Nippon Paint: 2nd Quarter FY2022 Financial Results Q&A Summary

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A1One of the items that could have a significant impact on our results is the provision for potential credit loss. Since we launched the Project segment in China 6-7 years ago, we have increased our market share by offering a wide range of solutions focused on the top 30 and 100 real estate developers. At the time, the extension of the period for collection of trade receivables from certain real estate developers was an effective means of getting ahead of competitors, even if it involved certain risks. However, the Chinese government has put in place restrictive measures, putting real estate developers, including quasi-private companies, in a difficult situation.

In this environment, we have been diversifying receivables collection risk since 2H of FY2021 by increasing transactions with public real estate developers and focusing on distributor projects such as builders. As a result, the share of large real estate developers in total transactions is gradually decreasing. Based on our understanding of the differences in the current market environment compared to the past environment, we aim to develop our business while maintaining a balance between benefits and risks.

When you look at the new housing market in China, sales of ready-to-occupy units with interior finishes are increasing, rather than skeleton units without interior finishes. As a result, some of the DIY demand is heading to the Project segment. However, we have been focusing more on the DIY segment since fiscal 2021 and believe there is still room for revenue growth due to our ability to pass on price increases and our strong market power. brand in the DIY sector. As a result, DIY revenue growth has increased significantly, from low single-digit year-over-year growth in 2019-20 to 35% in fiscal 2021.

The do-it-yourself activity entails very limited risks because the period for recovering trade receivables is short and the collection of receivables takes place essentially at the end of the year. If our business depends on the Project segment, your concerns would be justified. However, NIPSEA China’s sales come mainly from the DIY business in China, which has remained on a strong growth path, so we do not believe the risk involved is high.

Regarding geopolitical risk, considerable progress has been made in decoupling in China. However, China is not self-sufficient in all raw materials, so the country may be vulnerable to certain risks. Moreover, if China were to isolate itself from the rest of the global economy, it would disrupt the entire Chinese economy. If this happens, there is a risk that disposable income will decrease, which will lead to lower demand for paint. Although there may be geopolitical risk involving China, we do not believe there are many major risk factors that could affect our business.


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