the environmental impact of our
products at every stage from development to disposal.

 afety and disaster prevention and occupational safety
Sand health	We will maintain our record of zero accidents and disasters, making
every effort to assure safety, peace of mind, and health for regions andcommunities, as well as for everybody who works at KH Neochem.

Physical distribution safety and chemical and product safety	We will acquire the most up-to-date safety information on thechemical substances and products that we handle, and we will provide
the correct information to customers, to the people involved in physicaldistribution, and to the people who work at KH Neochem.

Dialogue with society	We will contribute to regions and communities by engaging in
dialogue and communication with them regarding the environment,
safety, and health.

Fundamental policy for safety management
 e will unfailingly comply with all that we have decided based onWcompliance with all laws and regulations regarding safety.
We will work to prevent accidents by always looking out for danger.
 e aim to improve our level of safety management through constantW
improvements to the safety management system.
 e work on training and education to promote the safety activities
Wof our employees and other related personnel.

46

KH Neochem Report 2021 (Integrated Report)

Work-related accidents: 0

 ccidents at cooperating companies resulting inAlost workdays: 1 (Chiba Plant)

Work-related accidents: 0

 ccidents at cooperating companies not resulting inAlost workdays: 7 (Yokkaichi Plant and Chiba Plant)

RC Program Policy

Environmental and
Safety CommitteeE mployee accidents not resulting in lost workdays:
1 (Yokkaichi Plant)

Inspections and Audits

Inspections underway(Photos show the 2019 inspections. In 2020, inspections were done remotely.)

Environment safety inspections and quality audits
At KH Neochem, periodic environment safety inspections of the
Yokkaichi Plant, Chiba Plant, and Sakai Logistics Center are
conducted by the Environment Safety & Quality Assurance
Division at corporate headquarters under the direction of theexecutive officer in charge of safety management.
Periodic quality audits are also similarly conducted under the
direction of the executive officer in charge of quality assurance.
The environment safety inspections and quality audits involve
evaluation of RC activities at our operating facilities.

Internal audit of plants
The Yokkaichi Plant and the Chiba Plant conduct internal audits
for ISO 9001*1 and ISO 14001*2 as well as for accreditation as
high-pressure gas inspection executors (completion inspection
and safety inspection)*3 based on safety management systems.
Environment safety inspection (Yokkaichi Plant)

Status of Certification Acquisition
The Yokkaichi Plant and the Chiba Plant have acquired
certifications for quality management systems (ISO 9001) andenvironmental management systems (ISO 14001). These plants
are maintaining their certification and promoting RC programsin line with those systems, and both have made the transition
to the new ISO 9001 and ISO 14001 standards (2015 versions).
Plant
Yokkaichi
Plant

Chiba
Plant

Certification acquired
ISO 9001

January 1999

ISO 14001

July 2000

ISO 9001

December
1998

ISO 14001

November
2000

Current certification body

External audits
The Yokkaichi Plant and the Chiba Plant undergo external audits(maintenance audits and renewal audits) based on ISO 9001*1
and ISO 14001*2 and are maintaining their certifications.
KH Neochem is taking continuing steps to improve RC programs
by incorporating the results of these environment safety
inspections, quality audits, internal audits of plants, and external
audits as feedback.
*1 and *2, See page 46*3 See page 51

Japan Chemical Quality
Assurance Ltd.

Environment safety inspection (Chiba Plant)

KH Neochem Report 2021 (Integrated Report)

47

Responsible Care

*Responsible Care-related data without notes, scope of aggregation and period covered are shown below.
Scope of aggregation: Yokkaichi Plant and Chiba Plant
Period covered: April 1, 2020 to March 31, 2021

Environmental Conservation
Flow of Environmental Impact Results

Global Warming Prevention

This shows an overall image of inputs and outputs that occur when manufacturing our products.

INP UTO UT P UTKH Neochem
Product
429,536t

Energy (crude oil equivalent)
Released into the atmosphere

Fuel...................................152,946kL
Purchased steam ................14,251kL

CO2 ..................................... 404,086t

Purchased electric power ....26,975kL

SOx ............................................. 0.5t
NOx ........................................ 283.8t
Dust ............................................ 4.2t

Water

Yokkaichi Plant
City water.................................. 15kt

Released into the water

Ground water ........................... 35kt

Total amount released ......... 6,233kt

Industrial water ................... 7,108kt

COD .......................................... 28.7t
T-N............................................ 10.4t
T-P .............................................. 1.8t

Raw materials
511,007t

Waste material

Energy consumption, specific consumption,
and CO2 emissions volume

Energy consumption and specific consumption
in physical distribution

As a designated business operator under the Act on the Rational
Use of Energy,*1 KH Neochem makes every effort to promoterational uses of energy. As a specified emitter under the Act on
Promotion of Global Warming Countermeasures,*2 we are also
working diligently to reduce CO2 emissions. Energy consumption
and CO2 emissions volume in fiscal year 2020 fell to 94.9% and91.8% of the respective levels in fiscal year 2019, but theenergy intensity worsened to 107.2% of the fiscal year 2019
amount, due to lower production volumes during the pandemic
and other factors. Going forward, the whole company will act
together to improve the specific energy consumption andreduce CO2 emissions.

As a designated shipper under the Act on the Rational Use ofEnergy,*1 KH Neochem also promotes the rationalization ofenergy use during physical distribution. Specific energy
consumption for logistics in fiscal year 2020 improved to 96.4%
of the prior-year amount due to increased use of trucks and ISO
containers for distribution. We will continue to work on
reducing our energy consumption in several ways, such asincreasing lot sizes and using additives to improve ship fuel.

*1. Act on the Rational Use of Energy:	
the law covering the rational usage of energy

Amount as final landfill............ 133t

Energy consumption and specific consumption
Scope of aggregation: Yokkaichi Plant and Chiba Plant
Period covered: April 1, 2020 to March 31, 2021

Environmental Accounting

Energy consumption (crude oil equivalent) (1,000 kL)
Specific energy consumption (L/t)(L/t)(1,000kL)

250

250

200

200

Environmental accounting quantitatively determines and evaluates the amounts of investment and expenses for environmental
conservation.

150

150

Environmental conservation costs

100

100

50

50

Classification(million yen)
Substance of main measures

Breakdown

Costs within business area

Investment amounts

Expense amounts

0

2,293

Air pollution prevention, water pollution prevention, etc.

(999)

(930)

Global environmental conservation costs

Global warming prevention, energy conservation measures, etc.

(57)

(170)

Resource recycling costs

Efficient use of resources, recycling of waste, etc.

(36)

(1,193)1

CO2 emissions

2016

Purchase of recycled stationery (eco-label goods), etc.

0Management program costs

Environmental management system maintenance, operation, etc.
Research and development, etc. for products contributing toenvironmental conservation, etc.
Contributions to groups engaging in environmental conservation,
support, etc.
Oil spill liability insurance, levies on pollution loads

025(1,000t)

0

148

500

0

0

400

0

6

Total

1,092

2,474

Environmental remediation costs

2018

2019

2020

(million yen)
Description

AmountSales of waste material (waste catalyst, scrap, etc.), sales of recovered containers

6

3,000

6

2,000

4

1,000

2

0

0
2016

2017

2018

2019

2020

(fiscal year)

Scope of aggregation: All KH Neochem operating facilities
Period covered: April 1, 2020 to March 31, 2021

(fiscal year)

300

100

Economic impact
Profit2017200* Some totals may not tally due to rounding

8

CFC Emissions

Upstream and downstream costs

Social program costs

4,000

0

1,092

Pollution prevention costs

Research and development costs

Energy consumption (crude oil equivalent) (kL)Specific energy consumption (L/t)
(L/t)

(kL)

*2. Act on Promotion of Global Warming Countermeasures:	the law covering the promotion of initiatives taken the measure against
global warming

Amount generated.............. 53,686t

Chiba Plant

Energy consumption and specific consumption in physical distribution

0
2016

2017

2018

2019

2020

(fiscal year)

Scope of aggregation: All KH Neochem operating facilities
Period covered: April 1, 2020 to March 31, 2021

KH Neochem is effectively managing facilities inline with the amended Act on Rational Use andAppropriate Management of Fluorocarbons
enacted in April 2015, including simple andregular inspections of Class I specified products
and calculating the volume of any leaks. In the
future, we will continue to effectively manage
Class I specified products and consider changing
to low-GWP*3 equipment when the plants arerenovated.
*3 GWP: Global warming potential

Scope of aggregation: Yokkaichi Plant and Chiba Plant
Period covered: January 1, 2020 to December 31, 2020

48

KH Neochem Report 2021 (Integrated Report)

KH Neochem Report 2021 (Integrated Report)

49

Responsible Care

Reduction of Amount Released into
the Environment

Amounts released (COD, T–N, T–P)

COD

T–N

Waste material treatment flow

T–P

(t)

Amount of waste generated: 53,686 t 100%40

Air pollutants
For the sulfur oxides (SOx), nitrogen oxides (NOx), and dust
discharged from boilers, liquid waste incinerators, sludge
incinerators, and other such equipment, KH Neochem of course
complies with emissions standards based on the Air Pollution
Control Act, and we additionally comply with levels that havebeen agreed upon with local communities.
Amounts released (SOx, dust)

SOx

Amount recycledinternally : 3,566 t 6.6%30
20Amount of waste released: 8,537 t 15.9%

10

2016

2017

2018

2019

2020

(fiscal year)(t)

Levels agreed upon with local communities and annual maximum values (kg/day)COD

6
Yokkaichi
Plant

4

Chiba Plant

2
0
2016

2017

2018

2019

2020

(fiscal year)

Amounts released (NOx)
400
300
200
100
0
2016

2017

2018

2019

2020

SOx

Dust*1

NOx

Maximum
value

Agreement
level

Maximum
value

Agreement
level

Maximum
value

1.0

Nm³/h

0.0

Nm³/h

53.3

45.5

0.025

0.002

9.0

0.1

12.0

2.3

4.5

0.5

Nm³/h

Agreement
level

Maximum
value

Agreement
level

Maximum
value

201.2

127.5

46.0

37.0

13.0

9.3

124.0

88.4

90.0

72.9

12.5

5.2

kg/h

Nm³/h

Nm³/h

kg/h

Nm³/h

g/Nm³
kg/h

Amount of waste generated, amount released, and amounttreated as final landfill

g/Nm³
kg/h

*1 Dust: At the Yokkaichi Plant, density controls are set per item of equipment.
Here, the generator boiler figure is shown as a typical example.

0
2016

2019

Water pollutants

84

2017
2018

140
124
136

2020

KH Neochem complies with emissions levels based on the Water
Pollution Prevention Act as well as with levels agreed upon withlocal communities for chemical oxygen demand (COD), total
nitrogen (T-N), and total phosphorus (T-P) in wastewater.

(fiscal year) 133

20,00030,000

Amount treated as final landfill

40,00050,00060,000(t)

51,396

8,807

Scope of aggregation: Yokkaichi Plant and Chiba Plant
Period covered: April 1, 2020 to March 31, 2021

The Yokkaichi Plant and Chiba Plant each define their own
Safety Management Policy in accordance with the Fundamental
Policy for Safety Management (see p. 46). They carry out avariety of activities to secure the safety of their plants, including
safety and environmental assessments, disaster preparedness
training, and so on.
Disaster evacuation drill for tsunami (Chiba Plant)

Safety and environmental assessment (SEA)
At KH Neochem, we conduct an SEA in advance to assess theenvironmental, safety, and health impact when introducing newtechnology, new processes, new facilities, new machinery, andnew chemical substances. By using the SEA assessment results
for feedback, we make every effort to heighten the safety ofprocesses and equipment.

Emergency training

54,825

11,337

KH Neochem conducts periodic disaster preparedness training
for emergency scenarios, as well as training in initial firefighting
response and emergency reporting. We prepare so that we canrespond promptly and appropriately, keeping damage to aminimum in the event of an emergency.

52,6108,962

53,686

8,537

1,000

2,000

3,000

Recycling rate (%)

4,000

Employees speak out

2017
2018

4,000
2019
2,000

Environment and Safety
Section, Chiba Plant

2020(fiscal year)

0
2016

50

2017

2018

KH Neochem Report 2021 (Integrated Report)

2019

2020

(fiscal year)

Accreditation as high pressure gas inspection executors(for both completion inspection and safety inspection)
This system, instituted by the High Pressure Gas Safety Act,
enables companies that are recognized to have high standards
for safety management, operations management, andequipment management, to conduct their own completion
inspections and safety inspections in accordance with the High
Pressure Gas Safety Act.
The Yokkaichi Plant has acquired this accreditation for six
manufacturing facilities and the Chiba Plant has acquired it forone manufacturing facility. Both plants take steps forcontinuing improvement by implementing the plan-do-checkaction (PDCA) cycle.

Processes involved in renewing high-pressure gas accreditation

(t)

2016

6,000

Marine disaster prevention drill (Yokkaichi Plant)

Safety and Disaster Prevention
Measures

54,705

9,958

Recycled amount (t)

0

8,000

*Some totals may not tally due to rounding

Recycled amount and recycling rate

Amount released (total effluent discharged)(kt)

10,000

Amount released

Amount treatedexternally as final landfill:133 t 0.2%

Amount reduced
externally: 8,085 t 15.1%

Safety and Disaster Prevention

Waste material

Amount generated

Agreement
level

Chiba Plant

T–P

Maximumvalue(fiscal year)

Levels agreed upon with local communities and annual maximum values

Yokkaichi
Plant

T–N

Agreementlevel

At KH Neochem we implement thoroughgoing separation ofwaste materials and engage in the 3Rs of waste management:
reduce, reuse, and recycle. We are moving forward to reuse acidwaste and alkaline waste in our plants as well as to reduce theirvolume, to contract recycling treatment of waste catalysts, andto reuse incinerator waste as aggregate. For waste material thatcannot be reused or recycled, we are making every effort totreat it to reduce the volume and to reduce the amount that
goes to a landfill.

(t)

Disaster prevention comprehensive drill (Yokkaichi Plant)

Amount recycled: 319t 0.6%
externally

0

Dust

8

Amount treatedinternally as final landfill: 0 t 0.0%

Amount reduced
internally : 41,583 t 77.5%

0

3

6

9

12

(%)

Hideaki Maita

At the Chiba Plant, We have to renew the high-pressure gas accreditation every five years, and this accreditation wasdue for renewal in fiscal year 2020. As the person responsible for compliance with the High Pressure Gas Safety Act,it was busy and productive for me in fiscal 2020.
We need continual improvements in safety management systems through the participation of every employee if
the plant is to maintain or improve on the safety levels required by high-pressure gas inspectors. Our systems need
to be approved by the Ministry of Economy, Trade and Industry and the High Pressure Gas Safety Institute of Japan.
Accreditation renewal in fiscal 2020 had to be done remotely due to the COVID-19 pandemic, so preparations weredifficult, but with the help of departments and sections at our corporate headquarters, I managed to renew theaccreditation without any problems. This accreditation renewal process provided me with a good opportunity toreview our activities to date and identify current issues.
Measures to ensure security and safety are never-ending, but we aim to be highly focused on our current work
to maintain accident- and disaster-free operations.

KH Neochem Report 2021 (Integrated Report)

51

Responsible CareSee page 32 for more information on measures by both labor and management to ensure safety.

KH Neochem is working to contribute to society for the sustainable development of society. We are strengthening our approachto community service by emphasizing activities with deep local roots in Yokkaichi City, Mie Prefecture and Ichihara City, Chiba
Prefecture in particular, where our plants are located.

Occupational Safety and HealthOccupational Safety and Health Measures
KH Neochem conducts risk assessments*1 in order to assure thesafety of employees and personnel engaged in work at ourplants, as well as to take preventive action against disaster. We
also conduct case studies on accidents and disasters that haveoccurred in the past, whether in the Company or elsewhere,
and we make every effort to prevent the occurrence of similar
accidents or disasters. We also engage in risk prediction activities
using hiyari hatto, close call recognition, and kigakari memo,
memos on matters of concern, improvement suggestion
programs, and other everyday health and safety activities.
A revision of the Industrial Safety and Health Act has also
made it mandatory to conduct risk assessments*2 of chemical
substances. We began administration of these assessments
when the amended law went into effect on June 1, 2016.
For projects defined under the regulations as high risk, if anyof these assessments reveal a risk, measures to manage the risk
are decided through discussions between workers andmanagement at Health and Safety Committee meetings.
*1 Risk assessment: 	This refers to a series of techniques for identifying the risks and hazards inwork, determining the seriousness and likelihood of work-related accidents
arising from them, combining that information to estimate the risks,
deciding on a priority for countermeasures based on the magnitude ofthose risks, studying measures to eliminate or reduce the risks, andkeeping a record of the results.
*2 Chemical risk assessment: 	This refers to the identification of the risks and hazards of chemical
substances and products, estimation of the likelihood of risk to workers or
damage to their health, and studying measures to reduce the risks.

Status of Work-related Accidents
In fiscal 2020, there were zero employee accidents resulting inlost workdays at either the Yokkaichi Plant or the Chiba Plant.
However, there was an employee accident resulting in lost
workdays at the Chiba Plant on May 12, 2021. We are making
every effort to examine the root causes of this accident and todevise countermeasures, including safety education andequipment improvements, to prevent a reoccurrence. At the
Yokkaichi Plant, there have been zero employee accidents
resulting in lost workdays for around 13 years, since October 11,
2008, and the plant employees are striving to maintain thiscontinuous accident-free work record.

Number of work-related accidents
Accidents not resulting in lost workdays (KH Neochem)
Accidents resulting in lost workdays (KH Neochem)
Accidents not resulting in lost workdays (cooperating companies)
Accidents resulting in lost workdays (cooperating companies)(cases)

7

5

3
2
1
0

0 0

0

0 0

0

2016

2017

2018

2019

2020

(fiscal year)*573 responded, approximately 90% of employees (non-consolidated) ecided on substance of social activities after reviews and discussions thatD
included management based on the results of the employee survey
Touched up paint at a sports field in Yokkaichi City, Mie Prefecture
Fiscal year

Activities that will provide
opportunities to learn about KH
NeochemFiscal year

2018
2019

Fiscal year2020

Touched up paint at a sports field in Ichihara City, Chiba PrefectureT ouched up paint at a General Athletic Playground in Yokkaichi City,
Mie Prefecture onated and painted benches at a sports fieldD
in Ichihara City, Chiba Prefecture
Touched up paint on benches at the multipurpose sports fields
in Yokkaichi City, Mie Prefecture

Chemical industry average(Ministry of Health, Labour and Welfare statistics)

2.0

Installed and painted benches at a site near our manufacturing plant(Ichihara City, Chiba Prefecture)

1.6
1.2
0.8
0.4
0.0
2016

2017

2018

2019

2020

(fiscal year)

Frequency rate: Indicator of the frequency of accident occurrence(Number of fatalities and injuries)÷ (Cumulative number of actual work hours) × 1,000,000

Severity rate

Cooperating companies

KH Neochem

Chemical industry average(Ministry of Health, Labour and Welfare statistics)(severity rate)

0.10
0.08
0.06
0.04
0.02

2016

2017

2018

2019

2020

As a chemical material manufacturer that supports
manufacturing around the world, we again used paint, which is
closely related to our business operations, and painted both
existing and newly donated benches in the Ichihara Sports
Recreation Park in Ichihara City, Chiba Prefecture, where our
Chiba Plant is located.
This time, we installed 24 new wooden benches at the
sports fields. Fifty-eight employees and executives from our head
offices or the Chiba Plant participated and worked with paints
used in our products to paint 108 new or existing benches.
To prevent the spread of COVID-19, only people working at
the head office or the Chiba Plant were allowed to participate.
This meant that everyone needed to paint two or three benches,
prompting initial concerns over whether the work would befinished on time. However, they worked enthusiastically until
the paint ran out and managed to finish all the painting onschedule. The Mayor of Ichihara City, Joji Koide, stopped byduring the painting to express his gratitude and give the team aletter of appreciation. This social contribution activity—aimed at
encouraging the people in Ichihara City to get involved in
sports—is extremely meaningful for our Company, and we plan

Painting work

Getting help from Ossa-kun, the Ichihara
City mascot

Letter of appreciation from Ichihara City
Left: Mayor Koide, right: President Takahashi

to continue with this type of activity next year and beyond.
Our wish is to continue making contributions to local
communities and other stakeholders.

(fiscal year)

Scope of aggregation: All KH Neochem operating facilities for the numberof work-related accidents; Yokkaichi Plant and Chiba Plant for thefrequency rate (accidents resulting in lost workdays) and the severity rate.

Maintenance work also done at Kasumigaura Ryokuchi multipurpose sports fields(Yokkaichi City, Mie Prefecture)

We painted five wooden benches that we donated in 2020 at
Kasumigaura Ryokuchi, where the Mie Tokowaka National

Period covered: January 1 to December 31, 2020

Physical Distribution Safety and Chemical and Product Safety
Data for Physical Distribution Safety and Chemical and Product Safety is available on our website: https://www.khneochem.co.jp/en/csr/rc/

KH Neochem Report 2021 (Integrated Report)

 onducted in-house questionnaire for all employees regarding socialC
contribution activities

Cooperating companies

KH Neochem(frequency rate)*Three work-related accidents graphs are based on the scope of aggregationand period covered shown below.

52

2017

Activities that can continue

Activities that relate to ourbusiness operations

Frequency rate (accidents resulting in lost workdays)

Severity rate: Indicator of the seriousness of an accident(Cumulative number of lost work days)÷ (Cumulative number of actual work hours) × 1,000

Plaque commemorating continuous accident-free days at Yokkaichi Plant (established in 2005)

Strengthening Social Contributions
Fiscal year

Activities that employees canactively participate in

4

0.00

5 Guidelines for Social
Contribution Activities
Activities that will be welcomedin local communities

60Social Contribution Activities

Twenty-two employees and executives
participated in the maintenance work

Painting work

Sports Festival will be held in 2021. The painting work was noteasy, but the 22 participants from our Yokkaichi Plant worked
conscientiously to produce neat and tidy benches, inspired by theidea of providing good places to rest for the athletes coming fromall over the country as well as local volunteers.
We aim to continue these activities in the future, with thegoal of being seen as a much-loved manufacturing plant bylocal residents in Yokkaichi City and elsewhere.

KH Neochem Report 2021 (Integrated Report)

53

Community-based Measures Taken at Plants
In 2020, we thoroughly implemented measures against new coronavirus infections and carried out a range of activities.

Yokkaichi
Plant

Location

Umaokoshi Plant: 2-3 Daikyo-cho, Yokkaichi City, Mie Prefecture
Kasumigaura Plant: 1-4 Kasumi, Yokkaichi City, Mie Prefecture

Corporate Officer
Plant Manager

Seiji Saito

TopicsChiba Plant

Cleaned safety mirrors at road curves in Kyohoku area
Participated in a volunteer cleanup of Takamatsu shoreline at Kawagoe-choParticipated in a volunteer cleanup and flower bed maintenance on Kyohoku-doriAvenueParticipated in a volunteer cleanup of Route 23 pedestrian crossings(recognized as an organization that cares for the roads by the Director of the Mie Office of Rivers and National
Highways, Chubu Regional Development Bureau, Ministry of Land, Infrastructure, Transport and Tourism)

Participated in a pro bono event in Yokkaichi City
Cooperated with a rogaining competition organized by a local NPO

Held a plant tour for a local educational institution
Employee received a commendation from the Japan Petrochemical Industry
Association
Employee received a commendation from a director of the Mie PrefectureHigh Pressure Gas Safety Association

Corporate Officer
Plant Manager

Akio Nakahashi

2020

Held a plant tour for a local educational institution
Cleaned safety mirrors at road curves in Kyohoku area
Cooperated with a rogaining competition organized by a local NPO

PICK
UP!

2019

2020

Cosponsored Goi Rinkai Festival
Participated in a volunteer cleanup of Route 16
Held a plant tour for a local educational institution
Carried out traffic safety exercise on Route 16
Chiba Labor Standards Association awarded one person acommendation as an outstanding worker.
Employee received a commendation from the Chiba Prefecture High
Pressure Gas Safety Association.

Sponsorship of a junior baseball competition:[ Initiatives at Yokkaichi Plant ]Cleaning safety mirrors at road curves
This activity was planned out of a desire for local
elementary and junior high school students to be able
to commute to school safely and with peace of mind at
the start of the new school year. In cooperation withthe area’s civic center, residents’ association, and othergroups, we cleaned the safety mirrors at road curves in
the area. Employee volunteers cleaned mirrors in 47
locations.

KH Neochem Report 2021 (Integrated Report)

11-1 Goi Minami-kaigan, Ichihara City, Chiba Prefecture

Topics2019

54

Location

Cooperation with local rogaining
competition
We cooperated in the management of a mini-rogaining(orienteering) competition organized by a local NPO
commissioned by Yokkaichi City. Rogaining is a sport inwhich teams compete for the highest score, visiting
multiple checkpoints using a map within a time limit.
One of the checkpoints was on the plant premises, andwe organized some activities, including commemorative
photos and yo-yo fishing.

the Ichihara City Friendly Baseball Tournament (KH Neochem Cup)

Volunteer cleanup of roads around the plant

PICK
UP!

C
 hiba Labor Standards Association awarded
one person a commendation as an outstanding worker.
M anufacturing safety officer received a commendation from the Chiba PrefectureHigh Pressure Gas Safety Association[ Chiba Plant Initiatives ]Ichihara City Friendly BaseballTournament sponsorship
KH Neochem sponsored a junior baseball competition,
the Ichihara City Friendly Baseball Tournament (KH
Neochem Cup). We presented the overall winners withmedals as well as sweets as prizes for participation.
We plan to continue supporting programs for local
children, who are the future of our region.

Cleanup drives
We have continued regular cleanup drives, including on
the roads near our plants—even during the pandemic—
after taking appropriate measures against infection.
We intend to continue supporting local
communities through these cleanup drives.

KH Neochem Report 2021 (Integrated Report)

55

Dialog with Shareholders and Investors

Management’s Discussion and Analysis (Fiscal Year 2020)

IR Activities in 2020

Operating Results

No.

1

2

3

4

5

6

7

Month

February

March

May

AugustSeptember

OctoberNovember

Activities

2019 results
briefing

Overseas
institutional
investors
conference2020 1Q
2020 2Q
results briefing results briefing(conference call) (conference call)

Overseas
institutional
investors
conference

North American
2020 3Q
institutional
results briefing
investors(conference call)conference

Communication with Shareholders

General meeting of shareholders

KH Neochem holds an ordinary general meeting of shareholders
in March every year. The general meeting of shareholders is ourhighest decision-making body. We also consider it a valuable
opportunity for us to engage directly in dialogues with ourshareholders, and we make every effort to schedule the meetingfor a time and place that will make it easy for shareholders toattend. We communicate the details of our business activities
and initiatives in an easy-to-understand way by using videos andother methods. Same as in 2019, this year’s meeting was held
while taking appropriate measures to prevent the spread of
COVID-19.

Communication with Investors
Our corporate executives actively communicate with investors inorder to deepen their understanding of our business andperformance. We had regular communication with investorseven during the pandemic of COVID-19, with web meetings orconference calls. As well as our regular investor relations (IR)activities, we began shareholder relations (SR)* initiatives,
engaging in dialogues, mainly on ESG. For individual investors,
we are working to make communications on our business andperformance easier to understand as well as improving the IR
materials published on our corporate website and presentations
at general meetings of shareholders. Further, to provide IR
information to overseas investors and shareholders timely, we
are working to disclose more materials in English.
*SR: Activities intended to foster deeper dialogue with shareholders and to improve relationships of trust

Selected as a Constituent of the JPX-Nikkei Mid and Small Cap Index
KH Neochem was selected as a constituent of the JPX Nikkei
Mid and Small Cap Index, effective November 30, 2020. These
indices are jointly developed by the Tokyo Stock Exchange, Inc.
and Nikkei Inc. In addition, KH Neochem continued as aconstituent of the MSCI Japan Empowering Women Index (WIN)and the SOMPO Sustainability Index. We are working to increase
corporate value even further in order to respond to the
expectations of investors and our shareholders.

*The inclusion of KH Neochem Co., Ltd. in any MSCI index, and the use of MSCI logos, trademarks, service marks or index names herein, do not constitute a sponsorship, endorsement or
promotion of KH Neochem Co., Ltd. by MSCI or any of its affiliates. The MSCI indexes are the exclusive property of MSCI. MSCI and the MSCI index names and logos are trademarks orservice marks of MSCI or its affiliates.

56

KH Neochem Report 2021 (Integrated Report)* T he current fiscal year (fiscal year 2020) means the consolidated fiscal year ended December 31, 2020,
while the previous fiscal year (fiscal year 2019) means the consolidated fiscal year ended December 31, 2019.

During the fiscal year* under review, the worldwide proliferationof the COVID-19 pandemic caused the state of the Japanese
economy to deteriorate as companies postponed capital
investment, individuals refrained from consumer activities, andexports and industrial production decreased. Moreover, theCompany encountered extremely challenging circumstances amid
decreasing production and sales of automobiles, etc., in addition
to sharply decreasing crude oil prices due to a breakdown in
OPEC Plus talks on the prospect of coordinated output cuts
associated largely with concerns of waning demand for petroleum
products. Since May, economic activity has resumed in Japan andthere has been a rebound in exports to China, industrial
production centered on automobiles, and personal spending,which has been boosted in part by government measures such as
income support. However, although there have been hopes thatthe worldwide economy will mount a full-fledged recovery as
some nations at year-end began administering vaccines that holdpromise of preventing transmission of COVID-19, the spread of
infection continued to extend unabated.
Under these circumstances, the Group has managed tosustain its business activities at its plant and other operations
without disruption, upon having established a task force at theCompany to prevent the spread of COVID-19 while also
implementing exhaustive infection control measures that include
drawing up behavior guidelines for the Company to protect its
employees from infection. The Group has furthermore been
taking steps to secure earnings. This has involved ensuring
production and appropriate inventory aligned with demand by
reinforcing coordination with suppliers regarding raw material
procurement, while also placing focus on assessing and analyzing
demand outlook amid uncertainty when it comes to market
trends. This has also involved implementing policies on pricing
appropriately geared to crude oil and naphtha price volatility andthe balance of product supply and demand. We have also been

cutting and otherwise curtailing costs by reviewing expendituresusing a zero-based budgeting approach carried out from theperspective of achieving cost-effectiveness.
Moreover, through initiatives pursued under the basic
strategies of its 3rd Medium-Term Business Plan, the Group has
made steady progress in carrying out various measures. This has
involved operating new facilities for refrigeration lubricant raw
materials and next generation semiconductor materials, continuing
efforts to introduce plant control systems utilizing the latest
technologies, engaging in activities for creating new businesses
enlisting the KH i-lab open innovation hub established in 2019,and clarifying performance accountability at the managerial levelas part of the personnel system reform. The Group has also taken
steps to strengthen governance by increasing the number ofIndependent Outside Directors and drawing up a new Compliance
Code as principles of corporate behavior for the entire Group.
In the Group’s results for the fiscal year under review, sales
volume experienced a large decline compared to the previous
fiscal year due decreased demand in Japan and overseas caused by
the spread of COVID-19. Sales prices remained week due to a
sharp drop in the price of crude oil and naphtha and weak
demand. Sales volume and profit were strong for electronicmaterials due to strong telework-related demand, but challenging
conditions continued due to the large decline in demand for
performance materials. The Group also incurred an increase in
fixed manufacturing costs, such as repair expenses associatedwith large-scale periodic maintenance. As a result, both revenue
and profits decreased, with the Group having posted net sales of¥77,332 million (down 17.9% year on year), operating income of¥5,642 million (down 41.0% year on year), ordinary income of¥5,627 million (down 43.1% year on year), and net income
attributable to owners of the parent of ¥4,046 million (down
41.5% year on year).

Results by Business Field
Performance Materials
Demand for refrigeration lubricant raw
materials for air conditioners fell sharply
in the second quarter due to the spreadof COVID-19. It continued to languish
until the third quarter partially due toinventory adjustments across supply
chains. Meanwhile, demand for cosmetic
raw materials remained sluggish amid adownturn in cosmetic sales as a result of
people refraining from going out. As aresult, sales volume, net sales and profits
declined year on year, with net sales
totaling ¥30,449 million (down 18.7%
year on year) and operating income
amounting to ¥5,129 million (down
36.7% year on year).

Electronic Materials
Sales of high purity solvents were up
year on year amid strong demand forsemiconductors and displays due totrends such as the expansion of
teleworking in Japan and overseas andthe shift to 5G. As a result, sales volume,
net sales and profits increased year on
year, with net sales totaling ¥11,507
million (up 1.8% year on year) andoperating income amounting to ¥1,783
million (up 8.3% year on year).

Basic Chemicals
Challenging conditions continued in thesecond quarter as domestic demand fellin a broad range of fields due to the
spread of COVID-19. On the other hand,demand has been mounting a moderate
recovery particularly in the automotiverelated field since the third quarter. As aresult of the overall situation, sales
volume, net sales and profits declined
year on year, with net sales totaling¥34,384 million (down 22.7% year onyear) and operating income amounting
to ¥1,342 million (down 47.0% year
on year).

KH Neochem Report 2021 (Integrated Report)

57

Management’s Discussion and Analysis

Consolidated Financial Statements

Financial Position

Consolidated Balance Sheet(Millions of yen)

AssetsCurrent assets at the end of the current fiscal year came to¥43,938 million, decreased ¥11,100 million compared withthe end of the previous fiscal year. This was mainly due todecreases of ¥8,801 million in cash and cash equivalents,¥576 million in receivables-trade notes and accounts, and¥1,970 million in inventories. Non-current assets came to¥51,570 million, increased ¥4,347 million compared withthe end of the previous fiscal year. This was mainly due toincreases of ¥3,562 million in property, plant and equipmentand ¥768 million in investment securities. The increase inproperty, plant and equipment was primarily attributable to
new manufacturing facilities for refrigeration lubricant raw
materials at our Yokkaichi Plant. As a result, total assets
became ¥95,508 million, decreased ¥6,752 million comparedwith the end of the previous fiscal year.

Liabilities
Current liabilities at the end of current fiscal year came to¥35,206 million, decreased ¥8,213 million compared withthe end of the previous fiscal year. This was mainly due todecreases of ¥3,260 million in payables-trade notes andaccounts, ¥2,097 million in accounts payable, ¥1,274
million in income taxes payable, and ¥1,717 million inprovision for repairs.
Long-term liabilities came to ¥14,418 million, decreased¥900 million compared with the end of the previous fiscal
year. This reflected increases of ¥652 million in deferred tax
liabilities and ¥659 million in provision for repairs, as well asa ¥2,400 million decrease in long-term debt.
As a result, total liabilities became ¥49,624 million,
decreased ¥9,114 million compared with the end of theprevious fiscal year.

Net Assets
Net assets at the end of the current fiscal year came to¥45,884 million, increased ¥2,361 million compared withthe end of the previous fiscal year. This reflected increasesof ¥4,046 million in net income attributable to owners of
the parent, ¥571 million in unrealized gain on available-forsale securities, and ¥2,224 million in cash dividend.

Cash Flows

As of December
31, 2019

Operating Activities
Net cash provided by operating activities totaled ¥6,931
million (provided ¥10,962 million in the previous fiscal year).
This was mainly the result of decreases from ¥1,058 million
in provision for repairs, ¥3,197 million in notes and accounts
payable, and ¥2,302 million in income taxes-paid, as well as
increases from ¥5,627 million in income before income
taxes, ¥3,737 million in depreciation and amortization, ¥556
million reduction in notes and accounts receivable, ¥1,931

million reduction in inventories, and ¥1,577 million increasein other current liabilities.

Investing Activities
Net cash used in investing activities totaled ¥11,182 million,(used ¥3,512 million in the previous fiscal year). This was
mainly due to purchases of property, plant and equipmentof ¥10,885 million.

Financing Activities
Net cash used in financing activities totaled ¥4,530 million(provided ¥294 million in the previous fiscal year). This was
mainly due to repayments of long-term bank loans of ¥2,400
million and dividends paid of ¥2,230 million.

As of December
31, 2020

AssetsCurrent Liabilities
17,867

9,066

Payables –trade notes and accounts

17,523

14,263

Receivables –trade notes and accounts

22,63522,058

Short-term bank loans

10,44010,550

Merchandise and finished products

10,263

8,278

Current portion of long-term debt

2,400

2,400

345

309

–

4

Raw materials and supplies

2,083

2,133

Accounts payable - other

8,313

6,215

Other

1,848

2,098

Income taxes payable

1,925

650

Provision for repairs

2,245

528

572

594

43,41935,206Work in process

Allowance for doubtful accounts
Total current assets

(5)

(6)

55,03843,938Non-current Assets		

Buildings and structures		Accumulated depreciation

comprehensive list of all the risks to the Group and there
could be unforeseeable risks besides these.
The listed items below include forward-looking
statements, but are based on the information available atthe end of the current fiscal year (December 31, 2020).

1	Changes in the economic
environment and market
circumstances

4	
Climate change8	Infectious diseases

12	Intellectual property

5	
Accidents or disasters

9	
Overseas businesses

13	Information security

2	Changes in raw material prices

6	
Human resources10	Legal regulations

3	
Foreign exchange fluctuations7	
Raw materials procurement

11	Product liability

14	Losses on valuation of
securities

Current portion of long-term lease obligations

Other
Total current liabilities

Long-term Liabilities

Property, plant and equipment

30,69731,594

Corporate bonds

5,000

5,000

(24,916)(25,254)

Long-term debt

5,650

3,250

		

Buildings and structures, net

5,781

6,339

Long-term lease obligations

–

259

		

Machinery and equipment

89,57997,653

Deferred tax liabilities

1,769

2,422

		Accumulated depreciation(84,561)(85,328)

Liability for retirement benefits

2,466

2,568

5,018

12,324

Provision for repairs

–

659

Other

432

258

15,31814,41858,73849,624

Machinery and equipment, net

17,54917,549		Leased assets–

221		Accumulated depreciation–(6)

		Land		

Leased assets, net

		Construction in progress

Total long-term liabilities

Total Liabilities–

215

Net Assets

5,935

848

Equity		Other

5,765

6,402

Common stock

8,822

8,855

		Accumulated depreciation(4,575)(4,642)

Capital surplus

6,107

6,140

25,557

27,379(36)(69)

40,45042,305590

1,162

		Other, net

1,189

1,760

Retained earnings		

35,47439,037

Treasury stock		Goodwill

1,512

1,378

Accumulated Other Comprehensive Income

		Other

225

535

Unrealized gain on available-for-sale securities

1,737

1,913

Deferred gain on derivatives under hedge accounting

00Foreign currency translation adjustments

113

70

Net property, plant and equipment

Intangible assets

Total intangible assets

Total equity

Investments and other assets

Below is a list of the main risks that the management teamrecognizes as having the potential to significantly impact our
financial position, business result, and cash flows. However,the listed items below notes only some of the main risks of
the KH Neochem Group. These do not represent a

As of December
31, 2020

Cash and cash equivalents		Business Risks

As of December
31, 2019

Liabilities

Current Assets

		Cash and cash equivalents at the end of the current fiscal
year came to ¥9,066 million, decreased ¥8,801 million
compared with the end of the previous fiscal year.
The details of cash flows in the current fiscal are as
follows:(Millions of yen)		Investment securities

7,523

8,292

Defined retirement benefit plans

(69)

(158)

		

1,562

1,523

Total accumulated other comprehensive income

634

1,074

		Deferred tax assets

100

109

Non-controlling Interests

2,438

2,504

		Other

825

696

Total Net Assets

43,52245,884

Total Liabilities and Net Assets

102,261

95,508Assets for retirement benefits		Allowance for doubtful accounts

(1)

(1)

		

Total investments and other assets

10,01010,62047,222

51,570102,261

95,508

Total non-current assets

Total Assets

Please refer to the Annual Securities Report for more details (in Japanese only). (https://www.khneochem.co.jp/ir/securities/)58

KH Neochem Report 2021 (Integrated Report)

KH Neochem Report 2021 (Integrated Report)

59

Consolidated Financial Statements

Consolidated Statement of Income

Consolidated Statement of Changes in Equity(Millions of yen)
Fiscal year ended
December 31, 2019

Fiscal year ended
December 31, 2020

Net Sales
Cost of Sales

94,20973,40977,332
61,187Gross Profit

20,80016,144

Selling, General and Administrative Expenses
Freight

3,827

3,416

Container packaging

1,213

1,095

Salary
Other

1,181
5,017

1,241
4,748

Total selling, general and administrative expenses

11,24010,501

9,559

5,642

Interest and dividend income

187

168

Equity in earnings of associated company

273

132

–

143

Other

–
346

94
257

Total non-operating income

807

795

Interest expenses

70

80

Loss on disposal of non-current assets

297

534

Extra retirement payments

–
102

106
90

Operating Income(Millions of yen)
EquityCommon stock

Balance, Jan. 1, 2019
Net change in the year
Issuance of stock (Exercise of share option)
Cash dividend
Net income attributable to owners of the parent
Increase in treasury stock
Disposal of treasury stock
Purchase of shares of consolidated subsidiaries
Net changes in items other than equity
Total net change in the year
Balance, Dec. 31, 2019

Capital surplus

Retained earnings

8,800

6,047

22

22

Treasury stock

20,746

Total equity(26)(2,107)
6,917
(15)
5
38
22
8,822

60
6,107

4,810
25,557(10)(36)

35,56744(2,107)
6,917
(15)
5
38
4,883
40,450Non-operating Income

Compensation income
Reversal of provision for environmental measures

Non-operating Expenses

Other
Total non-operating expenses

Ordinary Income
Income before Income Taxes

471

811

9,896

5,627

9,896

5,627

Income taxes - deferred

3,143
(293)

1,074
406

Total income taxes

2,850

1,481

Net Income

7,045

4,145

Net Income Attributable to Non-controlling Interests
Net Income Attributable to Owners of the Parent

127

99

6,917

4,046

Income taxes - current

Consolidated Statement of Comprehensive Income(Millions of yen)

Net Income
Other Comprehensive Income
Unrealized gain on available-for-sale securities
Deferred gain (loss) on derivatives under hedge accounting
Foreign currency translation adjustments
Defined retirement benefit plans
Total other comprehensive income

Comprehensive Income

Fiscal year ended
December 31, 2019

Fiscal year ended
December 31, 2020

7,045

4,145

176

571

(1)

0

(4)
127

(43)
(88)

297

440

7,343

4,586

7,215
127

4,487
99

Comprehensive Income Attributable to
Owners of parent
Non-controlling interests

60

KH Neochem Report 2021 (Integrated Report)

Accumulated other comprehensive income

Balance, Jan. 1, 2019
Net change in the year
Issuance of stock (Exercise of share option)
Cash dividend
Net income attributable to owners of the parent
Increase in treasury stock
Disposal of treasury stock
Purchase of shares of consolidated subsidiaries
Net changes in items other than equity
Total net change in the year
Balance, Dec. 31, 2019

Unrealized gain on
available-for-salesecurities

Deferred gains orlosses on hedges

Foreign currencytranslation
adjustments

Defined retirement
benefit plans

Total accumulated
other comprehensive
income

414

1

118

(197)

336

176
176
590

(1)
(1)
0

(4)
(4)
113

127
127
(69)

Noncontrollinginterests

297
297
634

Total net assets

2,401

38,304

36
36
2,438

44
(2,107)
6,917
(15)
5
38
334
5,217
43,522(Millions of yen)
EquityCommon stock

Balance, Jan. 1, 2020
Net change in the year
Issuance of stock (Exercise of share option)
Cash dividend
Net income attributable to owners of the parent
Increase in treasury stock
Disposal of treasury stock
Net changes in items other than equity
Total net change in the year
Balance, Dec. 31, 2020

Capital surplus

Retained earnings

8,822

6,107

33

33

Treasury stock

25,55740,450(38)
566(2,224)
4,046
(38)
5

(32)
(69)

1,855
42,305(2,224)
4,046

33
8,855

33
6,140

1,821
27,379

Accumulated other comprehensive income

Balance, Jan. 1, 2020
Net change in the year
Issuance of stock (Exercise of share option)
Cash dividend
Net income attributable to owners of the parent
Increase in treasury stock
Disposal of treasury stock
Net changes in items other than equity
Total net change in the year
Balance, Dec. 31, 2020

Total equity(36)

Unrealized gain on
available-for-salesecurities

Deferred gain (loss)
on derivatives underhedge accounting

Foreign currencytranslation
adjustments

Defined retirement
benefit plans

Total accumulated
other comprehensive
income

590

0

113

(69)

634

571
571
1,162

0
0
0

(43)
(43)
70

(88)
(88)
(158)

440
440
1,074

Noncontrollinginterests

Total net assets

2,438

43,522

65
65
2,504

66
(2,224)
4,046
(38)
5
506
2,361
45,884

KH Neochem Report 2021 (Integrated Report)

61

Corporate Overview

Consolidated Financial Statements

Consolidated Statement of Cash Flows(Millions of yen)
Fiscal year ended
December 31, 2019

Fiscal year ended
December 31, 2020

Income before income taxes

9,896

5,627

Depreciation

3,196

3,737

Amortization of goodwill

134

134

Increase (decrease) in liability for retirement benefits

(48)

128

Decrease (increase) in assets for retirement benefits

(97)

(114)

Increase (decrease) in provision for repairs

1,265(1,058)Interest and dividend income

(187)

(168)

70

80

Equity in (earnings) of associated company

(273)

(132)

Decrease (increase) in notes and accounts receivable

4,699

556

Decrease (increase) in inventories

(420)

1,931

Operating Activities

Interest expense(5,893)(3,197)

Decrease (increase) in other current assets

333

(262)

Increase (decrease) in other current liabilities
Other

1,601
4

1,577
92

Subtotal

14,280

8,933

366
(69)

382
(82)

Income taxes paid

6
(3,620)–(2,302)

Net cash provided by operating activities

10,962

6,931(3,322)(10,885)

Purchase of intangible assets

(71)

(247)

Purchase of investment securities

(10)
(107)

(11)
(38)

(3,512)(11,182)

Increase (decrease) in notes and accounts payable

Interest and dividends received
Interest paid
Subsidies received

Investing Activities
Purchase of property, plant and equipment

Other
Net cash (used in) investing activities

Corporate Overview (as of December 31, 2020)

Stock Overview (as of December 31, 2020)

Establishment

Total number of shares authorized to be issued
136,200,000(Our predecessor Kyowa Yuka, was established in November 1966)

8.8 bnJPY

Corporate
Headquarters
Head Office

2-3-1, Nihonbashi-Muromachi, Chuo-ku,

(150)

–

3,360

–

Repayments of bank loans(5,760)(2,400)

Increase in corporate bonds

4,975

–

44

66

Purchases of treasury stock
Dividends paid
Dividends paid to non-controlling interests
	Payment from purchase of investment in subsidiaries that do not result inchange in scope of consolidation
Other
Net cash provided by (used in) financing activities

Foreign Currency Translation Adjustments on Cash and Cash Equivalents

4,774Tokyo 103-0022, Japan

Japanese
Individuals, other

1.24%

6.93%

Group
Kurogane Kasei Co., Ltd.
companies andKurogane Fines Inc.
affiliatedcompanies
KH Neochem Americas, Inc.

Other Japanese
corporations

12.79%

Shanghai Seika Trading Co., Ltd.

Types ofshareholders(%)

J-Plus Co., Ltd.**Joint venture with Mitsubishi Chemical Corporation

Overseas
corporations, etc.

45.08%

Financial institutions

33.96%

Global Network*

KH Neochem
Americas, Inc.
Tokyo Head Office

Sakai Logistics Center

J-Plus Co., Ltd. (Tokyo)
Yokkaichi Plant
R&D Center

Chiba Plant R&D Center
Kurogane Kasei Co., Ltd.
and KUROGANE FINES
INC. (Nagoya)Shanghai Seika
Trading Co., Ltd.

KH i-Lab (Kawasaki)*Only headquarter locations are provided for Group companies and affiliates

109

Increase in long-term bank loans

Proceeds from stock issuance (exercise of share option)

37,149,400

Financial instruments business operators

Osaka Branch(0)

Increase (decrease) in commercial paper-net

Total number of issued shares
Number of shareholders

CapitalFinancing Activities
Increase (decrease) in short-term bank loans & borrowings-net

December 2010

(15)

(38)

(2,106)(2,230)

(35)

(33)

(17)

–

(0)

(4)

294

(4,530)(3)(19)

Net Increase (Decrease) in Cash and Cash Equivalents

7,741(8,801)

Cash and Cash Equivalents, Beginning of Year
Cash and Cash Equivalents, End of Year

10,126

17,867

17,867

9,066

Supporting Athletes

Short track speed skater

Moemi Kikuchi
At the All Japan Short Track Speed Skating Championships in October
2020, Kikuchi came third against a very strong field in the 1500 m
race and therefore qualified for the World Cup. Unfortunately, theglobal spread of COVID-19 led to the World Cup being cancelled.
At the All Japan Championships in January 2021, Kikuchi
dominated the Super Finals in both the 500 m and 3000 m races andcame second overall.
Qualifying competitions for the Beijing Winter Olympics will startin fall 2021. Our company is united in support of Ms. Kikuchi so that
she can maximize her abilities.
Photo: Aflo SportKH Neochem has signed a sponsorship agreement with short track speed skating athlete Moemi Kikuchi.
The Company is working as one to support Ms. Kikuchi and her goal of medaling at the Beijing Winter Olympics in 2022.

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KH Neochem Report 2021 (Integrated Report)

KH Neochem Report 2021 (Integrated Report)

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