【 10 min FY2021 2nd Quarter Earnings 】

Earnings

FY2021 2nd Quarter Earnings Presentation (Apr. 2021 – Sep. 2021)

Shuhei Abe, President and CEO, will explain the outline of the SPARX Group's Q2 FY2021 financial results and recent business activities.

Question: Continuing the positive momentum from the first quarter, this quarter's revenue and profits were significantly higher compared to the same period of the last fiscal year.

Please summarize the financial results for the second quarter.

CEO:Shuhei Abe:

Operating revenue was up by 12.5% year on year, increasing from 6.03 billion yen last year to 6.78 billion yen this year.

Although management fees increased as our average assets under management, or AUM, rose 24.8%, our operating revenue's overall growth rate was 12.5% due to a decrease in performance fees from 748 million yen last year to 512 million yen this year.

Our average management fee rate remains at almost the same level as the previous year, or 69 basis points.

On the other hand, operating profit increased by 32.2%, from 2.33 billion yen to 3.08 billion yen, not only due to the increase in our management fees but also lower expenses, especially office-related ones.

In addition to the reasons stated earlier, we recognized a gain of approximately 200 million yen from the sale of our investment securities.

As a result, net income rose 59.5%, or from 1.45 billion yen last year to 2.24 billion yen this year.

All in all, it was a positive quarter with our Base Earnings significantly increasing by 48.7%, or from 2.05 billion yen to 3.06 billion yen, reflecting the increase in our management fees earned.

In particular, I would like to highlight that our Base Earnings are steadily growing and have recovered to the same level as our record-high achieved in March 2007.

Our earnings power is certainly becoming stronger, but I would like to inform our shareholders of this fact because we have taken many small steps over the years to nearly achieve a complete recovery from our stagnation that was triggered by the Lehman Financial Crisis in 2008.

Also, as mentioned earlier, we recognized a gain from the sale of investment securities in the second quarter. This gain is related to using our proprietary capital to seed or start new funds managed by SPARX and is an example of our strong investment capabilities to build track records for these new funds.

In fact, the majority of our investment securities on our balance sheet represents seed capital in funds that we manage. When considering to seed a fund, we aim to generate sufficient returns in excess of the company's ROE for our shareholders.

Fortunately, these seed investments to-date have earned sufficient unrealized gains. I would like our shareholders to understand that we are not only using our capital to create new businesses but to also earn steady returns.

We will continue to strive to strengthen SPARX's unique business model as an investment company that has always started and built new business opportunities by developing new investment strategies.

Finally, we have already issued a press release reporting the completion of our stock buyback program with the purchase of 962 thousand SPARX shares for approximately 250 million yen.

We will continue to do our best to provide shareholders with higher and more stable returns.

Question: Would you please share your thoughts on the company's progress to-date towards its 3 trillion yen AUM goal by 2026?

CEO:Shuhei Abe:

First, the Group's AUM as of September-end 2021 was 1.6 trillion yen, which is an increase of 5.4% from the end of March 2021.

In particular, AUM for our Japanese Equities business has exceeded 1.1 trillion yen, and new monies for our long-short investment strategy have steadily continued to grow. We plan to continue to increase AUM for our other alternative strategies, including long-short, to strengthen our hybrid model.

For our OneAsia Equities business, Daiwa Securities started selling our new publicly offered investment trust in October.

The AUM for the Real Assets and Private Equity businesses have been stable and steadily increasing each year.

In addition, we believe that our earnings will receive a boost from Mirai Creation Fund I in the form of performance fees as more of its portfolio companies are going to be exited.

Most recently, the Private Equity business launched the Mirai Creation Fund III in October. We are currently conducting marketing activities and aim to raise 100 billion yen or about 1 billion dollars.

If we can achieve this, then an AUM of 2 trillion yen will come into our sight.

We will do our utmost to make this happen in order to reach our bigger goal that is to increase our AUM to 3 trillion yen.

To achieve our intermediate goal of 2 trillion yen in AUM, we have started new investment strategies that reflect our uniqueness through our Real Assets and Private Equity businesses.

At the same time, I am focusing on our equities businesses too.

First, I would like to strengthen our signature business - Japanese Equities. This business is still about 40 to 50% smaller than our record-high AUM in 2008.

Over the past couple years, I have initiated new strategies that are related to ESG and governance driven engagement and would like to continue to think about new opportunities.

I hope that these actions will be a driving force toward reaching our goal of 3 trillion yen in AUM.

I also would like to focus on our OneAsia Equities business. Our OneAsia investment team was created in 2006 and we have been nurturing our investment professionals for the past 15 years.

I am proud to say that it is one of the best Asia investment teams in the world.

I would like to spread the word about our great team to investors in Japan and to the world and am responsible for creating a new fund for them to demonstrate the quality of their Asian investment activities.

Since starting SPARX more than 30 years ago, I have consistently and repeatedly shared the SPARX investment philosophy with all SPARXONs and carefully selected each investment.

I believe that this approach has and will continue to strengthen our investment capabilities, which in turn will make SPARX a stronger investment company.

It is a process that will sustain our organization as well as nurtures our professionals' growth.

In this sense, I believe it is not only important to repeatedly share but also discuss the SPARX investment philosophy including our Purpose, Vision, and Mission.

These discussions allow everyone to develop a common and deeper understanding that can be shared by all SPARXONs from executives to employees, and can be put it into practice on a day-to-day basis.

This quarter, I conducted a series of sessions to review SPARX's Vision Statement.

As a company-wide effort, I personally hosted more than 30 sessions, each session was at least 2 hours long, with all of our employees to once again re-examine our Vision Statement and ensure that all SPARXONs are able to share it more firmly

I believe repeatedly sharing our vision is the source of SPARX's strength.

While remaining committed to our Vision of becoming the most trusted and respected investment company in the world, we will further strive to remain a company where investors are hopeful and supportive.

We sincerely ask for the continuous support and encouragement from all of our shareholders. Thank you for listening.

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