Newsletters - Asset Value Investors

AJOT

Shin-Etsu Polymer • Q1 2024

one of our three parent-subsidiary investments, was the next largest detractor with its share price dwindling -7% lower, reducing returns by 97bps. Shin-Etsu Polymer is a subsidiary of the chemical giant Shin-Etsu Chemical, where we have been engaging on ways to rectify their poor corporate governance and woefully low valuation (6.9x EV/EBIT). During the quarter, we met with Shin-Etsu Polymer’s President in Tokyo, and while it was a pleasant and cordial meeting, we found it to be somewhat underwhelming. We didn’t get the impression that management had an ambition to grow corporate value nor that the Company is taking adequate steps to address the conflicts and corporate governance shortcomings of its parent-subsidiary relationship. We continue to believe that the parent-subsidiary relationship is harming Shin-Etsu Polymer’s corporate value and that, as many listed subsidiaries in Japan have done already, it should be eliminated.

AJOT

Shin-Etsu Polymer • Q4 2023

+25% share price return over the quarter was buoyed by increased scrutiny from the TSE on the archaic practice of listed parent/subsidiary structures. While the business environment this year has been difficult for Shin-Etsu Polymer, with wafer manufacturers adjusting their inventory weighing on demand for wafer carrier cases, the business is performing resiliently with forecasts for modest sales and profits growth of +3% and +2%.

Trading on an EV/EBIT of just 7.3x with net cash covering 36% of the market cap, Shin-Etsu Polymer’s share price is still undervalued, owing to its parent/subsidiary structure with Shin-Etsu Chemical, who own over 50% of the shares. With ShinEtsu Chemical being both a customer and supplier of Shin-Etsu Polymer, there are potential conflicts of interest, and the lack of a majority independent board and presence of ex-Shin-Etsu Chemical employees as directors raises concerns. While we appreciate that management have made modest improvements, we do not think they go far enough to rectifying the Company’s undervaluation.

We have put forward proposals to both Shin-Etsu Polymer and Shin-Etsu Chemical in private, including asking for independent directors to account for a majority of Shin-Etsu Polymer’s board and dissolving the listed structure entirely. We hope both companies will recognise the current shortcomings and take more action to grow corporate value and protect shareholders interests. Pressure from the TSE, shareholders, and wider stakeholders to address conflicts from parent/subsidiary structures will not wane.

It would be remiss not to mention Jade Group (3558) (previously LOCONDO) whose share price saw a meaningful +32% jump over the quarter, taking full year returns to +96%, following the continued flawless execution of its acquisition of Reebok. Management have done a fantastic job in improving their shareholder communications, and, not resting on their laurels, have announced another three acquisitions this year already. We trimmed our stake modestly for portfolio allocation reasons but remain excited and supportive of the company’s future.

The only meaningful detractor over the quarter was TSI Holdings (3608) whose share price drifted -9% lower, albeit after a year in which its share price rose +68%. While earnings performance was lacklustre, with the business suffering from high raw material costs, this was offset by an 8.5% share buyback announcement. Trading below a 1x price-to-book ratio, management need to take more action to raise the share price, and as the largest shareholder we have been proactively engaging on how to achieve this. The response from management and outside directors has been positive, and we are hopeful we will see further shareholder accretive announcements next year.

AJOT

Shin-Etsu Polymer • Q3 2023

Shin-Etsu Polymer (7970)’s share price weakened by -10.5% over the quarter, which detracted -80bps from performance. Lacklustre earnings weighed on the share price as profits suffered from a downturn in demand for their wafer carrier cases. Sales grew by +5% YoY while EBIT declined -12%. Pleasingly, Shin-Etsu Polymer announced the sale of its low margin PVC pipe business in August to Sekisui Chemical and two affiliated companies, Tokuyama Sekisui and Vantec, rightly focusing the business on higher margins products.

Trading on an EV/EBIT of just 4.9x with net cash covering 45% of the market cap, Shin-Etsu Polymer’s share price is deeply undervalued, owing to its parent/subsidiary structure with Shin-Etsu Chemical, who own over 50% of the shares. With Shin-Etsu Chemical being both a customer and supplier of Shin-Etsu Polymer, there are potential conflicts of interest and the lack of majority board independence and presence of ex-Shin-Etsu Chemical employees as directors raises concerns. We have put forward a simple argument: either treat minority shareholders more fairly by acting in their best interests and improving governance or become a wholly owned subsidiary of Shin-Etsu Chemical. We plan to meet with both parent and subsidiary over the coming months.

AJOT

Shin-Etsu Polymer • April 2023

Shin-Etsu Polymer’s share price weakened -11% following the release of results towards the end of the month. As one of our largest positions it reduced returns by 109bps. The company’s full-year results undershot consensus by -8% driven by higher electricity and logistics costs. Next year’s guidance also underwhelmed with +3% and +2% sales and profit growth respectively. Despite the recent share price weakness, Shin-Etsu Polymer has been one of the strongest performers year to date with a share price gain of +19%. Management plans to disclose a mid-term plan for the first time later in May (something we had suggested to them), a positive step towards improving shareholder communication. Trading on a 4.6x EV/EBIT multiple with the possibility of being privatised by its parent company Shin-Etsu Chemical, we are optimistic about the upside potential.

AJOT

Shin-Etsu Polymer • July 2022

The first company reporting results for the quarter ending June 2022 was Shin-Etsu Polymer, whose +16.2% share price return over the month made it the second-largest contributor and added 122bps to performance. Shin-Etsu Polymer is the listed subsidiary of Shin-Etsu Chemical. Beyond the prospect of a buyout by Shin-Etsu Chemical, our interest in Shin-Etsu Polymer stems from its low valuation (5.7x EV/EBIT) and its growing wafer carrier cases business. Over the quarter ending June 2022, Shin-Etsu Polymer grew sales and EBIT by +20% and +55% YoY respectively, beating analysts’ expectations by +5% and +13%. Growth was driven by successful price increases and strong volume growth in the wafer carrier cases business. Our investment in Shin-Etsu Polymer is a good example of where we are positioned for an event, but not reliant on it, and can generate attractive returns from earnings growth and valuation rerating in the meantime

AJOT

Shin-Etsu Polymer • Q1 2022

We continued adding to our relatively new position in Shin-Etsu Polymer, which accounted for almost 1/3 of our purchases this quarter, as we increased its position size to 5.8% of NAV. Shin-Etsu Polymer has been on our radar since we launched AJOT. It is a listed subsidiary of Shin-Etsu Chemical, and our base case is that Shin-Etsu Chemical buys out the minorities of Shin-Etsu Polymer. The companies’ business operations are intertwined, and the management of both companies have made indications that they are open to addressing the parent/child listing issue. With the privatisation of Daibiru and Secom Joshinetsu last year, Shin-Etsu Polymer makes a welcome addition to our listed subsidiary theme, which across five companies accounted for 17% of NAV at the end of the quarter. We estimate Shin-Etsu Polymer is worth over 100% more than its current share price.