IR InformationA Message from the President & CEO
Tokyo Century is a financial services company formed in April 2009 from the merger of Century Leasing System and Tokyo Leasing initially known as Century Tokyo Leasing. This year, we celebrated our 10th anniversary. At the time of the merger, business conditions for the leasing industry were expected to be severe due to such factors as the revisions to leasing accounting standards and the global financial crisis triggered by the Lehman Brothers’ bankruptcy. We ourselves saw few prospects for major growth in a business format centered on conventional leasing, and we have therefore sought to expand our operations by creating a new financial services business model.
Our main strengths are our extensive client base and the capability to provide customers with a full range of support, from financial assistance to services and viable businesses in a largely unrestricted management environment free of regulatory constraints. The scope of our business has, in fact, expanded by entering into such innovative fields as subscriptions, rent-a-car operations, a power generation business centered on renewable energy, and a FinTech business. To reflect the shift in our business model away from conventional leasing, we even removed the word “leasing” from our company name in 2016 to become known simply as Tokyo Century. This decision was taken to signal our determination to be a company with financial capabilities that can flexibly respond to the needs of society and to the true needs of our customers.
In terms of earnings, we have posted record-high ordinary income in each of the last 10 years stretching back to the period directly before the merger, and we plan to further increase shareholder dividends that we consistently raised every year since our founding. This steady growth has also contributed to increasing our market capitalization. I am extremely pleased to report that we have also received a degree of recognition from investors over the last 10 years for our innovative business model and management strategy.
Throughout this period, I have been deeply impressed by the efforts of each and every one of our employees to apply their accumulated experience to adapt the business to change and to work every day with a positive mindset. Tokyo Century is transforming itself from a conventional leasing company by expanding financial services and viable businesses, and I believe that the change in thinking and proactive stance toward work by employees are proving to be key elements in the company’s current growth. I am convinced that everyone is now deeply engaged in establishing financial services and viable businesses with creativity and confidence.
We have worked hard to grow our business base, including expanding segment assets to more than ¥3.5 trillion, and we now occupy a unique international position as a company able to freely develop in a liberal regulatory environment. Over the next 10 years, we intend to steadily reap the benefits from our up-front investments while continuing to create a multitude of new businesses that answer the needs of society.
The main theme of the three-year Third Medium-Term Management Plan which began in fiscal 2016 was the same as the first and second plans, to build a basis for future growth. We made strong progress on pursuing business focused on asset efficiency and expanding viable businesses that take full advantage of the high degree of management freedom we enjoy. The management targets of the plan called for ordinary income of at least ¥80 billion, an ROA of at least 2.3%, and a shareholders’ equity ratio of 11.0%, and we concluded the plan in fiscal 2018 by booking ordinary income of ¥86.3 billion, an ROA of 2.6%, and a shareholders’ equity ratio of 10.4%.
Ordinary income grew by ¥18.3 billion compared to fiscal 2015, due to our strategy of expanding comparatively high-ROA viable businesses such as aviation, solar power generation, and mobility services. We were also able to significantly outperform our target for the compound annual growth rate (CAGR), achieving an actual rate of more than 8%. Our ROA rose by 0.3 percentage point over the fiscal 2015 figure to 2.6% on the contribution from viable businesses. The final shareholders’ equity ratio fell just short of the plan target, in part because of a decision to prioritize M&As and other strategic growth investments, although we were able to maintain robust financial stability.
During the period of the Third Medium-Term Management Plan, we worked to strengthen our sales and management bases, and the results of the practical measures undertaken in each operating segment were as follows. In Equipment Leasing, we expanded into new domains beyond leasing, including converting Bplats, which provides subscription platforms, to an equity-method affiliate, and launching robot rental business in partnerships with major robotics manufacturers. In Mobility & Fleet Management, with a view to boosting profitability by accumulating high-quality assets, Nippon Car Solutions acquired Tokyo Gas Auto Service as a consolidated subsidiary, and Nippon Rent-A-Car Service reviewed its franchise system and completed its transition to direct management. Our focus in Specialty Financing was building aviation and real estate business value chains, which involved converting Aviation Capital Group, a leading U.S.-based commercial aircraft lessor, to an equity-method affiliate, as well as converting Shinko Real Estate to a consolidated subsidiary and Nittochi Asset Management to an equity-method affiliate. In International Business, we completed the conversion of CSI Leasing, a major independent U.S. leasing company, to a wholly owned subsidiary, and invested in Grab, the largest ride-hailing services company in Southeast Asia, followed by converting Grab Rentals into joint ventures and other business forms. We also invested in an electronic money and point services company operated under the OVO brand by Lippo Group, a leading Indonesian conglomerate.
To further strengthen our management base, we shifted to full-scale measurement of risk on a consolidated basis and refined measurement logic for factors including asset risk and foreign-currency-denominated investment or liquidity. We also endeavored to strengthen internal management control worldwide, including the creation of an internal reporting system and establishing crisis management measures such as business continuity planning. Through these efforts, we were able to build capacity and reinforce risk control systems, and, as a result, our credit rating from Japan Credit Rating Agency, Ltd. was upgraded from A+ to AA- in January 2019, and our rating outlook by Rating and Investment Information, Inc. was revised from A Flat “stable” to “positive” in March 2019. Another outcome of the Third Medium-Term Management Plan was having the company added to stock market indices. We are now a constituent of the MSCI Japan Index used as a benchmark for institutional investors, the FTSE Blossom Japan Index, and the MSCI Japan ESG Select Leaders Index, comprised of companies selected for demonstrating strong ESG practices.
Achievement of Management Targets
With an eye on the next 10 years, we embarked on the Fourth Medium-Term Management Plan starting in fiscal 2019, which is intended to prepare for a new stage and achieve sustainable growth. In the 10 years since the merger, we have focused on transforming ourselves from a finance-focused company and promoting viable businesses that can be operated jointly with our partners and by expanding into new business areas. The goal of the Fourth Medium-Term Management Plan is to build on the achievements of the previous plan, further expanding viable businesses and raising asset efficiency to push our ROA even higher and make steady progress on sustainable growth.
The Fourth Medium-Term Management Plan includes targets for ordinary income, ROA, the shareholders’ equity ratio, and ROE, and it calls for achieving an ordinary income of at least ¥100 billion in fiscal 2021, the final year of the plan. Accomplishing the ordinary income target will require even greater development and expansion of our innovative business model in cooperation with our partners. Through fiscal 2018, we calculated our ROA based on total operating assets, but beginning from fiscal 2019, we changed the denominator for this calculation to segment assets in order to reflect factors such as the investments made in equity-method affiliates. Final ROA for fiscal 2018 using the balance of segment assets as the denominator was 2.5%, and the target within the Fourth Medium-Term Management Plan is to grow ROA by at least 0.2 percentage point over the three years, to 2.7% or more. An ROA of 2.7% or more is an industry-leading goal, and meeting the target will depend on providing high-value-added financial services. In order to become an industry-leading financial services company in both name and fact, we will continue to focus on expanding our innovative business model built on cooperation with partners in Japan and overseas. We target a shareholders’ equity ratio of at least 12.0% to increase resilience to risk that matches the expansion in business scope. This target of ROE of at least 12.0% is a new goal, appearing first in this medium-term plan. In addition to achieving our targets for ordinary income, ROA, and shareholders’ equity ratio, we believe having an ROE that exceeds the cost of shareholders’ equity will help link an increase in profits to a rise in corporate value.
Our capital policies are intended to steadily expand earnings through the practice of strong financial discipline while we remain mindful of shareholder returns and, at the same time, continue to invest in promising businesses to generate sustainable growth. We intend to raise the dividend payout ratio to around 30% by the final year of the Fourth Medium-Term Management Plan while maintaining a balance with growth investment.
Fourth Medium-Term Management Plan Targets
Dividend and Dividend Payout Ratio
Improve payout ratio based on stable long-term return of profits while ensuring balance with investment in future growth
In the Fourth Medium-Term Management Plan, we also intend to continue pushing forward to put into place a management base for supporting a medium- and long-term increase in corporate value. We believe that our human resources strategy is a key management focus in this respect. I would not be surprised if the pace of change in the operating environment further accelerated over the next 10 years to a point where changes were occurring every few years.
To respond to the evolving business environment and rapid expansion of our business areas, Tokyo Century has accelerated the promotion of diversity for its employees. Since our viable businesses require a high degree of expertise, we have been hiring individuals in the middle of their careers in addition to new graduates. As a consequence, we have added personnel with diverse abilities in a variety of fields, including foreign nationals, and I feel this has energized the entire corporate climate. In addition, half of the new graduates hired are women, recognizing their essential role for our company’s growth.
Amid societal progress in reforming working styles, Tokyo Century is planning to support the health and well-being of employees by offering options such as flexible working hours and working at home. Moreover, we believe that accelerating diversity and providing training that both increase employee fulfillment and create a sense of personal growth will bolster the development of cutting-edge businesses which depend on creativity.
Risk management is also a key factor in enabling sustainable growth through a further increase in asset efficiency, and one of the goals of the Fourth Medium-Term Management Plan is to create a more sophisticated risk management structure. We must also strengthen our responses to information security, crisis management, and product quality control to facilitate more flexible risk taking.
In corporate governance, we added a new external director in June 2019, with the result that external directors now comprise more than one-third of all board members, and we expect this will further enliven discussions at the Board of Directors meetings.
The Board of Directors has implemented free discussion to allow for open debate on how to achieve sustainable growth, and I believe this will represent a valuable forum for also considering future management strategy. I think that lively discussions at Board of Directors meetings and the implementation of checks and balances driven by external directors will give the company the basis it needs to strive for further growth, and I remain fully committed to strengthening corporate governance going forward.
Achieving sustainable growth over the next 10 years will require that we expand viable businesses in cooperation with our partners and enter a phase for achieving profitability from our up-front investments.
In addition, we must focus on creating new businesses tailored to resolving social issues. In practical terms, while deeply mining growth businesses such as aviation, mobility, real estate, and renewable energy, we must expand operations closely related to the SDGs.
We anticipate that the future business environment will necessitate new services grounded in technological advances, as illustrated by key concepts such as digital, mobility, and subscriptions, and we believe this will increase opportunities for delivering financial services as a company attuned to prevailing demands. Given that our earnings currently derive from four operating segments with stable business bases, we will need to develop a fifth pillar to drive future growth.
Amid this era of major change, we will continue creating new financial services as a company with financial capabilities. As part of this effort, we intend to play a role in realizing an environmentally sound, sustainable economy and society as a key corporate mission declared in our Management Philosophy for the next 10 years.
Starting in fiscal 2019, we have identified five materiality issues related to the SDGs. For “Contribution to a low carbon society,” we will expand our reusable energy business, including the dissemination of solar power generation as a clean energy source. For “Creation of new business driven by technical innovation,” we will leverage our originality to contribute to the digital economy in areas such as subscriptions and FinTech. For “Contribution to social infrastructure development,” we will provide mobility services centered on Nippon Rent-A-Car Service and contribute to regional revitalization through the ANA InterContinental Beppu Resort & Spa, scheduled to open in August 2019. For “Sustainable resource use,” we are considering entry into the development of a circular economy focused on the value of assets, for example, through CSI Leasing operations in IT equipment leasing, aviation, and automobiles. By adding “Enhanced work environment, leading to strengthening of human resources” to these issues, the shared platforms for the five materiality issues is to “Utilize diverse partnerships to create new value,” and we believe this will assist us in contributing to the achievement of the SDGs by expanding our core business operations.
A strong track record tends to make any organization fearful of upsetting the status quo. Tokyo Century, however, believes that adapting to changing conditions is an essential aspect of corporate management and consequently places high priority on organizational reform. By combining the capabilities of the entire Group, we will provide the best products and services around the world to assist customers and corporate partners in pursuing their own growth. We look forward to the continued support and patronage of our stakeholders.