Japanese listcos are coming under corporate governance scrutiny from all angles. It’s likely to create near term opportunities for advisors and investors.
In January, the Tokyo Stock Exchange (TSE) called on Japanese listcos to focus on improving shareholder friendly metrics such as capital cost and share price. Two months later it reiterated its stance and called out “around 50% of companies on the Prime Market and 60% in the Standard Market” for having ROE below 8% and P/B ratios below 1”.
“The TSE sent a 100-page letter to any company trading below 1x book. This put those companies under tremendous pressure… it’s a game changer,” a portfolio manager at a Japan focused international asset manager told the Flash recently.
The TSE’s efforts have triggered a wave of apologies and capital return initiatives in recent months. Japan Post Holding [TYO:6178] said it is “ashamed” of its low P/B ratio and others, such as Citizen Watch [TYO:7762], have directedly referenced the TSE’s reforms when announcing buybacks.
This pressure – and evidence that Japanese corporates are starting to listen - combined with billions of dollars flooding into the country’s stock markets due to international investors’ belief that Japan’s equity market has a bright outlook has seen the Nikkei 225 Index hit a 33-year high in recent months.
But international institutional shareholders, proxy advisory firms and activist funds are not simply riding the wave. Shareholder proposals have targeted a record-breaking 86 (77 in 2022) Japanese companies for the June AGM season. Many of these relate to the rejection of C-suite director appointments that have historically been foregone conclusions.
Japanese bosses were given a wakeup call in March when, Fujio Mitarai, the Chairman of JPY 4.7tn (USD 33.5bn) market cap electronics maker Canon [TYO:7751] was narrowly re-elected with just 50.59% of the votes. This week Toyota Motor [TYO:7203] fended off an unprecedented attack on Chairman Akio Toyoda and the carmaker’s perceived electric vehicle strategy failures. But the group has been left in no doubt as to the changes major shareholders want to see. Later this month JPY 2.9tn (USD 20.9bn) market cap ceramics and electronics maker Kyocera [TYO:6971] will come under a similar spotlight at its AGM.
The moves against the heads of both Kyocera and Toyota also take aim at the companies’ shareholdings in JPY 10.1tn (USD 72.3bn) market cap telecom company KDDI [TYO:9433], which has long been subject to activist scrutiny. Kyocera’s 14.55% stake in KDDI is worth twice Kyocera’s market value.
Eight companies to watch
With a focus on companies trading below 1x PBR and generating less than 8% ROE, the Flash has screened technical and valuation indicators, cross-shareholdings, shareholder activism history as well as news flow to identify eight companies that may be pushed into taking material corporate action in the near term.
Japan Post Holding [TYO:6178]. The JPY 3.5trn (USD 25bn) market cap postal holding company owning 61% in Japan Post Bank [TYO:7182] and 49.8% in Japan Post Insurance [TYO:7181] said it is “ashamed” of its 0.34x PBR. The company said it will review its new mid-term plan announced on 14 May 21 and reiterated that its FY23 dividend will be kept at 41.4% but that its FY24 dividend is forecast to be 72.1%. Japan Post Holding, Japan Post Bank and Japan Post Insurance are all trading around 0.4x PBR. The Ministry of Finance owns 36.29% in the postal holding company; its stakes in Japan Post Bank and Japan Post Insurance are worth an aggregate of JPY 2.8trn (USD 20bn).
Nissan Motor [TYO:7201]. The 43.4% Renault [EPA:RNO] owned JPY 2.2trn (USD 16bn) market cap automotive company is trading at 0.4x PBR. Nissan Motor said in its May earnings call that in addition to increasing its dividend, it sees “an urgent need to improve the price-to-book value” to increase shareholder value. The company also owns 43.1% of Nissan Shatai [TYO:7222] which generates 2.3% ROE and is trading at 0.83x PBR. Activist Effissimo has 25.6% of Nissan Shatai. In February, Renault agreed to reduce its stake in Nissan Motor to 15% in 4Q23 as part of a plan "to take their partnership to the next level".
JFE Holdings [TYO:5411], the JPY 1.2tn (USD 8.3bn) market cap steel maker, said in May it takes the low PBR issue “very seriously”. It said it will implement a growth strategy for its next (8th) mid-term plan [due for FY25] but did not provide any concrete details. JFE noted that one possible explanation for the low PBR is that "investors do not have a clear understanding of the future growth potential of the company and that they may feel this uncertainty as to whether profitability will not reach the cost of capital, whether profitability will be sustained...". It also said JFE will improve its P/B ratio following implementation of the 8th mid-term plan. JFE owns 65.16% in JPY 38.8bn (USD 278m) market cap JFE Systems [TYO:4832], which generates 17.7% in ROE while trading at 1.6x PBR.
Toppan [TYO:7911]. The JPY 994.7bn (USD 7.1bn) market cap printing company is trading at 0.75 PBR and 5.85x EV/TTM EBITDA, much lower than close peer Dai Nippon Printing [TYO:7912] which was targeted by US activist Elliott early this year and subsequently saw its PBR rise to 1x from 0.6x. Toppan said in its new mid-term plan that it would reduce strategic shareholdings to 15% of its net assets. Toppan is a top shareholder in TOYO INK SC Holdings [TYO:4634] and Bellsystem24 Holdings [TYO:6183]. The two stakes are worth an aggregate of JPY 39.4bn (USD 283m). The company also announced that it would carry out a JPY 100bn share buyback (~10% of share capital) over the next three years to improve shareholder value. At the 2022 AGM, Toppan Chairman and President both recorded an approval rate of slightly above 80%.
TBS Holdings [TYO:9401]. The television broadcaster trades at 0.42x PBR and has net cash of JPY 77.4bn (USD 557.4m), equivalent to about 19% of its JPY 394.2bn (USD 2.8bn) market cap. The company also owns Tokyo Electron [TYO:8035] shares worth JPY 109.2bn (USD 785.8m) or about 14% of TBS’ net assets as of March 2023. In 2019 Whitebox Advisors called on TBS to accelerate the unwinding of cross-shareholdings as well as to review the low-return real estate business. UK-based activist investor Asset Value Investors have also urged TBS to cut its cross-shareholdings with Tokyo Electron. At the 2022 AGM, TBS President and Chairman both received slightly more than 70% of support from shareholders.
Fuji Media [TYO:4676]. The JPY 318.7bn (USD 2.3bn) media company trading at 0.39x PBR said in its mid-term plan in May that it aims to promote growth investment and reduce strategic shareholdings to improve return on capital and shareholder returns. Fuji Media’s top holdings include stakes in Toei Animation [TYO:4816], Yakult Honsha [TYO:2267], Recruit [TYO:6098], Toho [TYO:9602] and Dentsu group [TYO:4324] which in aggregate are worth at least JPY 189.6bn (USD 1.37bn), equivalent to about 32% of Fuji Media’s net assets. Asset manager Silchester is Fuji Media’s largest shareholder with 12.15%. The company has received two shareholder proposals that will be voted on at this year’s AGM on 28 June. Last year, Fuji Media’s Chairman and President both received shareholder approval of slightly above 70%.
Alps Alpine [TYO:6770], the JPY 270.9bn (USD 1.9bn) electronics company, is trading at 0.64x PBR and 3.86x EV/TTM EBITDA. The company said on 26 May that it aims to improve PBR by introducing a ROIC framework to evaluate and manage business portfolio profitability. It also aims to increase the dividend payout ratio to 71% from 35%. The company’s ROE fell to 2.9% for FY22 from 6.3% in FY21. In 2019, Alps acquired Alpine Electronics at 8.2x EV/EBITDA. Japanese activist fund City Index Eleventh currently has 6.14%.
Hokuetsu Corp [TYO:3865]. ROE for the JPY 170.8bn (USD 1.2bn) market cap paper milling company has dropped to 3.8% for FY22 ended March 2023 from 10.3%. It trades at 0.79x PBR. HK-based activist Oasis Management, which has been engaging with Hokuetsu since 2019 is currently the company’s largest shareholder with more than 18%. The activist has decided to vote against the re-election of President Sekio Kishimoto at the 29 June AGM due to his failure to address corporate governance issues and inability to realize the full potential of Hokuetsu. Meanwhile, UK-based Nippon Active Value Fund also made shareholder proposals including a 10% share buyback where the company has 10.6% in treasury shares.
