Japan Specialist

Mark Chadwick

Equity Bottom-Up

<ul>
<li>Shin-Etsu Polymer Co., Ltd. has entered into a contract to transfer its PVC pipe manufacturing business to Sekisui Chemical Co</li>
<li>Asset Value, a vocal activist shareholder, has likely had some strong words about better capital allocation.</li>
<li>The unwinding of the parent-child relationship (one way or the other) is where the real value creation lies</li>
</ul>


Shin-Etsu Polymer Co., Ltd. has entered into a contract to transfer its PVC pipe manufacturing business to Sekisui Chemical Co
Asset Value, a vocal activist shareholder, has likely had some strong words about better capital allocation.
The unwinding of the parent-child relationship (one way or the other) is where the real value creation lies


Shin-Etsu Polymer (7970) | Pipe Dreams or Parent-Child Break-Up

<a href="https://www.smartkarma.com/entities/shin-etsu-polymer-co-ltd" target="_blank" data-smartkarma-citation="entities:11035:1" rel="noopener">Shin Etsu Polymer (7970 JP)</a>  is a diversified plastics company specialising in PVC and silicone rubber products. The poor quality of corporate governance, an inadequate capital allocation policy, and an overly diverse business portfolio obscures the company’s underlying value. 
The Precision Moulding division (70% of profits) benefits from exposure to semiconductor industry growth. It is a high margin business that piggy-backs on structural growth in end markets such as 5G, IoT, and AI. 
At 1x EV/Revenue, the Precision Moulding division alone could be worth ¥30b, which is more than the company’s entire enterprise value of ¥28b. Perhaps it is worth considerably more – other semiconductor equipment and materials peers trade at around 9-12x EV/EBIT – implying a divisional valuation of ¥45b to ¥60b. 
Shin-Etsu Polymer has a huge capital deployment opportunity, with a net cash balance sheet (60% of market cap), strong free cash generation (12% FCF yield) and so-far limited shareholder returns. 
Weak corporate governance, protected by a 52%-owned <a href="https://www.smartkarma.com/entities/shin-etsu-chemical-co-ltd" target="_blank" data-smartkarma-citation="entities:4481:1" rel="noopener">Shin Etsu Chemical (4063 JP)</a>, is a key barrier to realising a higher valuation and greater shareholder returns for minorities. 
With shareholders and regulators promoting corporate reorganisation, companies must reconsider these parent-child relationships. Now would be a good time for Shin-Etsu Chem to buy out the listed subsidiary and take full control. ROE has failed to reach 8% for many years, the stock trades below book value, and around a 5-year share price low versus the parent.  They may need some encouragement from an activist shareholder.

Shin Etsu Polymer (7970 JP)  is a diversified plastics company specialising in PVC and silicone rubber products. The poor quality of corporate governance, an inadequate capital allocation policy, and an overly diverse business portfolio obscures the company’s underlying value. 
The Precision Moulding division (70% of profits) benefits from exposure to semiconductor industry growth. It is a high margin business that piggy-backs on structural growth in end markets such as 5G, IoT, and AI. 
At 1x EV/Revenue, the Precision Moulding division alone could be worth ¥30b, which is more than the company’s entire enterprise value of ¥28b. Perhaps it is worth considerably more – other semiconductor equipment and materials peers trade at around 9-12x EV/EBIT – implying a divisional valuation of ¥45b to ¥60b. 
Shin-Etsu Polymer has a huge capital deployment opportunity, with a net cash balance sheet (60% of market cap), strong free cash generation (12% FCF yield) and so-far limited shareholder returns. 
Weak corporate governance, protected by a 52%-owned Shin Etsu Chemical (4063 JP), is a key barrier to realising a higher valuation and greater shareholder returns for minorities. 
With shareholders and regulators promoting corporate reorganisation, companies must reconsider these parent-child relationships. Now would be a good time for Shin-Etsu Chem to buy out the listed subsidiary and take full control. ROE has failed to reach 8% for many years, the stock trades below book value, and around a 5-year share price low versus the parent.  They may need some encouragement from an activist shareholder. 

Shin-Etsu Polymer (7970 JP) - Fake Plastic Governance

Japan

Shin-Etsu Polymer Co., Ltd. is a processor of silicon and vinyl resin materials. The Company's products include silicon rubber molds, semiconductor components, wrappings, and construction materials.

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Shin-Etsu Polymer (7970 JP)

Shin-Etsu Polymer (7970) | Pipe Dreams or Parent-Child Break-Up

Shin-Etsu Polymer transfers PVC pipe business to Sekisui Chemical; focus on value creation through parent-child relationship.

Mark Chadwick