Gate 2 Strategic Edge
Portfolio Management and Financial Strategy
Diverse Business Portfolio Resilient to Downward Pressure
Mitsui has carried out business investments by leveraging the experience and client base it has amassed through trading in a wide range of industries. Mitsui aims to further enhance the value of its investments by leveraging its business management capabilities and comprehensive strengths. At the same time, Mitsui has continuously replaced its business assets while always keeping an eye on the future. Formed as a result of these efforts, our diverse business portfolio has been able to generate strong cash flows in a challenging business environment under the COVID-19 pandemic.
Core Operating Cash Flow*
Cash flows from operating activities minus cash flows from changes in working capital. Core operating cash flow for the fiscal year ended March 31, 2020 (above) is calculated by additionally deducting the repayments of lease liabilities.
Core operating cash flow for the fiscal year ended March 31, 2020 (above) is calculated by additionally deducting the repayments of lease liabilities.
Practicing Disciplined Portfolio Management and Maintaining a Stable Financial Base
By practicing disciplined portfolio management, Mitsui has strategically allocated our limited capital to areas that are of importance to the Group, to further strengthen our business portfolio with the aim of sustainable growth and social development.
In addition, our basic financial policy is to maintain liquidity and a stable financial base to support our diverse business portfolio as well as our growth strategies.
Basic philosophy of portfolio management
- Strengthening earnings bases of existing businesses and leveraging economies of scale
- Generating inter-business synergies through strategic positioning in the value chain
- Acquiring new function platforms
- Expanding into new business fields and taking on the challenge of creating innovative new business models
FOCUSThe Portfolio Management Committee’s Role and Yearly Cycle of Portfolio Management
Establishment of a strategy for the overall portfolio of Mitsui
Specify priority areas and areas of focus, new target areas, and areas that need to be reviewed, in view of the overall strategy of Mitsui, the individual strategies of business units, market trends and macro analyses, and the allocation of its management resources
Establishment of investment and finance policies
Establish important policies relating to the management of the overall portfolio of Mitsui such as guidelines for investment and finance limits, the design of a consolidated capital cost structure, etc.
Regular monitoring of Mitsui’s overall portfolio
Review regularly to confirm the significance of all business holdings, in addition to confirming the appropriateness of asset size in accordance with each business area and country
Withdrawal standard cutoffs include risk-return ratio, core operating cash flow, insolvency indicators, and other profitability standards as well as qualitative standards.
Indicators We Focus on in Our Financial Strategies
In 2014, Mitsui introduced a framework for cash flow allocation. The purpose of this framework is to drive the implementation of our growth strategy while maintaining and strengthening our financial foundation by making a balanced allocation of cash, gained from operating cash flow and asset recycling, to both growth investments and shareholder returns. For all of the indicators we focus on when considering financial strategy, our policy is to maintain appropriate levels based on our cash flow allocation framework.
Concomitant with the shift in business composition from trading to investment, our investment assets and fixed assets have been increasing. When business investments of fixed assets that are relatively high risk or take longer to generate returns, leverage needs to be reduced, and we have in fact deleveraged significantly compared to historic levels.
Non-Current Assets / Shareholders’ Equity
When we compare our non-current assets, which are relatively high risk, and the equity that ultimately absorbs this risk, we see that there has continued to be gradual improvements. The gap between non-current assets and equity is mainly funded by interest-bearing debt, and if this expands, it reduces financial stability.
Risk Assets / Shareholders’ Equity
In addition to the risk amount carried by assets on the balance sheet, we assess and periodically monitor the amount of off-balance-sheet risk, such as market risk and guarantees, using a set standard. Our risk exposure is being held within a range of about 60%–70% of our shareholders’ equity, and we periodically stress test our risk assets for various scenarios, verifying the impact on the risk assets to shareholders’ equity ratio.
Lifecycle Management of Business Investments
Mitsui develops existing businesses by leveraging the networks and insights gained through partnerships and customer relationships in various industries and regions while seeking out and advancing new projects with the potential to become promising businesses in a similar manner.
Analysis, Evaluation, and Deliberation
Investment decisions are made based on analysis of qualitative factors as well as the required profitability ratio and other quantitative standards.*1 Moreover, a variety of factors are evaluated in making decisions, including the ability to execute business plans, Mitsui’s functions to be utilized, probability of increasing value, conditions of contracts with other related parties, risk analysis and management measures (including ESG-related risks), value of the business, period of project execution, and internal control effectiveness. Investment candidates are screened and final decisions are made after deliberations by relevant committees.
- Verify assumptions, including strategic viability, ability to execute business plans, commodity prices, costs, foreign exchange rates and interest rates
- Deliberations by committees on investment, loan, and guarantee amounts
|Council of Investment and Finance Proposals||Investment, loan, and guarantee proposals, project entailing acquisition of business assets or other such project||Over
|Corporate Management Committee||Total investment, loan, and guarantee amount on a consolidated basis||Over
|Among investment, loan, and guarantee proposals, matters to be resolved by the Board of Directors||ー|
|Board of Directors||Disposal and acquisition of important business assets||Over
- In accordance with the Specially Designated Business Management System, separate discussions are held, when necessary, regarding business domains with high qualitative risks pertaining to ESG and other factors.
- Introduced internal carbon pricing system in April 2020*2
Final Investment Decision and Execution
Investments are decided and executed once it has been determined that they meet internal approval standards and that contractual obligations have been fulfilled.
Energy resource and infrastructure development projects are advanced together with partners. By carefully monitoring project progress and flexibly responding to unforeseen circumstances, projects are completed within the planned budgets and timeframes.
Risk Management Project management (budgets, construction period, credit, contracts, finances, environmental concerns, etc.)
Business Operation and Management
Mitsui plays a direct role in operating businesses and managing companies in order to boost their competitiveness and value. Mitsui’s functions are utilized to this extent by appointing professionals who are highly specialized in the respective business area, dispatching our diverse group of professionals, and pursuing close coordination between Mitsui and individual businesses. Furthermore, inter-business collaboration is promoted to help Mitsui explore new markets and business models. Our aim is to continuously improve the efficiency of invested capital by utilizing ROIC (return on invested capital) as an internal management indicator, in addition to profits and cash flow.
Businesses we have invested in are continually evaluated based on growth potential, the ability to increase value with Mitsui’s functions, and strategic benefits. If it is deemed that a business’ viability is beginning to peak, we will consider new strategies, such as merging businesses into other companies, or the possibility of asset recycling, and then put these plans into effect.
- Quantitative standards considered include consolidated internal rate of return, ratio of consolidated investments and loans outstanding to guarantees, and risk-return ratio. The risk-return ratio is the ratio between the amount of risk assets associated with a specific project and the profit for the year projected to be generated through Mitsui’s equity holdings in the project. Risk assets refer to the maximum amount of anticipated loss on operating receivables and investments, assets such as property, and off-balance-sheet positions such as liability on guarantee belonging to the Group, calculated by multiplying internally established risk weight according to latent risks such as credit and market risks.
- For more information on the internal carbon pricing system, please refer to Sustainability Management