Message from the President
of the Corporate Planning Unit

Since the 2009 merger through which Tokyo Century was formed, our earnings growth has been propelled by the expansion of our asset portfolio as we conducted aggressive growth investments and engaged in M&A activities to decrease our dependence on the Equipment Leasing segment. This approach realized ongoing high praise from shareholders and other investors, as indicated by our ROE consistently surpassing 10% and a PBR that long remained above 1.0 times. However, this did not last forever; our ROE dipped below 10% a few years ago, causing PBR to decline to lower than 1.0 times. As of June 30, 2024, the Company’s total assets were approximately ¥6.7 trillion while interestbearing debt came close to ¥5.0 trillion, and ROE had been lower than 10% for some time at this point. This reality suggests that we will face challenges if expanding the volume of our operations is the only approach that management takes toward pursuing growth.

From this perspective, improving asset efficiency will be an important management strategy for ensuring Tokyo Century’s ongoing growth. Steps toward this end will include seeking to increase the value of existing businesses and facilitate asset turnover in business investments. At the same time, we will carefully assess the portfolios of each operating segment, divest from assets with low efficiency and growth potential, and reallocate management resources to areas that offer the high profit margins that shareholders and other investors expect. We thereby aim to improve asset efficiency and grow net income attributable to owners of parent: the numerator in the equation for calculating ROE. This approach hints at the extreme importance of accomplishing the financial targets outlined in Medium-Term Management Plan 2027 through portfolio transformation for building an asset portfolio with substantial earnings power and growth potential. All operating segments are currently aggressively promoting portfolio transformation initiatives. A prime example of the portfolio transformation seen in fiscal 2023 was the revision of our holdings in Orico Auto Leasing Co., Ltd., and Orico Business Leasing Co., Ltd., both of which are joint ventures with Orient Corporation. This move led to these companies being changed from consolidated subsidiaries to equitymethod affiliates. During discussions, both internal and external, we came to the realization that, although both joint ventures were delivering reliable performance supported by steadily growing asset portfolios, they would be able to best contribute to improved corporate value by advancing their management strategies as consolidated subsidiaries of Orient Corporation. This decision prompted the change in ownership. The capital recovered through this move, together with the benefits of converting these companies into equity-method affiliates, has driven improvements in Tokyo Century’s return on assets (ROA). We plan to continue reassessing our businesses in this manner going forward. However, if all we care about is divesting from businesses, we will no doubt suffer a decline in earnings per share (EPS). Accordingly, we must use the capital recovered through portfolio transformation to invest in growth fields in order to heighten EPS and ultimately improve how the capital market assesses Tokyo Century. We can see this approach in action in the data center business we are developing together with the NTT Group as well as in numerous other exciting projects built upon the strength of Tokyo Century’s partnership strategy. In this manner, we are moving forward with portfolio transformation initiatives that will allow us to conduct decisive growth investments in business fields with the potential for high growth and also synergies with our existing businesses.

Revising the level of equity, the denominator in the equation for calculating ROE, is one method for contributing to improvements in ROE. However, we believe that, given our level of risk exposure, the current level of equity is appropriate for maintaining financial health and stabilizing our fund procurement.

Reducing cost of shareholders’ equity requires that we improve the stability and predictability of our performance to ensure that there are no surprises for shareholders and other investors. Under the previous medium-term management plan, which covered fiscal 2020 to fiscal 2022, we were forced to record massive losses due to the materialization of tail risk in forms such as the COVID-19 pandemic and Russia’s invasion of Ukraine. It goes without saying that this had an impact on our stock price. We therefore recognize how important it is that we continue to deliver a level of performance that makes people want to invest in Tokyo Century so as to foster a strong sense of anticipation for our growth.

There are three main tasks that we will tackle in order to accomplish this: (1) Reinforcement of comprehensive risk management, (2) fostering of anticipation for growth, and (3) enhancement of investor relations activities. By addressing these tasks, we aim to reduce cost of shareholders’ equity.

The mission of our risk management efforts is to allow Tokyo Century to boldly take risks when appropriate for supporting growth and value creation. However, as massive losses were recorded under the previous medium-term management plan and ROE is currently at a low level, it is clear that reinforcing risk management is a crucial task needing to be tackled. We are approaching this task from four perspectives, management of capital use rate guidelines, management of risks and returns emphasizing cost of capital, entrenchment and enhancement of the investment management framework, and country risk and global risk readiness.

Under the investment management framework, we confirm the anticipated level of profitability after considering capital costs based on the inherent risks as one of our quantitative standards, as well as the compatibility with Tokyo Century’s strategies as one of our qualitative standards, in the process of selecting investments and conducting progress management. In addition, shared withdrawal standards applicable to all projects and individual withdrawal standards applied to specific projects are implemented for use in determining when withdrawal from an investment should be discussed. These provisions help us practice effective portfolio management. Frontline organizations have received a number of straight-to-the-point remarks as a result of our implementation of this framework. Regardless, I still believe that a framework for assessing the appropriateness of investments from various angles and based on a variety of risk scenarios is imperative to ensuring disciplined governance functions. For this reason, I hope to provide forums for vigorous discussion among relevant parties to help entrench and enhance this framework.

Lastly, we need to enhance country risk and global risk readiness. The portion of our asset portfolio accounted for by assets located outside of Japan is increasing, particularly in our aircraft leasing business. We therefore intend to ramp up monitoring of political, social, economic, and other operating environment changes in the relevant regions. We are also moving forward with the development of country-specific exposure guidelines and the designation of countries not eligible for financing or investment.

As we reinforce risk management, I also look to help Tokyo Century advance in its pursuits by conducting the growth investments that will lay the groundwork for creating value in the medium to long term. On April 30, 2009, soon after the Company was born out of the merger, our market capitalization was around ¥65.0 billion. Today, this number has climbed to about ¥800.0 billion. This impressive growth is a result of our ability to live up to the expectations of the capital market by aggressively undertaking M&A activities and other investments, without fear of failure, to expand our business scale and create growth drivers. This approach, I believe, is also one of the most important factors toward reducing cost of shareholders’ equity.

Major growth investments in fiscal 2023 included the acquisition of aircraft to expand the asset portfolio of aircraft leasing subsidiary Aviation Capital Group LLC as well as investments in new growth businesses, such as a data center business in the United States and overseas renewable energy projects. Despite our conducting these investments, I feel that we have not sufficiently lived up to the expectations of shareholders and other investors. To respond to such expectations, we at Tokyo Century are uniting in our quest to seize hold of business opportunities so that the capital market will come to recognize the earnings growth that will be fueled by our growth investments.

The enhancement of investor relations activities is imperative to the reduction of cost of shareholders’ equity. Bolstering information disclosure is, of course, an important part of this process. At the same time, we intend to practice active engagement with shareholders and other investors to enable management to earnestly address their input and requests so that we can steadily address any issues identified. Through this process, we seek to heighten the sense of anticipation toward our growth and alleviate any concerns regarding the volatility of our performance via conscientious communication with the capital market in order to foster trust.

When I look back on fiscal 2023, I am reminded of the new disclosure initiatives we commenced in this year, such as the posting of data books on the Company’s website and the release of information on the progress toward achieving the targets for net income attributable to owners of parent for specific operating segments in quarterly IR presentation materials. Our estimate for cost of shareholders’ equity and our revision of dividend policies were also a result of our arranging various opportunities for discussion with shareholders and other investors in Japan and overseas. This disclosure of our efforts to practice management emphasizing cost of capital and share prices has been received incredibly well. Going forward, we will continue proactive efforts to bolster information disclosure and address management issues to foster a sense of anticipation toward the growth and transformation of Tokyo Century.

Tokyo Century promotes effective balance sheet management with the goal of maintaining its financial health and raising ROE above 10%. For fiscal 2027, the final year of Medium-Term Management Plan 2027, we aim to achieve ROE of 10%, a goal that is prefaced on our building a balance sheet comprising total assets of around ¥7.0 trillion and which results in a shareholders’ equity ratio of around 14%. On June 30, 2024, we had already increased total assets to approximately ¥6.7 trillion and posted a shareholders’ equity ratio of about 14%. One major factor behind this outcome was the fact that a lot of our assets are denominated in U.S. dollars, which meant that the recent deprecation of the yen served to increase the value of our balance sheet. However, the differences in interest rates between the United States and Japan and other factors suggest that the yen depreciation trend will gradually reverse going forward. Accordingly, there has been no change to the scale of assets or the shareholders’ equity ratio deemed appropriate under the medium-term management plan.

Tokyo Century’s basic dividend policy is to provide stable, long-term returns to shareholders, and we are pursuing increases in dividend payments founded on continuous earnings growth while maintaining a payout ratio of about 35%. Up until the commencement of Medium-Term Management Plan 2027, Tokyo Century refrained from reducing dividend payments to reflect earnings growth trends. Under this new plan, however, we have adopted a progressive dividend policy indicating that, in principle, we will not lower dividend payments, in order to clarify our stance toward ongoing dividend increases based on input from shareholders and other investors. As for fiscal 2024, we look to steadily grow earnings to enable us to issue annual dividend payments of ¥58 per share, an increase of ¥6 year on year.

The Bank of Japan canceled its negative interest rate policy and then increased the policy interest rate to 0.25% in July 2024, creating a need to carefully monitor trends in interest rates pertaining to the yen given that Japan now has positive interest rates. The Asset Liability Management Committee, which meets quarterly, is tasked with furnishing flexible responses to changes in the financial market by sharing information on yen interest rate scenarios and funding cost estimate revisions based on recent trends and setting hedge ratios and other fund procurement policies. Our projections for fiscal 2024 are based on the assumption that market interest rates will increase by 0.25% in December 2024, following up on the increase of the same degree implemented in July. The higher interest rates are expected to increase funding costs in the short term. Tokyo Century will combat the impacts of this trend by maintaining hedge ratios at a level appropriate to compensate for these increases.

In terms of our business, I am committed to enhancing our responsiveness toward positive interest rates to enable all employees to go about their business activities with an understanding of how the current operating environment is different from the one seen previously. Based on our recent performance, I think I can say that we are responding to the interest rates appropriately. Nevertheless, I look to go further to ensure that we can gain interest income over the medium term and to differentiate ourselves through value-added services, rather than purely competing with our financial functions. Through this approach, I aim to contribute to higher earnings power for Tokyo Century.

In promoting Tokyo Century Transformation (TCX), portfolio transformation, as well as the human resource and organizational transformation, green transformation, and digital transformation that support portfolio transformation, will be of the utmost importance. Concerning human resource and organizational transformation, specifically, it is crucial that we transform the human resources and organizations responsible for promoting TCX. To this end, we are utilizing the results of employee engagement surveys to close the gap between the actual conditions and the ideal state for the Company.

The principle that the Company and its employees should be on equal footing underpins all of our human resource and organizational transformation efforts. Based on this principle, we are reexamining what the Company expects of employees and what the Company can provide or how it can support them in meeting these expectations and arranging forums for exchanges of opinions among officers and employees for the purpose of sharing the recognized issues and discussing future initiatives. Fostering a corporate culture and developing human resources take time, and the results of our initiatives will not be immediately apparent.

Accordingly, we will need to adopt a medium- to long-term perspective with regard to our initiatives. Moreover, our human resource and organizational transformation must be linked to our business strategies. Enhancing human resource and organizational transformation strategies contributes to improved employee engagement and helps employees with highly specialized skills feel motivated and make larger contributions through their work. This, in turn, will lead to greater earnings power and improved corporate value for Tokyo Century.