ESG

• It was reported today in numerous local media that there will be an inclusion of ‘shareholder value improvement’ management evaluation criteria for listed government enterprises.
• Some of these listed government enterprises rallied strongly today (KEPCO – up 10%; KOGAS – up 12.7%; Korea District Heating – Up 30%). 
• The detailed evaluation criteria for management evaluation of government enterprises will include the appropriateness of dividend levels, protection of minority shareholders, and compliance with best practices for ESG improvement.

• There was modest improvements in corporate governance in 2023, without any Code revisions. About two thirds of companies showed little improvement in their corporate governance practices over the past year.
• However, the increase in % Woman Board Members, a touchstone for measuring the improvement attitude of some companies that have shown improvement, gives us hope for the future.
• Companies with Metrical CG scores rising below 2.5 points and those with declines have challenges with their use of cash, along with their stock repurchase and dividend policies.

• Over the past year, Tobin’s Q increased slightly for listed companies as a whole; companies that increased their ROE and ROA increased their Tobin’s Q. vice versa.
• Companies that originally had high stock valuations and high ROE and ROA increased their valuations by becoming more profitable. Raising ROE and ROA is the key to higher valuations.
• For companies with low valuations, it wasn’t easy to raise ROE and ROA solely at TSE’s request. Some of companies whose stock valuations have fallen will go private through MBOs.

• % of independent directors continued a modest rise, and % of women board members still reached 10% level. 6 of 1,788 companies transitioned to Company with US type 3 Committees.
• Growth Policy score improved as more companies included ROIC in their KPIs, and AGM Disclosures score improved as the majority of prime market listed companies joined the voting platform.
• Scores related to the use of cash and IR Disclosures score also didn’t improve noticeably. Companies are not taking action on how to use cash to expand their corporate value.

• Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
• We view Selecta’s ESG as “Adequate”, in line with the Environmental and Governance scores, while the Social pillar is “Weak”. Controversies are “Immaterial” and Disclosure is “Adequate”.
• Selecta claims to be the leader in the European vending machine market. The company operates vending and coffee machines in workplaces, public areas (e.g. hospitals, universities, train stations, airports and petrol stations) and entertainment venues.

• With ISS’s plan to resume ROE criteria and TSE’s mention of P/B, more shareholder proposals calling for stronger shareholder returns due to stagnant stock prices and ROEs can be expected.
• Since over 30% of listed companies have major shareholders holding 20% or more of their interests, the voting behavior of domestic institutions is key to the passage of shareholder proposals.
• With TSE’s disclosure request regarding the significance of parent-subsidiary listings, this matter will become another focus of the AGM in business portfolio reform and securing the interests of minority shareholders.

• EPS and BPS had run in parallel since June 2022, but BPS has accelerated at a more rapid pace since May 2023, and TOPIX has risen sharply since April 2023.
• Since TOPIX is more correlated with BPS than EPS, the hypothesis that “stock prices are more reliant on BPS increases, including cash increases, than on EPS” would be considered.
• Investors may believe that Japanese management still needs more time to use cash effectively, and evaluate companies based on their BPS, which indicates a movement toward improved cash flow.

• There are 167 companies of 1,784 companies in Metrical Universe (12/2023) with major shareholders holding over 50% stake, and 605 companies with major shareholders holding between 20% and 50% stake.
• TSE has requests listed parent companies, listed subsidiaries, and affiliates to disclose the significance of parent-subsidiary (affiliates) listings. This will further increase pressure for the dissolution of parent-subsidiary (affiliates) listings.
• Hitachi’s transformation into value-creating company, which once spawned numerous listed subsidiaries, has been a success story since it began full-fledged “selection and concentration” process through the dissolution of parent-subsidiary listings.

• While many companies have disclosed enhanced shareholder returns, dividend payout ratio in 30% range and no increase, and 4% increase in total dividends from the previous year, is not enough.
• Since DOE remains at just under 3% same as the previous year, few companies allocate enough cash to dividend to reduce Shareholder’s Equity, and consequently ROE is expected to lower.
• Cash on hand in September is at all-time high. Behind the ROE, which shows no sign of rising, is the psychology of managers who want to keep cash on hand.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).

We assess Progroup’s ESG as “Adequate”, in line with its Environmental, Social and Governance pillars. Controversies are “Immaterial” and Disclosure is “Adequate”.

Progroup is a leading family-owned producer and supplier of containerboard and corrugated board in Central Europe.

• In addition to the large number of micro-caps among companies listed on the Growth Market, another problem is the lack of growth in market capitalization after IPOs. 
• Many managers consider IPO to be the goal, and this is evidenced by the fact that not many companies raise capital at IPO and after listing.
• The government proposed raising the market capitalization criteria for IPOs and revitalizing the secondary market for pre-listed companies. TSE is likely to review its listing criteria as early as 2025.

• Since the introduction of the Corporate Governance Code, the hurdle for listed companies to fulfill their responsibilities has become higher, which is why more managers are choosing to go private.
• While some of companies with large market capitalizations that overseas investor engagement extends to are showing promise for change, many others are failing to step up management to create value.
• TOPIX’s rise has been mainly driven by an increase in the number of companies rather than an increase in stock prices. The market should become higher in quality through de-listing.