Financial Times 08Apr2020

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