Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

<ul>
<li>Most large companies initially estimate sales and profits conservatively, and CapEx, which is often planned more than a year in advance, isn’t often above plan.</li>
<li>Companies have a cautious earnings outlook, but the market consensus still expects profit growth in FY2024. CapEx growth in the BOJ Tankan is expected to be slightly higher than profits.</li>
<li>Assuming an 8.5% increase in CapEx for large manufacturing companies and a low single-digit growth in the recurring profit outlook, the level of cash on hand is unlikely to decrease.</li>
</ul>


Most large companies initially estimate sales and profits conservatively, and CapEx, which is often planned more than a year in advance, isn’t often above plan.
Companies have a cautious earnings outlook, but the market consensus still expects profit growth in FY2024. CapEx growth in the BOJ Tankan is expected to be slightly higher than profits.
Assuming an 8.5% increase in CapEx for large manufacturing companies and a low single-digit growth in the recurring profit outlook, the level of cash on hand is unlikely to decrease.


Since Cash on Hand Will Not Decrease in FY2024, Shareholder Returns Remain a Hot Topic

<ul>
<li>Profit margins boosted by cuts in personnel, R&amp;D, CapEx, and corporate tax rates. Much of the improved free cash flow went onto the balance sheet instead of being invested.</li>
<li>OP Margin's sluggish growth indicates that the cost-cutting model is no longer working. Investments are needed to create products with higher gross margins.</li>
<li>While the limitations of the cost-cutting model can be seen, ROE, which indicates the achievement of the management goal of increasing medium-to-long-term shareholder returns, is sluggish in many companies.</li>
</ul>


Profit margins boosted by cuts in personnel, R&amp;D, CapEx, and corporate tax rates. Much of the improved free cash flow went onto the balance sheet instead of being invested.
OP Margin's sluggish growth indicates that the cost-cutting model is no longer working. Investments are needed to create products with higher gross margins.
While the limitations of the cost-cutting model can be seen, ROE, which indicates the achievement of the management goal of increasing medium-to-long-term shareholder returns, is sluggish in many companies.


Any Manager Can Simply Implement Shareholder Returns

<ul>
<li>The reason why the approval for the shareholder proposal on profit appropriation exceeded 40% is that the proposal was easy to understand and easy to get approval from other shareholders.</li>
<li>Although domestic institutional investors don't currently vote against a low ROE when it comes to improvement measures, they may take a more aggressive stance if ISS raises its ROE criteria.</li>
<li>The trend of top management being reappointed even with continued low ROE is likely to continue for a while longer, but the time frame is definitely getting smaller.</li>
</ul>


The reason why the approval for the shareholder proposal on profit appropriation exceeded 40% is that the proposal was easy to understand and easy to get approval from other shareholders.
Although domestic institutional investors don't currently vote against a low ROE when it comes to improvement measures, they may take a more aggressive stance if ISS raises its ROE criteria.
The trend of top management being reappointed even with continued low ROE is likely to continue for a while longer, but the time frame is definitely getting smaller.


A Common Case of a Company with a Low ROE but with the Founding Family Serving as Successive CEOs

<ul>
<li>In addition to too much cash on hand to begin with, ROE is expected to continue to grow at a sluggish pace, as shareholder returns are less than profit growth.</li>
<li>Given that we expect more companies to have stock price, P/B, and ROE on the agenda for the June AGM, more companies are expected to announce increases in shareholder returns.</li>
<li>However, ROE is unlikely to increase significantly. Shareholder returns are certainly too small, but a more serious problem is the inability to find growth investment opportunities.</li>
</ul>


In addition to too much cash on hand to begin with, ROE is expected to continue to grow at a sluggish pace, as shareholder returns are less than profit growth.
Given that we expect more companies to have stock price, P/B, and ROE on the agenda for the June AGM, more companies are expected to announce increases in shareholder returns.
However, ROE is unlikely to increase significantly. Shareholder returns are certainly too small, but a more serious problem is the inability to find growth investment opportunities.


Shareholder Returns Will Increase over June AGM, but Will Companies Hold up with Sluggish ROE?

<ul>
<li>Criteria for IPOs aren't a major issue. TSE is concerned that many companies will be in jeopardy of being delisted if the criteria for maintaining listing are raised.</li>
<li>TSE will likely make "request" to Growth Market listed companies to increase their market capitalization if the criteria for maintaining listing are not raised.</li>
<li>From 2025, delisting and subsequent re-listing through M&amp;A and MBOs is expected to increase, which will lead to more investment opportunities.</li>
</ul>


Criteria for IPOs aren't a major issue. TSE is concerned that many companies will be in jeopardy of being delisted if the criteria for maintaining listing are raised.
TSE will likely make "request" to Growth Market listed companies to increase their market capitalization if the criteria for maintaining listing are not raised.
From 2025, delisting and subsequent re-listing through M&amp;A and MBOs is expected to increase, which will lead to more investment opportunities.


The Raising of Listing Criteria in the Growth Market Will Lead to Increased Investment Opportunities

Japan

The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.

TSE Tokyo Price Index TOPIX (TPX INDEX)

Since Cash on Hand Will Not Decrease in FY2024, Shareholder Returns Remain a Hot Topic

I would like to discuss the issues on the April 1 Nikkei article, "CapEx up 8.5%, first growth since the bubble economy, driving future economic...

Metrical Inc

Any Manager Can Simply Implement Shareholder Returns

I would like to discuss the issues on the April 1 Nikkei article titled "Good Performance, Future Strategies of Japanese Companies: Time to...

Metrical Inc

A Common Case of a Company with a Low ROE but with the Founding Family Serving as Successive CEOs

I would like to discuss the issues on the March 30 Nikkei article, "Ezaki Glico's Shareholders' Meeting Causes Ripples in the Era of "All Activist...

Metrical Inc

Shareholder Returns Will Increase over June AGM, but Will Companies Hold up with Sluggish ROE?

I would like to discuss the issues on the March 25 Nikkei article, "Shareholder Returns Reach a Record 25 Trillion Yen Due to Earnings Expansion...

Metrical Inc

The Raising of Listing Criteria in the Growth Market Will Lead to Increased Investment Opportunities

I would like to discuss the issues on "Study on the Listing Criteria for the Growth Market" at the 15th Follow-up Meeting on the Revision of Market...

Metrical Inc