ESG

• Since companies with higher foreign ownership have better profitability and corporate governance practices, it can be inferred that the overseas investor engagement has improved the company’s profitability and corporate governance.
• If the company’s management has changed to value-creating management through the overseas investor’s engagement, the company isn’t expected to change to value-creating management in just one year after “TSE’s request”.
• Many companies that do not receive overseas investor engagement have more room for improvement in aspects of management strategy execution and will be evaluated over time for improvements in profitability.

• Companies with larger market capitalizations tend to have higher profitability and valuations, and those companies have higher foreign ownership.
• Given that board practices improved and that valuations, highly correlated with foreign ownership, are higher for companies with larger market capitalizations, this can be due to engagement of overseas investors.
• If this hypothesis is correct, the gap between the top and bottom market capitalization companies will widen further as it takes a certain time for engagement to pay off.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
We assess China Vanke’s ESG as “Adequate”. The company has “Adequate” scores for all three pillars. Controversies are “Immaterial” and Disclosure is “Strong”.

• Companies with higher ratings for Corporate Governance Practices (Board Practices and Key Actions) tend to have significantly higher profitability, market capitalization and valuations.
• Foreign ownership has the highest correlation with the Metrical CG score, suggesting that years of overseas investor engagement have improved the companies’ corporate governance practices and profitability.
• The pace of efforts varies with criteria of Corporate Governance Practices.  Companies with Metrical CG scores of over 70% are ahead in % independent directors and % female board members.

• Even after the TSE’s request for a P/B increase, it is not possible to raise valuations simply on the expectation of a P/B increase without improving profitability.
• Most companies have cash allocation challenges. Companies with higher profitability will accumulate even more cash on hand, so higher level of shareholder return will further positively impact ROE and ROA.
• Some of the companies that have reduced valuations include those with relatively high ROE and ROA, so there are small-cap stocks with reduced valuations and increased investment opportunities.

• Although it’s possible to move AGM forward given the timing of financial reporting, 70% of companies will hold their AGM during the 3 days of the last week of June.
• As long as the concentration of AGM dates continues, the start of electronic provision of AGM documents should at least be accelerated to allow time to review the agenda.
• Only slightly less than 30% of prime market listed companies provide English translations of all convocation notices, including business reports and financial statements.

• Companies that increased Tobin’sQ have further increased Tobin’sQ due to continued growth in ROE and ROA. They have room to further improve return on capital by reducing cash on hand.
• Companies with lower Tobin’s Q may include small-cap stocks that are increasingly undervalued because they have relatively high ROE and ROA but are not covered by overseas investors.
• Over the past year, few companies raised their valuations based solely on expectations of P/B bottoming-out without improving profitability, and IR activities alone have had limited effect in boosting valuations.

• While communication with investors is an important tool, “TSE’s request” should be the starting point for solving management issues, as it gave managers the opportunity to think about strategy themselves.
• Since many Japanese companies have management issues, it is not surprising that more activist investors believe that investment opportunities can be created by encouraging companies to solve these issues.
• Even if a company can convince activist investors through shareholder relations, it will only buy time, and investors/shareholders are looking to increase corporate value by solving problems.

• Since shareholder proposals related to “TSE requests” are unlikely to be passed at the AGM, many companies are likely to have capital profitability improvement plans that merely indicate effort targets.
• The outperformance of TOPIX by the company that announced the medium-term management plan can be attributed to the short-term outperformance of the company that announced the share repurchase.
• Investors don’t trust the contents of “mid-term management plan” because they are focusing on more reliable shareholder return rather than betting on improving operating margins over the uncertain three-year horizon.

Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
Sappi’s ESG is “Strong”, driven by its “Strong” Environmental and Governance scores. The Social score is “Adequate”. Controversies are “Immaterial” and Disclosure is “Strong”. 

Sappi is a constituent of the FTSE4Good Index. All of the company’s regions (Europe, North America and South Africa) received a Platinum rating from EcoVadis for corporate social responsibility in FY 2022. The Platinum rating recognises the Top 1% of companies evaluated by EcoVadis.

• Excluding the special factor of companies applying transitional measures moving to standard, the pace of natural decrease of prime market listed companies is moderate.
• Companies with high foreign shareholdings and large market capitalization are already highly valued. Companies that are not have investment opportunities that are often at a discount due to liquidity.
• Nearly half of the companies are companies with large shareholders holding more than 20% equity; investment opportunities are expected to increase as companies go private through TOBs and MBOs.