TRANSFORMATION

In times of uncertainty, it is not enough for us to simply respond to changes; we must actively transform ourselves to lead the era. In fiscal 2023, Tokyo Century launched Medium-Term Management Plan 2027. This plan puts forth the concept of TCX, or Tokyo Century Transformation, which encapsulates the Company’s strong commitment to transforming itself. Based on this concept, we aim to strengthen our earnings power through portfolio transformation, human resource and organizational transformation, green transformation, and digital transformation. We will also be promoting environmental, social, and governance (ESG) initiatives for this purpose.

Strengthening earnings power requires us to heighten our profitability. Recognizing that asset efficiency is integral to profitability, boosting our profitability could be viewed as akin to increasing asset efficiency. Improving the profit margins for our segment assets worth some ¥5.4 trillion to increase efficiency should contribute to growth in earnings per share. We thus emphasize return on assets (ROA), which we calculate as net income attributable to owners of parent divided by total assets, when gauging the extent to which we have strengthened earnings power.

Medium-Term Management Plan 2027PDF:327KB

What most captured my attention about Medium-Term Management Plan 2027 was the phrase “bring about change.” In fiscal 2020, Tokyo Century announced its intention to grow based on its seven pillars of business strategies. It was thus quite impactful how, in Medium-Term Management Plan 2027, the Company chose to not only pursue growth in scale but also shift focus toward improving capital efficiency. I took this course correction to be a message indicating Tokyo Century’s adoption of a policy of increasing efficiency to strengthen its earnings power, based on the fact that strong earnings power is vital if the Company is to transform in advance of changes to the times. The disclosure of ROA targets for individual operating segments and other measures to break financial targets down by segment seem to have been a decision made to underscore this message.

Also, as one of its concrete strategies, I understand that Tokyo Century plans to replace assets in its portfolio to shift toward growth businesses as it seeks to increase the representation of high-margin service businesses in order to heighten efficiency. However, I feel that it would be even more compelling if the Company was to offer more detail with regard to the strategy of shifting toward service businesses, such as the standards that will be used when replacing assets as part of specific business strategies.

Each of our five operating segments is important to Tokyo Century, and I believe that it is crucial for us to grow these segments in a balanced manner. Raising ROA through asset replacement is the mission of every operating segment, after defining the degrees of independence and authority delegated thereto. We encourage operating segments to act with autonomy in order to achieve higher levels of effectiveness.

All operating segments are engaged in growth businesses that are their primary drivers. However, as some businesses in these segments are underperforming, there may come a time when we need to consider withdrawing from businesses or downsizing the associated assets. The capital recovered in said ways will be allocated to high-profit, high-potential businesses as we replace the assets in our portfolio.

As another aspect of revising our portfolio, we established a new operating segment, the Environmental Infrastructure segment. In the past, we advanced environmental businesses as part of the operations of the Equipment Leasing, Specialty Financing, and other segments, but these businesses were judged to lack efficiency. It is therefore my hope that going forward the Environmental Infrastructure segment will function as the nerve center for the environmental businesses advanced on a Companywide basis in order to heighten their effectiveness from a Companywide perspective. It was more than a decade ago when we embarked on a new journey with the establishment of the International Business segment. Today, this segment has grown to have an asset portfolio with a scale of ¥650.0 billion. We have a track record of expanding the asset portfolios of newly launched segments, and I am committed to making the Environmental Infrastructure segment such a success as well.

At a GlancePDF:2,897KB

I have high expectations for the newly established Environmental Infrastructure segment, especially given how long it has been since the last new segment. Generally, the more unclear it is what a company is doing on an overall basis, the likelier it is that it will be discounted. The same applies when it comes to the Company’s overall asset portfolio and the possibility for investors to apply a conglomerate discount to Tokyo Century. This means that making business strategies and rules clearly visible from the outside is crucial for avoiding being discounted.

I agree with you in that it is important to have operating segments that act autonomously and responsibly in the process of revising the portfolio. At the same time, however, management and the Board of Directors need to view these efforts from an overall perspective accounting for the entirety of the portfolio to confirm that segments are properly emphasizing profitability and efficiency. Adopting this approach, I want to see Tokyo Century engage in frequent communication with investors to stress its commitment to discipline in pursuing overall optimization and its strong determination toward improving profitability.

I think it is fair to say that Tokyo Century’s ESG initiatives are on a par with global standards. Regardless, the market’s assessment has resulted in a price book-value ratio that is less than 1.0 times. This is likely partially due to recent performance and other financial factors. Another factor, however, may be that the Company has yet to effectively communicate its ESG narrative to the market. Tokyo Century is fully capable of continuously generating earnings. If this fact, as well as the ESG strategies that underpin this earnings power, is consistently stressed when communicating with the market, I am sure that Tokyo Century will see improvements in its price book-value ratio.

Evolution of Tokyo Century’s Corporate Governance System

You are exactly right. Under the previous medium-term management plan, our performance became more volatile as a result of developments like the COVID-19 pandemic. In fiscal 2022, we undertook what we refer to as a “great reset” by recording losses on our Russia-related exposure and on operational investment securities. Going forward, I think it will be important for us to eliminate the sources of volatility in performance and take steps to recover our evaluation in the market.

We will also need to be diligent when communicating to stakeholders about our practicing well-thought-out ESG management that will support us in getting back to our prior compound annual growth rate and achieving constant growth.

All companies are a combination of changing and unchanging elements. Looking at Tokyo Century, the unchanging elements are the sources of its strength. These include our discerning eye as a leasing company, which we have honed for over five decades, and how we provide value by allowing customers to use assets under the arrangement that is most convenient for them.

What changes, meanwhile, is the specific services we offer, which are changing in conjunction with the increasing digitalization and decarbonization of society, as well as the ways in which customers use assets. Significant changes have occurred in these regards over the past several years. For example, we have seen the emergence of services that utilize the data associated with assets as well as ways of using assets for reducing greenhouse gas and other emissions. If we are to respond to changing customer and social needs, it will be imperative for us to flexibly transform our business model. Tokyo Century cannot accomplish this task alone; the Company must be capable of working toward its goals together with its business partners. I am confident that such a capacity for collaboration will become a unique competitive edge for Tokyo Century.

Business ModelPDF:2,898KB

I have a lot of praise for Tokyo Century’s unique business model. This model goes beyond simply providing the value of assets to include joint efforts with business partners to resolve social issues in order to deliver higher levels of convenience and use value. Notable M&A activities conducted by Tokyo Century include Aviation Capital Group LLC and CSI Leasing, Inc. In these examples, we see the Company starting with minority ownership, fostering a true partnership based on deep mutual understanding over the course of years before finally converting these companies into consolidated subsidiaries. Here, we see the strength of Tokyo Century in choosing partners, learning about partners’ needs, and building mutual trust. This strength will no doubt be a powerful asset toward broadening the Company’s business scope and ultimately raising asset efficiency. There are a lot of opportunities for Tokyo Century to seize in the future, and I think that the Company still has a lot of potential.

However, fostering partnerships takes time, and change is always happening. This means that flexibility is essential when deciding to continue or discontinue an investment. In this manner, it is important for a good balance to be maintained between acting with speed and taking time to assess a situation.

As far as weaknesses of the Company, I think that there is room for improvement when it comes to corporate governance systems. Tokyo Century’s current management bodies, which include the Management Meeting and the Investment Management Committee, are functional, and business in all operating segments is executed by managers with high degrees of specialized insight. For these reasons, I believe that the Board of Directors should be positioned as a venue for discussion and oversight regarding Companywide rules and portfolio policies. The ideal numbers and composition of directors should be determined based on this positioning as Tokyo Century seeks out the ideal governance structure given its multiple business portfolios. Our interactions thus far have revealed that you, President Koichi Baba, are highly committed to reforming governance, and I look forward to seeing the steps you decide to take.

I see management and employees as being equal. For this reason, Tokyo Century needs to become an organization with a corporate philosophy that resonates with people, inspiring them to join, and in which employees feel that our initiatives contribute to their growth and self-actualization.

This is why the Company and its employees should be aligned along a single vector to act as a united entity. The previous medium-term management plan defined our vision of becoming a global corporate group with a diverse team of people, and I think we are finally at a point when we can really work toward that vision. Once again, Medium-Term Management Plan 2027 puts forth the concept of TCX, or Tokyo Century Transformation. Based on this concept, I am spreading the message within the organization that we all need to become transformative people who are able to bring about change. I therefore hope that everyone at Tokyo Century will be able to evolve into such transformative people, brimming with ambition and potential.

Human Resource and Organizational Strategies

My firm takes a medium- to long-term stance toward investments, and our fundamental approach is to invest in companies that are expected to achieve ongoing growth through high levels of efficiency. A core aspect of ensuring the continuity of this growth and of operating a company is human capital investment, and of particular importance in this regard is whether or not the people working at a company feel happy. Multiple factors can affect whether a person feels happy at their company, including their level of pay, how conducive the working environment is to acquiring skills, or if there are opportunities to form interpersonal connections. Regardless of the factor, it is important for a company to increase the number of its employees who feel happy working there.

For this reason, it is prudent to have a corporate culture in which people are appointed to positions based on their skills, as opposed to their background, especially given the diverse range of employees a company may have. Similarly, a company should have a variety of compensation frameworks, which should be monitored to confirm whether or not they are contributing to higher employee satisfaction. Tokyo Century discloses the results of its employee awareness surveys. I am convinced that ongoing communication of such human capital initiatives to external stakeholders is sure to contribute to higher corporate value.

It is our customers that support Tokyo Century, and we cannot grow if they do not have a high opinion of us. Earning the praise of customers is at the heart of what Tokyo Century does. This is why I place so much emphasis on the cycle of reinforcing our partnership strategy as an asset and service provider and thereby winning the favor of customers, a cycle that allows us to form various new connections.

These new connections will contribute to higher satisfaction among the employees who work on our shared platform and give them tangible feelings of success and growth. This process will, in turn, fill them with ambitions they want to pursue going forward. I want Tokyo Century to be a platform that can support such ambitions, and I am confident that the Company will be able to grow together with its employees if it can accomplish this. This is the vision for Tokyo Century that I intend to work toward.

I suspect that the COVID-19 pandemic and the recent emergence of geopolitical risks have led Tokyo Century to make some important discoveries. These discoveries appear to be reflected in the message communicated by Medium-Term Management Plan 2027: the message that Tokyo Century does not want to grow merely by expanding its asset portfolio but rather aims to achieve ongoing growth through high efficiency. Talking to you today really made me feel the passion behind this message.

As Tokyo Century moves into the phase of enacting its plan, I hope that the Company will demonstrate this commitment in its every action. Tokyo Century has a lot of potential, and I look forward to seeing how it continues to grow by advancing the partnership strategy it has implemented thus far and exercising its other unique strengths.