ORIX Corporation (IX) Q2 2020 Earnings Report, Transcript and Summary

Good afternoon. I’m Yano of Treasury and Accounting Headquarters. Thank you very much for your attendance to this business performance announcement meeting of our company. Let me now start my presentation on our second quarter business result for FY 2020 March end period. I hope you can hear me. Now please open Page two of the handout slides. Net income for the quarter was up by 2.6% year-on-year to JPY 159.2 billion, which resulted in annualized ROE of 10.9%. Please refer to the chart on the right-hand side. Net income tends to fluctuate from quarter to quarter to some extent. However, the result for the single quarter this time was at a higher level at JPY 89.9 billion with annualized ROE of 12.3% as compared to JPY 69.2 billion and annualized ROE of 9.6% in the first quarter. So please turn to the next page. The page shows the breakdown by business segment. Segment profit for the second quarter was up by 3% at JPY 230.4 billion. The trend of the profit over the past five years are shown on the bar chart on the same page. The pale blue expresses the level of gains on sales, while the darker blue expresses the level of segment profits excluding the gains on sales. From the dark blue bar chart, I hope you can see a stable growth achieved over the past five years by the segment profits that excludes gains on sales. Now please refer to the bar chart in a small box on the right-hand side of the same page. Here we compare the result against the first half of last year. The segment profit excluding gains on sales achieved a higher level than the first half of fiscal year 2019, thanks to contributions made by NXT Capital and Avolon, both of which was a new investment in the prior fiscal year. It is our intent and will to continue to steadily grow the segment profit excluding gains on sales going forward. Now gains on sales for the first half was JPY 74.5 billion. This is an increase by JPY 2.5 billion from the first half of last fiscal period of JPY 72 billion. We divested some assets in the Real Estate segment and Overseas segment, including ORIX Living, the largest contributor to the gains on sales, which we concluded the deal in August of this year. As you may know, we have been proceeding with the sales of our own shares of Houlihan Lokey in the United States since its IPO in 2015. But I would report to you that we have completed the sales of our entire holding as of July of this year. We will continue to exert our effort to build the portfolio of asset and continue to enhance its value so that we can generate steady and constant gains on sales, although fluctuation may not be avoided from quarter to quarter or from year to year due to the nature of the profit that can be enjoyed from the gains on sales. We at ORIX regard the profit to be a profit that are generated from our day-to-day businesses. Please turn to the next page. The page shows the trend of segment profits as well as segment assets. Segment profits was up by 3% at JPY 230.4 billion. Profits of Real Estate segment, Investment and Operation segment as well as Overseas segment were up while the profits of other segments were down. Segment assets increased by JPY 435 billion. This includes the impact from leasing accounting standard change by about JPY 200 billion as well as a negative impact from foreign exchange at about JPY 120 billion. So if it was not for these impacts, the assets increased by about JPY 360 billion. Details of the performance by each and every segment are shown from Page 15 onwards. So allow me to make a few comments about each and every segment, although it may be very brief. So while, of course, projecting the page of each and every segment, it will be only a few words to each and every segment. So this is going to be Page 17, Corporate Financial Services segment profit was down by JPY 7.6 billion year-on-year at JPY 9.2 billion. The main reason was attributable to a decline in agency fee income from life insurance business for corporate customers. Accounting software and its support business, Yayoi, on the other hand, enjoyed profit increase as a result of increase in the numbers of fee-based support membership as well as the sales of packaged product. Now Maintenance Leasing segment’s profit was down by JPY 4 billion year-on-year at JPY 16.6 billion. Despite of the persisting harsh competitive environment in the auto-related businesses, we managed to maintain the level of revenue in both leasing and maintenance businesses as the prior year. However, in order to further expand the client base, service-level improvement was indispensable, which translated in an increase in SG&A, and for this reason, the profit was down. Now the negative impact from the change in the accounting standard were JPY 1.3 billion for Maintenance segment, and as I had explained, JPY 900 million for Corporate Financial Services segment in the first half. Now let me move on to the next page. Real Estate segment profit was up by JPY 2 billion at JPY 46.2 billion. Large amount of contributions are continuing in this segment that includes the sales of ORIX Living shares in the second quarter. DAIKYO enjoyed a profit growth of JPY 5 billion due to a large number of condominium units being delivered in the second quarter. Now the next is Page 23, Investment and Operation segment profit, which was up by JPY 3.5 billion at JPY 28.4 billion. Although there was some negative impact from the decrease in the assets for service businesses. In the Investment and Operation unit of the segment, CORNES AG the new investment in the last year, has started to make profit contributions allowing the unit to trend flat Y-o-Y. Concession business increased its profit by 3.9 – includes, of course, Kansai International Airport, this concession business increased its profit by JPY 3.9 billion, thanks to a rise in the number of tourist visitors to Japan as well as sales of goods. Now the next segment is a Retail segment. The segment profits was down by JPY 6 billion at JPY 43.2 billion. Profits declined due to the large gains on sales in the last fiscal year as well as a decrease in profit generated from former Hartford Life Insurance. And also, banking continued to expand mortgage loans for condos for investment, resulting in an increase of financial revenue and income. So this is going to be the sixth and the last segment, Overseas segment. The profit of the segment was up by JPY 19.1 billion at 869 – JPY 86.9 billion. OCU in the United States increased its profit as a result of growth enjoyed by the asset management business, including NXT Capital. And the next is OCE, which is ORIX Corporation Europe, again, an asset management business. Although AUM did expand, the fee pressure continued due to a shift in trend from active to passive that resulted in declining profit. And the next is Aircraft and Ship business, benefited from incorporating profit from Avolon, new investment in the prior year, while Asia and Australia increased their profit, former from gains on sales on investment from the first quarter and latter from a positive turnaround from a loss incurred from IL&FS in India in the prior quarter. Now this concludes the performance explanation by segment. And please go back to Page five of the slide deck. And this is going to be the last page that I’m going to be covering. The page shows the trend of employed capital and breakdown of funding over the same period. Funding environment remains to be favorable, allowing us to enjoy sustained – substantial capacity to either borrow from financial institution or procure from capital market. We will further effort in diversifying our fund method as well as – funding method as well as the market to tap on, while continuing to extend the duration as well as diversifying the timing of maturity. As shown on the chart to the left, long-term debt ratio is now at about 90%. We will remain to be flexible in maintaining a stability of our fund management. And moreover, employed capital ratio as at the end of September was 85%, an improvement from the end of prior year as a result of buildup of an internal reset. We intend to carefully control the employed capital ratio as well. With regard to the financial soundness, Inoue, our CEO, will elaborate a little more in his presentation on the midterm direction later. This concludes my presentation of the second quarter business performance for FY 2020 March end. Thank you for your attention.

I’m Inoue from ORIX. Thank you very much for your attendance once again. So I would like to explain in the backdrop to the reasons why we have decided to make some changes to our midterm business plan. As you may recall, back at the time of the business performance announcement in October of 2017, we made the announcement of achieving net profit growth of 4% to 8% during the three years of 2019 – FY 2019 to 2021, with ROE of more than 11% and the maintenance of credit A rating. However, for the first half of 2020 March end period, we had posted a net profit of JPY 159.2 billion, which is an increase by 2.6%. However, for the following reasons, I would like to report to you that we have – we will be only generating a net profit of JPY 300 billion for the full year of 2020 fiscal period. While the pretax net profit is forecasted to be at JPY 430 billion, which is an increase by 9% and also a record high, however, after-tax profit is expected to be down by 7.3% year-on-year. Since the beginning of this year, macroeconomic slowdown has become more apparent. In addition to that, there seems to be no end to China-U. S. trade war as well as chaotic conditions in Iran as well as Middle East countries are aggravating and also uncertainty in EU with the Brexit and geographic – geopolitical risks seems to be increasing. And despite of IPO market experiencing confusion, there’s still an abundance in terms of liquidity. So therefore, despite of the fact that we may start considering making an investment in certain deals, the valuation for each of those deals are way beyond the price of what we regard to be appropriate and adequate and which, in fact, propels us to remain to be cautious. So as to the portfolio of ORIX in the United States, Europe as well as in China, it is well diversified and it is centered around infrastructure related. And we do not have any investment in trade related nor the manufacturing related, which means we’re not going to be – we cannot expect us to be negatively affected by all the geopolitical risk that are aggravating, but we feel the need to recognize our attitude towards investment in light of these macroeconomic conditions of the world. While despite of all this, we are securing quite a rich pipeline. But in order to – for us to maintain an appropriate and adequate level of valuation, we feel the need to specialize and focus on the development deals, in other words, a greenfield rather than brownfield. Although – however, although greenfield has a benefit of allowing us to have a better control over the investment amount, but it tend to incur cost before taking much time in making a positive contribution to the business performances. So therefore, we would like to continue to give ways and/or rather prioritize real estate investment deals such as MICE-IR. But as I have said, there will be a cost incurred in advance for the greenfield investment. With regard to MICE-IR, despite of the fact that we have not been approved of our project, but we are expecting to generate as much as JPY 5 billion of expenses in this year for RFC as well as RFP, and that we are expecting to generate more expenses going forward as well. But it is something which we cannot avoid in order to win the deal. So for the – in the short run, we would have to be incurring cost in advance of the profit generation or the revenue generation, which would a put pressure upon our P&L. In light of all this, for this year as well as in the next year, we feel the need to revise our midterm business plan. So although we have come up with a target of achieving 4% to 8% of profit growth starting from 2019 for the three years, but we would like to take this back and start all over again. Rather, we have come up with a renewed target of achieving JPY 300 billion of net profit in March end of 2020. While the net profit target for 2021 March end, we would like to continue to monitor our business performances and continue our rigorous analysis of our business performances and would like to come up with an announcement at the end of the next – this fiscal period. As to the target of maintaining credit rating of A, we would like to change it to an expression of continued maintenance of financial health, while maximizing our effort to maintain credit or keep the credit A rating. So the reason for this is because we do not want this maintenance of credit A rating to become the factor in making any investment decisions, but please do understand that these changes is not going to be a change – which is not a mere change in the maintenance of the credit rating. We are aiming to increase the net income level from the current JPY 300 billion level to JPY 400 billion to JPY 500 billion. However, for new investments, we have to prioritize our projects with upfront cost, which means that for the short term, ROE may drop below 11%. We will still maintain the objective of ROE of 11%, which speaks to the capital efficiency. However, we would like to change it slightly to say that we want to achieve ROE of 11% over the mid to long term. In other words, we would like you to understand that for the short term, it may fall below 11%. The capital ratio against the total assets for the fiscal year ending March 2019 was at 23.8%, and we believe it is time for us to rediscuss the proper capital ratio for ORIX Group as a whole. ORIX Group implements various businesses. And for such a group, the lower limit of capital adequacy ratio should be set at around 23%, and this is the basic assumption, which will be used for us to figure out the shareholder returns. Of course, future financial turmoil and recession potentials should be included in this discussion as factors. So this policy is not an absolute. However, we believe that it is important for us to return the surplus capital to our shareholders. For fiscal year ending March 2020, we will employ whichever is higher payout ratio 30% or JPY 0.76 for the – per share for full year, JPY 0.35 for the first half and JPY 0.41 for second half, whichever is higher will be paid to our shareholders. We will also implement share buyback with a maximum ceiling of JPY 100 billion, which will be executed between the dates 1st of November 2019 to 8th of May 2020. Through the share buyback, we expect the total shareholder return to be at about 65%. We will also set upper limit to the treasury stock ratio of 5% against the total issued shares, and anything exceeding this ratio would be retired or canceled. Since the global financial crisis, as you can see on this chart, key financial indices have improved greatly. And as far as this chart will tell you, we do not believe there is anything that should interfere with the A rating. However, unfortunately, some rating agencies have pointed out that there are certain issues, which is not specific to ORIX Group, but general concern about ability to obtain foreign exchange for ORIX as well as Japanese financial institutions in general. And therefore, this concern may impact the rating of ORIX according to the ratings agencies. Either way, there is no change in our policy to further improve our financial indices. We intend to manage this company by achieving the right balance between growth and the financial health. JPY 1.5 trillion of liquidity consists of, first of all, JPY 500 billion of liquidity, which is based on the current assets of ORIX Bank as well as the Life Insurance company, and the remaining JPY 1 trillion is the current assets for maintaining the single A rating. We believe that the validity or appropriateness of our 23.8% of shareholder equity ratio should be done and this is why we have decided to buy back the shares as the first step toward this end. On this slide, you can see the project or assets that are being invested into or sold since April 2018. Although not shown on this list, if you include the sales of real estates as well as purchase and sales of aircrafts, the total amount is approximately JPY 1.3 trillion each, after implementing the new deals as well as the sales. And the total capital gain of these five assets shown here, which are being sold, is approximately JPY 100 billion. On this slide, you can see the list of pipelines of new deals, including developments as well as timing of profit contribution of these different deals. Out of this list, MICE-IR project is not a confirmed asset yet because we are still preparing for the licensure. RFC and RFP for Osaka Prefecture and Osaka City will have to be prepared, and we are collaborating with approximately 20 different companies, including MGM Resorts. This project requires upfront expenses, and until we obtain the license, we expect about JPY 10 billion worth of upfront investment. We believe that this project will put ORIX on a completely new stage. And the promotion of greenfield deals, including this deal, is one of the major reasons why we want to make corrections to the midterm plan in addition to the external factors. We will continue to execute the deals on the pipeline and the launch digital-related business, implement new M&A without fail and continue to sell projects from the existing portfolio. And this is how we intend to increase the net income from JPY 300 billion to JPY 400 billion and then JPY 500 billion. And success or failure of MICE-IR will determine whether or not we will make this announcement and also how to formulate the midterm plan for the term beyond March 2021. We appreciate your kind understanding and patience. It all depends on the market and macro environment. But if everything goes smoothly, we believe that we can achieve the level of JPY 400 billion by 2025 or 2026. And if we add the sales of assets from existing portfolio, we may be able to achieve this earlier. So market, profitability of existing portfolio, progress of development projects, pipeline and financial health, all of these different aspects need to be carefully monitored as we continue to move forward. On this graph, you can see the trend of ROE. If we maintain the current speed, ROE will not be pushed up until around March 2025, when the development projects will start to contribute in terms of profit. We should never buy something at expensive price. We need to carefully examine the purchase price of new initiatives and develop greenfields and continue to promote new M&A, which can contribute to the profit in the short term. We also need to promote timely sales of items in the existing portfolio and contribute and return to our shareholders, including proactive buyback, and we need to use the surplus capital in an effective manner so that we can achieve the red line level, rather than the blue line level. But for the short term, the ROE may drop below 11%. This is the summary. For the first half of fiscal year ending March 2020, net income went up by 2.6% at JPY 159.2 billion. ROE was 10.9%. Single A rating is still maintained, but in preparation for the future growth, ensuring flexibility is our biggest focus considering the current macro environment and other uncertain external factors. This is why we would like to revise and change our midterm strategic direction for the period up until the end of March 2021. ROE may fall below 11% for the short term, but as I mentioned before, we believe that early recovery is possible. And therefore, for the mid to long term, we want to keep the ROE 11% as our management objective. ORIX’ financial health is very sound, and we will make further efforts to work on this, but if we try to maintain single A rating, it may interfere with the growth potential. It is not appropriate for us to be constantly aware of the rating every time we want to execute a new deal. Of course, maintaining single A rating is something that we will strive towards, and we believe that there is obligation to return the surplus capital to our shareholders. We would like to use our capital for new investments to sustain growth, so this policy hasn’t really changed, but return of surplus capital is a different matter. And this time around, we have decided to apply whichever is higher, 30% of payout ratio or JPY 0.76 per share. And in addition, we have also announced the share buyback of JPY 100 billion, which puts the total return at about the 65%. We will continue to discuss the lower limit of dividend as well as proactive buyback for next fiscal year and beyond. That concludes my explanation about our midterm strategic direction for ORIX Group. There is some additional explanation regarding ESG activities at ORIX. ORIX Group Sustainability Report will be published on the website on the 31st of this month. We operate in 37 different countries and therefore, we should be a global group, which can achieve high global standard in addition to achieving growth objective of the whole group. We have a specific policy and objective for the group regarding sustainability and this is reflected in the business activities on a day-to-day basis at each segment. We have formulated policies for sustainability, human rights and the sustainable investments and loans. And important challenges related to sustainability have been analyzed and evaluated for each of these different businesses. In order to enable diverse business at ORIX, we need to distribute sustainability risk. By diversifying or removing sustainability risks, we are able to respond to new business opportunities in a flexible and timely manner. We will continue to promote our own sustainability initiatives going forward. And on the 31st of this month, report will be released. I hope that you can refer to this report. And if you have any questions at all, please contact our secretariat, and we would very much appreciate your inquiry. Thank you very much for your attention. That’s all from me. And now we would like to open the floor for questions. Regarding numbers, please ask Mr. Yano, but for other matters, I myself will attempt to answer your questions. Thank you very much.

[Operator Instructions] So the person sitting at the front row.

My name is Watanabe from Daiwa Securities. I have two questions. First of all, and that is to do with Page 8, midterm direction and also your dividend policy. So you are considering to set a minimum payment of dividend. So – which means that you’re not going to incorporate the idea of payout ratio going forward. Is that right?

So we have said JPY 300 billion of net profit is to be achieved. And if we were to set payout ratio of 30%, which means that we would be experiencing certain negativity, which is not particularly good. So this is why we have come up with this idea of paying the minimum amount of dividend. So it seems to be a trend mentioning this word of minimum payment of a dividend and we thought that we cannot take this for granted. And so we would continue to consider whether this is the best policy or not. But in our case, if you could wait a little while, for sure, we will be able to recover our businesses going forward. So this is why we did not want to, even for a single year, express any kind of negative indicators and this is why – this is, of course, a matter that is to be approved by the Board. So please do understand, this is not a decision that can be made by all my own. So – but this is something that I’d like to, for sure, consider.

And the second question is about the Page 12 and that is to do with the profit growth. And by following the best scenario, JPY 300 billion of net profit is to achieve JPY 500 billion, which means that you can be achieving a growth of 5% to 6% every year. So how much of a commitment do you have to this target? And achieving JPY 400 billion, JPY 500 billion, JPY 600 billion, what would be the base profit as well as what would be the structure that you are imagining to be generating in terms of the split?

So the new investment, as you can see, from this chart and the numbers, automotive, inclusive that is. So of course, there’s a declining trend. So in addition to this profit generation, which means that we have – so we have to be thinking a mix of the both, which means, you see, the main part is this part. So this is the divestment or the gains on sales of the existing portfolio, which means, in other words, ORIX Living, for example, in the past it belonged to this area. But in light of the profitability, we have decided to divest the business. So as to the existing portfolio of ours, there’ll be no such thing as fixing the portfolio forever. So in other words, we may perhaps decide to exit – make an exit from certain investment that we have made in the past or either we would maintain it because for the reason that it could be contributive to the overall numbers, as you can see, because it is all about hitting the right balance. I hope you understand where I come from. So I was wondering, out of this JPY 400 billion, JPY 500 billion of net profit to be generated in the future, how much of these amount is – would come from gains on sales, I wonder. But you see there are no kind of exception, please understand because we have – that has been the case in the past as well. But as I have explained last time, Rentec as well as automotive, we do regard the business to be still having more space for growth or B2B or AI-related as well as mobile revolution. If that is going to be the case, automotive profit can be growing at the same time. So these are the kind of direction that we are going to be employing going forward. Thank you very much for that.

[Operator Instructions] Gentleman in the front row, please.

SMBC Nikko, my name is Muraki. After the revision, the plan seems to be easily influenced by the decision of the management, ROE target on Page 13, for example. Can you give us more specifics about the outlook and the plan itself? For example, 11% to be achieved in the fiscal year ending March 2024. Is that how we interpret this slide? You say that you want to achieve this earlier, but is it problematic to conclude that it’s going to be March 2024? And it seems that it’s never below 10%, and earlier, you had the target of above 11%. So that was the commitment. Is there some kind of commitment, again, achieving 11% by March 2024 and keeping it above 10%?

Let’s go back a few slides. Unfortunately, this is mostly greenfield, MICE and IR, especially. This is JPY 650 billion expenses up until March 2025. So business will start, there’s depreciation. There’s no profit contribution, but 14, 15 and additional profit contribution will be made in the future. So this is JPY 1.3 trillion investment in total. And because we started this investment, it means that there’s going to be a big variance. And that is why we have decided to give this some flexibility in terms of the policy. With regard to MICE-IR, the local people wants to open this before the World Expo, but it’s extremely difficult to open this before the World Expo takes place. The coordination is not really completed. Genting, Galaxy and ourselves, there are three companies or three groups competing against each other. So we don’t know if we can win this. We will know maybe in the first half of next year and that will change the future picture very dramatically and that is why we are asking you to give us some time. Without MICE-IR, JPY 650 billion expense will not be incurred, which means that further return may be possible. So please give us one year. And once this is decided, we can give you more specific numbers. That is what we believe. But basically you want to go back to the 11%, but we are talking about 10% now. And regarding this slide and the previous slide, we will be making some adjustments, including buyback plan. So we will try to maintain 10% as much as possible and go back to 12% – 11% as soon as possible and further appreciate up to 12%, that is our policy. Thank you.

Second question. Proactive buyback from next fiscal year and onwards, what would be the trigger for proactive buyback? And how do you decide the amount? 11% ROE, if that was to be achieved, then without any exception buyback would take place. That was the plan. But are you looking at ROE or capital ratio, 23%? And is this used as a trigger?

Even with our JPY 100 billion, ROE impact and also, the capital impact is only about 0.1%. If ROE is set at 11%, JPY 1 trillion buyback would be necessary, but relatively speaking, it is not possible. Therefore, on a regular basis, about JPY 100 million buyback may take place, but it all depends on the market status. And when it comes to share buyback, it has to be approved by the Board of Directors. So I cannot really commit personally to share buyback at this venue. It has to be approved by the Board and there are 6 outside directors and we have to explain the growth strategy and provide balanced explanation in order to convince them. So to be honest, I cannot really say clearly whether we’re going to do a buyback or not. Please understand the situation.

So we’d like to entertain the next question. The person at the left.

I’m Tsujino from Mitsubishi UFJ Morgan Stanley. The first question is with regard to the dividend, setting a minimum payment level?

No. We are considering to set a minimum dividend payment.

So the level of this year for the dividend – so as compared to your expected level of the minimum payment of the dividend, how does it position? So you’re just – you have arrived at a decision so that it will be at least not lower than the prior year’s level of JPY 0.76. In considering this next year’s possible minimum payment of the dividend, is it indicative of the idea that may be applied in the next year is my first question? And the second question, oh, no, I’m going to be asking three questions, which is not allowed. And on Page 13, the blue line and the red line, in fact, is converging. And on Page 12 as well, so you are, in fact, disclosing the existing repurchase plan, but be it Investment and Operation or Real Estate, the red part, that may not be expanding dramatically, which means at the time when your net profit may expand beyond JPY 400 billion, you’re not expecting that much of a capital ratio control being very different or the management being very different because currently it is about 30% or so until last year that is. So is my understanding correct?

No, that is wrong. So the number here, so with the existing portfolio includes the ones that we may perhaps be considering to exit out from. So, of course, there are some – I’m sure the employees will not be happy, but there may be some still in the pipeline for us to be divesting in the future. So this is something that we can foresee in the nearest future perhaps. So this is only within the range of our expectations for now, which means that the unrealized gain, that could be perhaps generated from these assets, it is not included in this diagram. So far as we can foresee for now that’s what I’m saying. So if there was to be any future possible gains on, say, unrealized gain, so don’t put that too much pressure on me, please.

Yes, I understand.

But what I want to be explaining through this chart, you see 11% of ROE, may perhaps go below that level for the time being. I had told you, but then if you could give me – give us some time, I think you can start imagining by referring to this chart that we should be able to bring it back to the 11% level. I have confidence, however, of course, we will be affected. We cannot go unaffected by different conditions and environment. So this is why – based on this, this is how we are going to be managing our businesses. And at this point in time, we may be able to achieve JPY 400 billion, JPY 500 billion of net profit, if not earlier. This is how we are going to be taking the lead of our businesses as top management. And as to this appropriateness of the number JPY 0.76 of dividend, we did pay JPY 0.76 last time. And for all these reasons, I had told you that our net profit is to be at JPY 300 billion, and this is from a management perspective and it has nothing to do with the shareholders. So this is why we feel the need to still be paying JPY 0.76 at the minimum. But if we were to say at the minimum, then, in the future, you see the minimum of JPY 0.76 doesn’t sound very attractive in the future. So this is why for the time being, we would still be paying JPY 0.76. This was the expression that we had made use of because it is just a matter of changing the payout ratio to on or around 30%. So this is why I’m sure you have more interest in achieving the total shareholders' return of 65%. So this is why I would not like to set the payout ratio around 30%, but we would have to go through different processes so that we will be able to payout more on a total shareholders' return basis. That’s what we mean.

Gentlemen in the middle, please.

Sato with Mizuho Securities. First question about MICE-IR. On Page 11, specifically, you were talking about JPY 650 billion investment. What are the assumptions for this investment? You mentioned that total investment is about JPY 1 trillion and maybe 300,000 goes – JPY 300 billion goes where – so what is this JPY 650 billion for?

To the local government, we are showing the total cost of JPY 1.3 trillion and the 40% is ORIX and the 40% is MGM and 20% is 20 cooperating companies. Now the bankers, of course, are considering extending loans as we speak. Usually, this should be non-recourse loan, but this is different from Kansai Airport. Kansai Airport was already completed and the non-recourse loan could be given from day one. But for the IR, it’s corporate credit up until the completion of the project. So until 2025, JPY 650 billion will have to be on ORIX balance sheet. So JPY 650 billion up until completion and after completion, it should go down to about JPY 250 billion and debt should be about JPY 300 billion. This is non-recourse. However, according to the current accounting standards, it will be part of recourse, but there is no obligation to repay. In other words, it’s a separate line item.

So JPY 1.3 trillion, half of that is what you have just explained, is that right?

Yes. JPY 650 billion is what we have to pay and 20 cooperating companies will pay after the completion of the construction. So MGM and ORIX will have to share the burden up until the completion of the construction.

That’s very clear. Second question is on Page 12. Again, I would like to ask you about gain on sales. From existing portfolio, you’ll be maybe selling some of the assets and those are indicated here. You also have asset management below and also energy and environment. These are already included. So for these items, you are not assuming sales according to the current scenario. Is that correct?

That’s a very difficult question for me to answer. If there is a good offer for us to sell, of course, we will consider the possibility. However, as far as asset management business is concerned, at least for the time being, we can increase based on the market. There is fee pressure, though. Asset management business for a portfolio, is it really valuable or not? If there is no value, we will sell. But as of today, as we are preparing this slide, we are not planning to sell.

So the next question, please.

I’m from Citigroup Securities. My name is Niwa. And you’re revising the midterm business plan and this is my question and also the new investment. So with regard to the gross prospect, can I interpret it to be a downward revision? And if that is the case, is it due to the pressure from the market conditions or is it for any other reasons? In forecasting ahead, so the market forecast, if this was to be erroneous, then it may perhaps be repeated in the future. So I was wondering how can we kind of figure out the probability of you achieving this JPY 500 billion in the future?

So the investment that we have been making so far, after making an investment in that fiscal period, we could have enjoyed a profit generation from that year onwards from day 1 almost from the M&A deals. However, because of the complexity, the due diligence cost, in fact, is becoming – has become sizable. So for the next two to three years, many of the project that we are undertaking or we can foresee ourselves engaging may perhaps have more of an advance cost implications, such as unlike those Vision Fund who has abundance of capital. So we would have to be very careful and cautious in carrying out the due diligence process in making an investment decision. So the majority of the M&A deals are not by tender, but they are done on a one-on-one deal. So therefore, it may take us as long as two years, three years, but of course, which would allow us to pay an optimum amount of pricing – prices. So this is why, inclusive of MICE-IR, greenfield investment, the amount is quite controllable, and this is why the price is reflective of the quality, of course, which we would have to further effort in maintaining the quality. So we have a – we can be controlling the amount, whereas if it was to be a greenfield, the IRR is also under our control dependent on our management capabilities and competence and our efforts, that is the IRR could be enhanced. However, that it will put a pressure on the depreciation charges and this is why we had asked you to give us some time. And it doesn’t mean to say we have quit on the idea altogether of the brownfield investment, but this JPY 300 billion of net profit achievement, we do – we’re pretty confident in achieving the target and – but this JPY 300 billion, even if we can be achieving JPY 300 billion, but not carry out the repurchase program at all, then we would have the ROE dipping below perhaps 11%. And so therefore, the payout ratio and the deals that we are currently considering, they would be like JPY 1 trillion, JPY 2 trillion in some years time. So – which means – but they will not be profit generators for the time being, which means that the ROE may perhaps start to decelerate. So this is why in taking all this into account, we wanted to strike the right balance. So please understand that we have not revised the target for the sake of – for the reason that we have become less confident. But please understand that we have taken everything into consideration. As to the second question, referring to Page 12, this gray area of investment, new M&A and others, so the investment seems to be taking place at a later stage and MICE-IR contribution is much later and I was wondering, you have quite a number of deals that you are imagining. So can I take that you will be able to start generating some revenue profit from MICE-IR from 2030 March or I would not like to be that aggressive like our founder, Mr. Miyauchi, but I have to – of course, we would be engaging in discussion with all the top management and we have to arrive at a consensus. So this is not my – it is not a reflection of my personal idea, please do understand that. But as for this gray area that you had asked the question for, we have quite a number of deals as a matter of fact, a project in the pipeline. However, at this point in time, with the current conditions, there are about 20 plus deals, half of which exist outside of Japan. So in, of course, concluding the M&A deal outside of Japan and making sure that there will be a corporate governance in place, and of course, integration, management and so on and so forth, if we think that we’re successful in doing so, then this will be contributive, however, the price could be higher. But whether as a result of tough negotiation, we can lower the pricing or not, of course it remains to be assessed. So this, in fact, is reflected on to this gray area. So with the current management level, the commitment that we have or rather this is a picture that we are imagining ourselves to be achieving or we feel the need to be achieving. In 30 years' time, I’m sure I will not be around. But in a chronological manner, how would it appear, at what time – point in time, what kind of magnitude still remains to be unknown.