Sekisui was founded in Japan, in 1947, as a general plastics business. Their development of an ‘unbreakable telephone’ using thermoplastics marked the start of their success as a pioneer of plastic products. The group’s growth since inception is rooted in creative technological advancements that have enabled product diversification and a deep commitment to societal enrichment. We trace Sekisui’s successes that have led to their being the highest ranked Japanese company (12th overall) listed in the Global 100 Most Sustainable Corporations since 2018.
Strong prospects in niche markets
Sekisui’s early experimentation with injection moulding led to innovative new product development. Most notable was the Eslon PVC duct pipe, which was the first of its kind on the market – highly resistant to corrosion, chemicals and impact. Its commercial success resulted in Sekisui listing on the Tokyo Stock Exchange in the mid-1950s and, by 1958, the business had started producing an interlayer film for laminated glass, called S-LEC™, now used worldwide in the manufacturing of windscreens.
In the 1960s, Sekisui successfully created the first prototype of a housing model, which was developed into prefabricated housing. This model allows components to be manufactured in a factory before being assembled on-site. The concept of prefabricated homes has been popular in Japan – a country renowned for the unconventional practice of knocking down houses after 30 years. The early 1960s also saw Sekisui separately listing an independent homebuilding company, Sekisui House Ltd, which primarily focused on building residential homes and condominiums in a more traditional manner, using bricks and mortar.
In 2001, Sekisui restructured the business into the three main divisions that it has today (charted below):
• High-performance plastics (HPP) focuses on business development motivated by high value-add products that command top global market shares (eg materials used in smartphones and other LCD devices, interlayer films and polyolefin foam used for automobile interiors). A small medical product segment also operates within this division.
• The housing division1 specialises in prefabricated housing.
• Urban infrastructure and environmental products (UIEP) dominate the supply of construction materials and pipe systems for water and sewerage in Japan.
Technological advancement affirms future growth
HPP is the primary income generator for Sekisui, leveraging off core strengths in extrusion, blowing and stretching technologies to launch standout products within key growth markets. With a view that plastics are indispensable to society today, the company focuses on actively exploring new ideas that are sustainable and not bound by established concepts.
S-LEC™ Film, a leading brand of interlayer films2 for laminated glass used mainly for windscreens and in building and infrastructure, is one of Sekisui’s flagship products. The global auto interlayer market is worth 1 000 to 1 600 billion Japanese yen (R150 to R250 billion) per annum. Sekisui’s 43% global market share exists within an oligopoly structure, with their closest competitor at 34% and smaller players constituting the remaining 23%.
Through the adoption of patented multilayer technology, Sekisui offers a versatile range of specialist film products in their S-LEC™ catalogue. These have improved functionality and achieve the best results for safety (shatter proofing) and UV protection – mandatory requirements for automotive glass. Multi-layer technology, nano-dispersion and wedge angle control has been integrated to create the Heads-Up Display (HUD) that projects images onto a windscreen, eliminating the driver’s need to adjust their line of vision. Further applications include virtual speedometers and driver notifications, while also providing essential sound insulation and solar heat reduction. As illustrated below, S-LEC™ products include:
• Sound Acoustic Film enables sound insulation for wind and engine noise, and enhances penetration resistance against shattering.
• Solar Control Film uses fine particle distribution and other materials mixed into resins to insulate and protect drivers from infrared and ultraviolet rays.
• Sound and Solar Film combines the above technologies to offer varied protection.
• HUD is the world’s first high performance interlayer film, with superior adhesion properties.
1Sekisui’s housing division operates as Sekisui Heim and is a competitor to Sekisui House Ltd.
2A 0.76mm thick plastic layer is placed between two sheets of tempered glass made from poly-vinyl butyral (PVB) resin.
Sekisui estimates that approximately 10 million new cars (92 million were produced in 2019) will be equipped with HUD by the end of 2020. This implies that the market currently remains underpenetrated and a period of increased demand for wedge-shaped interlayer films is expected to follow. Sekisui’s current 70% market share in HUD could prove significantly valuable if these levels can be sustained. Additionally, their Solar Control Film has even lower levels of penetration (presently at 5%), with strong prospects owing to heat retention. Sekisui retains a 90% market share with this product at present (charted below).
Most of Sekisui’s research and development is dedicated to technological advancements and innovation. They have also recently expanded their films manufacturing capacity, with new plants in the Netherlands and Mexico. Unfortunately, this has coincided with a period of decreased automobile production due to trade tensions and the Covid-19 pandemic, therefore, supply currently outstrips demand in this area. However, with meaningful capacity for future growth strongly evident, good returns on capital are likely and Sekisui is focusing on pushing their interlayer film products more towards the building and infrastructure industries in Japan.
Prime positioning in Japanese housing market
Sekisui’s housing division specialises in three key offerings: housing (predominantly detached, prefabricated homes), renovation work (targeting customers who bought new-build homes from Sekisui) and the frontier business (managing leased apartments and building detached housing in Thailand). They have established a unique position in Japan through their prefabricated Unit Construction Method – an advanced factory-built approach where 80% of the house is manufactured in the factory and the remainder is assembled on-site, within a day. Currently, competitors produce around 20% of their models in-factory and are often disrupted by skilled staff shortages that affect the more considerable, on-site side of the build.
There is a great degree of flexibility in the design as they are fully customisable and:
• the structure is made up of box frame units that are stronger than standard global Earthquake Resistant Design legislation stipulations;
• the key to strengthening each frame is spot welding at the joints; and
• they are easy to renovate and have a lifespan that can exceed 60 years (a concept largely unheard of in Japan).
Disrupting the raze and rebuild culture
Post-World War II, reconstruction efforts saw an unusually high demand for housing in Japan and resulted in poor construction standards that rendered homes almost worthless after a period. This practice has continued over time, with most sources citing a 30-year lifespan cap. Consequently, the rebuild rate in Japan is exceptionally high, further intensified by the prevalence of natural disasters.
The housing market in Japan has, however, experienced a contraction over the last 14 years, mainly due to the country’s shrinking population. Sekisui has flagged a 5% decline in new house builds, with data indicating a struggle to return to pre-crisis (2008/09) levels – stagnating at around 800 000 new builds per year.
This has prompted consolidation among major players in the industry as seen by the merging of six of Japan’s leading home building companies. They benefit from greater economies of scale in materials procurement, enabling cost savings to be partially passed on to customers.
Sekisui has set itself an ambitious target to double housing sale volumes by 2030. Management’s immediate focus will be on built-for-sale houses where the market is less depressed and there is potential to harness greater volumes by targeting first time home buyers. A strong product line-up and lower end price range offers great potential to gain market share. By integrating production across all Sekisui companies in Japan and increasing automation for greater efficiency, the group is committed to reducing internal costs. Additionally, favourable payment terms (80% upfront deposit towards the total purchase price of a prefabricated house) and a quick project turnaround period, translates into strong cash generation and conversion for the business.
Attractive prospects draw investor confidence
Sekisui’s exposure to interlayer film is robust following considerable capital expenditure in this area and, despite global automobile production now being in a weak state, the outlook for HUD is extremely positive. With a considerable share in this growing market, even a modest industry recovery could result in above-average group growth prospects.
Despite operating in a competitive space the housing division is highly cash generative, with low production costs. Commitment to maximising built-for-sale resources, keeping production cost ratios low and pricing down, and improving overall productivity, serves to boost the substantial potential that this segment holds – particularly relative to Japanese competitors.
This, together with Sekisui’s contributions towards sustainable practices, underpins their current attractive valuation, with exciting prospects for ongoing returns on capital.