ESG

• 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.

• The fact that only 7% of companies disclosed their cost of capital disappoints investors who had hoped that the “TSE request” would change management’s mindset to become more share-price conscious.
• The average ROE of listed companies declined slightly. This indicates that they haven’t been able to find effective investments to raise business profitability and that shareholder returns have been inadequate.
• The ROE trend does not indicate a significant change in management’s mindset, so this will be a major issue if the stock price moves lower to the June AGM season.

• If the ISS ROE criteria, which seems somewhat slow, were to be resumed, many companies would still be below 5%. However, how many companies are feeling threatened?
• About 40% of the companies have large shareholders holding more than 20% of their shares, which is one reason why many companies do not feel a sense of threat.
• Domestic institutional investors should apply the Proxy Voting Guidelines more strictly to companies that do not make maximum efforts to increase their ROE.

• Looking at BOJ’s fund flows for private non-financial corporations for 4 cumulative quarters, Cash and Deposits have increased, and Outward Direct Investment has increased steadily as a destination for cash.
• The average dividend payout ratio for listed companies has remained flat, while both ROE and DOE have declined slightly, which may reinforce the view that shareholder returns are not sufficient.
• With cash on hand still increasing while capital expenditures have not grown much, the use of cash is expected to remain a focus of discussion next fiscal year.

• It will be useful for investors if timely disclosure information, which has large market impact but is still disclosed in English by half of companies, is disclosed in English simultaneously.
• By limiting the TSE policy to documents that are already disclosed in English by many companies, there is concern that other high-demand documents may not be disclosed in English.
• An analysis of English disclosure status and value creation indicators shows that many companies, even those with high profitability and high stock valuation, are not ready for disclosure in English.

• It is premature to start discussions on stopping raising the hurdles of the Corporate Governance Code when Japan’s boards are not dominated by a majority of independent directors.
• If listed companies are left to voluntarily improve their corporate governance practices, differences in corporate governance practice efforts among listed companies are expected to widen.
• Companies with high percentage of foreign shareholders, primarily those with large market capitalization, are expected to continue to improve their corporate governance practices through engagement by overseas investors. vice versa