Financial Times 08Apr2020

(Amelia) #1

8 ★ FINANCIAL TIMES Wednesday8 April 2020


L E O L E W I S— TO K YO


For years, the factory automation spe-
cialist Keyence used its cash to attract
Japan’s top talent. The company had so
much of it, Keyence boasted in its
recruitment presentation, that it could
survive for 17 years without any sales
revenues.
To young graduates craving job secu-
rity, the message was compelling.
Across risk-averse corporate Japan the
company’s “rainy-day” preparations
were held up as a model in a country reg-
ularly pummelled by natural disasters
and man-made financial crises.
As the world’s third-biggest economy
moves towards declaring anational
emergency over coronavirus, Keyence’s
balance sheet looks clairvoyant. More
than that, after years of criticism from
western investors, Japan’s model may
emerge from the crisis more paragon
than pariah.
To foreign investors, Keyence’s pride
in its cash pile symbolised both the risk
and the potential of a market where
companies — from huge global brands
such as Nintendo, with ¥1.09tn ($10bn)
net cash, to hundreds of small-cap min-
nows — hoarded cash while refusing to
give shareholders the priority they
enjoyed in the US and UK.
The contrast with the US market is
stark: 14 per cent of companies in the
S&P 500 are net cash, whereas in the
Japanese market the figure for the Topix
index is 53 per cent.
According to calculations by CLSA
broker John Seagrim, the 434 non-
financial companies in the S&P 500
have a combined market capitalisation
of $18.8tn but just $880bn of tangible
book value — net assets minus intangi-
ble assets and goodwill.
In the Topix 500, 451 non-financial
companies with a combined market
capitalisation of $3.6tn are sitting on
$2.6tn of tangible assets.
For the past five years, since the gov-
ernment of Shinzo Abe announced
major corporate governance and stew-
ardship reforms, the central narrative of
Japanese investment has been that the
old resistances, many of them hardened
by the financial shock of the 2008 Leh-
man Brothers collapse, were faltering.
The theory was that a Tokyo gold
mine — a market where more than half
of all listed companies trade below their
book value — was about to be unlocked.
But the swift and unforgiving eco-
nomic impact of coronavirus, with its
punishment of highly leveraged compa-
nies everywhere — including, promi-
nently,SoftBank —has given Japan’s
cash- and asset-hoarding companies a
powerful new justification.
It may also, say analysts and inves-
tors, insulate them against the more
aggressive forms of shareholder activ-
ism.
Nikko Asset Management strategist
John Vail said Japan may now find the
moment of “peak activism” has passed
and that while calls from outside inves-
tors for strategic change and consolida-
tion are likely to continue, the kind of
activism that pushes for buybacks and


debt-fuelled expansion will diminish.
Another fund manager analyst said the
cash-rich Tokyo market could show the
way for a new philosophy of why com-
panies should exist at all.
“People have berated Japan for not
going far enough down the shareholder
reward route, but maybe that’s not the
route the world is on now,” said
Jonathan Allum, a Japan equity strate-
gist at SMBC Nikko.
Akihiko Shido, chairman of Yorozu, a
parts supplier for Nissan, credits strin-
gent balance sheet management and a
4.5-month buffer of cash and bank loans
for helping it weather the crisis that has
halted its operations worldwide.
The company has been targeted by

activists seeking greater returns to
shareholders, but “this crisis has proved
that our management policy was cor-
rect”, Mr Shido said. “I hope [the activ-
ists] will change their thinking.”
Alistair Dormer, the executive vice-
president of Hitachi, said that in addi-
tion to their strong balance sheets and
diversified sources of earnings — in the
case of conglomerates — other aspects of
the Japanese corporate model looked
appealing in the crisis.
“I think the world will probably
change after this and companies will be
viewed on how they looked after their
people and how they looked after their
customers,” he said.
“Unusual situations do help people

see companies in a different way. We’ve
seen some pretty bad behaviour by
some companies in this situation, and I
don’t think that will be forgotten.”
On the stock market, investors cer-
tainly seem to be re-evaluating the Japa-
nese model. Japan’s Topix index is down
16 per cent since February 21 in dollar
terms but has been hit less hard than the
S&P 500, which is down 26 per cent and
the FTSE 100, which is 30 per cent
lower. Japan’s banks, in particular, have
fared better than their western counter-
parts because the balance sheets of their
corporate borrowers are in better shape.
The virus hit Japan when its compa-
nies were under pressure from outside
investors like never before.

By late 2017, in a tacit admission that
the market mood had changed, Keyence
had removed the slide about its huge
capital-to-asset ratio from its presenta-
tions. Not because it was no longer true
but because a new generation of activ-
ists was swarming over the Tokyo Stock
Exchange on the premise that Japan was
changing the way it did business, thanks
to governance reforms that forced com-
panies to focus on returns and bring in
external directors and institutional
investors to step up their scrutiny.
The number of activist funds applying
public pressure to corporate targets
quadrupled between 2014 and 2019 to
31, and dozens more are active behind
the scenes.
As of last week, according to Mizuho
Securities, a quarter of companies in
Japan’s Nikkei 225 index have an activist
on their shareholder register, and 10 per
cent have two. The more undervalued
the company, the bigger the cash piles
and the portfolios of non-core assets, the
greater the appeal to the activist.
To a significant extent, the govern-
ance reforms had begun to work
towards rewarding shareholders. In the
financial year that ended on March 31,
share buybacks by Japanese companies
reached ¥7.3tn —a second straight year
of record highs nd a 23 per cent year-a
on-year increase.
The reason, said Nomura strategist
Yunosuke Ikeda, was that the reforms
had become entrenched and a larger
number of companies now judged their
own stock to be undervalued.
Richard Kaye, a portfolio manager at
Comgest, said that while it was too early
to predict fundamental changes on
activism in Japan, the rude health of cor-
porate balance sheets would strengthen
companies’ hands.
There had always been a suspicion, he
added, that Japanese companies did not
buy into the idea that a more aggressive
Anglo-Saxon approach was the way for-
ward.
“When we talk to our investors, there
is a consensus that with Japan you look
for something cheap and you rework the
balance sheet, and I think that this is
going to be challenged,” he said.
But as many now point out, views
were already beginning to shift in the
west. Last year, the influential Business
Roundtable in the US revised its defini-
tion of the primary purpose of a com-
pany to state that it should benefit all
stakeholders: customers, employees,
suppliers and communities — very close
to what corporate Japan had been claim-
ing were its priorities for more than four
decades.
According to Mr Allum: “The
supreme irony would be if the very tra-
ditional features of Japanese capitalism,
which the classic argument has always
seen as backward — the addiction to
holding large wodges of cash, the reluc-
tance/inability to lay off workers, the
pre-eminence of stakeholders rather
than shareholders — will actually
be... cherished by those who abide by
them and adopted by those who do not.”
Additional reporting by Kana Inagaki in
Tokyo

COMPANIES & MARKETS


apan cash-hoarders have moment in the sunJ


Businesses that prioritise strong balance sheets over shareholder rewards are better positioned to ride out pandemic


Asia Inc holds more cash than US
and European groups
 of total
     
Topix (Japan)
Shenzhen Comp (China)
Topix  (Japan)
CDax (Germany)
CSI  (China)
S&P/TSX (Canada)
S&P  (US)
CAC  (Paris)
FTSE All-Share (UK)
MSCI Europe (Europe)
FTSE MIB (Italy)
Micex (Russia)
Straits Times (Singapore)
S&P  (US)
Xetra Dax (Germany)
FTSE  (UK)
Ibex  (Spain)
Sources: FactSet, CLSA; Mizuho Securities * Active activist funds with Japanese investment either in Japan or overseas

Net cash Net debt

Number of activists in Japan up sharply
As of Sep *















     



More than a third of Nikkei 225 stocks
have activist shareholders
By selected global stock markets ()
      

ASE

DB

Topix

LSE

Nasdaq

NYSE

Nikkei 

S&P 

D E R E K B R OW E R— U S E N E R GY E D I TO R


ExxonMobil is slashing this year’s capi-
tal spending plans by $10bn and will
cut cash operating expenses by 15 per
cent as it seeks to preserve its dividend
inthefaceofthecrudeoilpricecollapse
sparkedbycoronavirus.


Capital investment this year will be
$23bn, down from the previously
announced $33bn. The biggest cuts will
be in the Permian Basin, the heart of the
US shale boom, where Exxon’s drilling
will slow — the second time in two
months that the company has lowered
its output projections for the area.
“We haven’t seen anything like what
we are experiencing today,” said chief
executive Darren Woods saidyesterday.
He added that Exxon was anticipating a
20-30 per cent short-term drop in global
oil demand.
Exxon said it could also reduce its
planned spending next year as it navi-
gated the downturn.
“We have the capacity to do more if
we need to,” said Mr Woods. “Our objec-
tive is to continue investing in industry-
advantaged projects to create value,
preserve cash for the dividend and
make appropriate and prudent use of
our balance sheet.”
Mr Woods, who on Friday attended a
meeting of oil industryheads with Presi-
dent Donald Trump at the White House,
did not endorse calls from some produc-
ers to impose tariffs on Russia and Saudi


Arabia to compel them to end their
price war.
“Our position has always been that
free markets for our industry work best.
It allows the free flow of product, it also
ensures that the most efficient produc-
ers continue to produce,” he said.
The Financial Timesreported on Sat-
urday hat US and Canadian officialst
had held discussions about imposing
tariffs on foreign oil supplies to North
America.
Production from Permian shale this
year would fall by about 15,000 barrels
of oil equivalent a day, said Mr Woods.
Previously, Exxon said output would
come in at about 360,000 b/d. In 2021
output is projected to be 100,000 to
150,000 b/d lower than the target of
600,000 b/d.
“The reductions we are making in the
Permian will not compromise the scale
or functional excellence” of the com-
pany’s operations there, said Mr Woods.
He added that, as storage facilities
and pipelines filled globally, producers
would be forced to shut down more pro-
duction, potentially adding to output
losses beyond those associated with the
reduction in planned capex.
Exxon said development of deepwa-
ter discoveries off the coast of Guyana
remained “integral” to its long-term
growth plans. Start-up of the 220,
b/d second phase of the Liza project
remained on course for 2022.
See Lex

Oil & gas


Exxon slashes capex by $10bn


and vows to protect dividend


Nintendo Switch consoles on sale at a Tokyo store. The gaming company has net cash of ¥1.09tn ($10bn)— Toshifumi Kitamura/AFP/Getty Images

K AY E W I G G I N S A N D M I C H A E L P O O L E R
LO N D O N

PrivateequitygroupEQTPartnersisin
exclusive talks to buy Air Liquide’s
hand sanitiser and disinfectant busi-
ness, in a roughly €900m deal agreed
as the company ramps up production
to meet demand during the coronavi-
ruspandemic.

The sale of Schülke, whose products
range from alcohol-based hand rubs to
hospital disinfectants and industrial
cleaning products, is one of very few
European buyouts to be struck in recent
weeks. The coronavirus crisis has left
dealmakers scrambling to shore up the
companies they already own, while debt
markets have dried up, making financ-
ing harder to come by.
Schülke is experiencing a “short-term
increase in demand [and] it is doing
anything in its power to deliver as many
products to the market as possible”, said
Christian Sinding, chief executive of
Stockholm-based EQT. While that will
slow down, he believes demand will
remain high in the future.
“I think the world has now learned
that good sanitation, washing your
hands and using hand sanitiser, those
are the two main ways to combat the
spread of germs and viruses,” said Mr
Sinding. “We think this trend is going to
be accelerated [in the] long term.”
Schülke was put up for sale by Air Liq-
uide last year before the outbreak of the

pandemic, and the French industrials
group initially gave it a roughly €1bn
price tag. However in the wake of coro-
navirus, Air Liquide had beenseeking a
premium, the Financial Times reported
last month, reflecting what one person
called the “coronavirus effect”.
An adviser to another bidder said
“nobody moved” when sellers asked
them to raise their bid on the grounds
“there’s been a shift in the way people
will use these products going forward”.
With adjustments, the company’s
earnings were pegged at €75m, two peo-

ple familiar with the matter said. The
deal comes at a time when the price of
one of the main chemical ingredients for
sanitisers — isopropyl alcohol, or IPA —
has hitrecord highs n Europe, reflect-i
ing a surge in demand.
Meanwhile, companies ranging from
gin distilleries to high-endperfume
makers ave converted production toh
help plug the shortage of alcohol-based
gels, and chemicals group Ineos has
ramped up capacity to turn raw materi-
als into hand sanitiser.
Additional reporting by David Keohane in
Paris and Robert Smith in London

Industrial goods


Air Liquide set to sell hand


sanitiser unit to EQT Partners


S O N G J U N G - A— S E O U L
E DWA R D W H I T E— W E L L I N GTO N

Samsung Electronics said first-quarter
profit would be near its lowest level in
five years as the economic fallout from
the coronavirus pandemic batters glo-
balgrowthinelectronicdevices.

The South Korean technology company
— the world’s largest producer of com-
puter chips, smartphones and elec-
tronic displays — yesterday said it
expected operating profit for the first
three months of the year to come in at
Won6.4tn ($5.23bn).
That is ahead of a Refinitiv estimate of
Won6.2tn and up nearly 3 per cent on
the same period in 2019, but below first-
quarter earnings reported in each of the
three years prior to that.
Shares in Samsung were up just under
1 per cent in morning trading in Seoul,
but remain down more than 10 per cent
this year. The company still faces risks
from the coronavirus epidemic, which
has forced it topause production t fac-a
tories in South Korea, India and Brazil
and close some retail operations in
Europe and the US.
“Demand for mobile phones, automo-
tive and consumer electronics is falling
sharply, which could negatively affect
chip demand in the second half if the
coronavirus outbreak is not brought
under control,” said Kim Young-woo, an
analyst at SK Securities in Seoul.
Samsung is one of the first big global

technology companies to provide first-
quarter guidance, offering insight into
how the pandemic is affecting demand
for consumer electronics and reshaping
supply chains.
Analysts said the operating profit pro-
jection reflected an improvement in the
profitability of Samsung’s smartphone
business and narrower losses for its dis-
play unit, as well as better than
expected chip demand from the bottom
of a cyclical downturn last year.
The company said group sales were
projected to grow 5 per cent to Won55tn
in the first quarter, though that would
still be less than the Won61tn reported
during a boom for the chip business in
the first three months of 2018.
It will report detailed financial results
for the quarter later this month.
Samsung, South Korea’s biggest and
most important company, has tried to
strike an optimistic tone during the
virus outbreak, telling shareholders
that global computer chip demand will
rise this year because of increased
investment from data centre firms and
expansion of 5G networks globally.
Analysts pointed to a boost in the first
quarter from server companies and PC
makers as a result of a broad shift to
working from home, increased video
conferencing and a boom in digital
entertainment prompted by lockdowns.
However, they warned that the com-
puter chip market could be hit hard by
the worsening economic downturn.

Technology


Samsung first-quarter profit


projection near 5-year low


Air Liquide put
Schülke up for sale
last year before
the outbreak,
initially giving it a
€1bn price tag

‘This crisis
has proved

our olicyp
was correct.

I hope [the
[activists]

will change
their

thinking’


Akihiko Shido

APRIL 8 2020 Section:Companies Time: 4/20207/ - 18:18 User:andy.puttnam Page Name:CONEWS2, Part,Page,Edition:EUR, 8, 1

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