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.

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.

<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

<ul>
<li>Many companies have low liquidity since listing, with nearly half of companies having major shareholders with over 20% ownership. Raising listing criteria should considered to improve quality of the market.</li>
<li>TSE seems to raise the listing criteria for Growth Market in 2025, when the transitional measures expire, but for Prime Market, TSE is likely to respond with a "request."</li>
<li>Although TSE's "request" may be the catalyst for increasing MBOs and dissolution of parent-subsidiary listings, engagement with overseas investors over years to resolve management issues was foundation of this trend.</li>
</ul>


Many companies have low liquidity since listing, with nearly half of companies having major shareholders with over 20% ownership. Raising listing criteria should considered to improve quality of the market.
TSE seems to raise the listing criteria for Growth Market in 2025, when the transitional measures expire, but for Prime Market, TSE is likely to respond with a "request."
Although TSE's "request" may be the catalyst for increasing MBOs and dissolution of parent-subsidiary listings, engagement with overseas investors over years to resolve management issues was foundation of this trend.


TSE's "Request" Is a Catalyst for a Final Decision on the Foundation of Years of Engagement

Keisei Electric Railway Co., Ltd. provides passenger rail and bus transportation services in the Metropolitan Tokyo and Chiba prefecture areas.  The Company operates department and supermarket stores, hotels, travel agents, movie theater and restaurants, and sells, leases, and maintains real estate.  Keisei Electric is a shareholder of Oriental Land Co., Ltd. which operates Tokyo Disneyland.

<ul>
<li>A solution for Keisei, similar to case of parent-subsidiary listing, is cashing OLC shares to raise profitability and growth potential of its business, to eliminate the distortion in market capitalization.</li>
<li>There is a corporate governance issue in that OLC is accepting board members from Keisei, which has below 20% equity and does not clearly explain the synergies of the business.</li>
<li>This can be viewed as part of dissolving cross-shareholdings where the company wants to obtain voting advantage without business synergies and cannot find opportunities to spend the cash it sells.</li>
</ul>


A solution for Keisei, similar to case of parent-subsidiary listing, is cashing OLC shares to raise profitability and growth potential of its business, to eliminate the distortion in market capitalization.
There is a corporate governance issue in that OLC is accepting board members from Keisei, which has below 20% equity and does not clearly explain the synergies of the business.
This can be viewed as part of dissolving cross-shareholdings where the company wants to obtain voting advantage without business synergies and cannot find opportunities to spend the cash it sells.


Keisei Electric Railway's Problems Are Part of a Cross-Shareholding Dissolution Process

<ul>
<li>Asset Turnover and ROA deteriorated as a result of accumulating cash on hand rather than investing. There was also insufficient R&amp;D to create products that could have stronger pricing power.</li>
<li>Conditions are ripe for investment expansion, as demand for equipment replacement is rising due to long-standing CapEx restraints, and there is no need to accumulate more cash.</li>
<li>Companies are now in the stage of raising return on capital to increase reinvested cash flow from the stage of temporarily increasing earnings through price pass-through.</li>
</ul>


Asset Turnover and ROA deteriorated as a result of accumulating cash on hand rather than investing. There was also insufficient R&amp;D to create products that could have stronger pricing power.
Conditions are ripe for investment expansion, as demand for equipment replacement is rising due to long-standing CapEx restraints, and there is no need to accumulate more cash.
Companies are now in the stage of raising return on capital to increase reinvested cash flow from the stage of temporarily increasing earnings through price pass-through.


Few Companies Have Started to Move Yet, but Can They Raise R & D Investment to Regain Pricing Power?

Executive Director, Co-head of CG Research, Metrical Inc.
METRICAL INC. is a corporate governance(CG)research, investment research and consulting firm in Japan, offering a full service CG research and solutions to investors, public companies and other wide range of organizations globally. http://www.metrical.co.jp/

Aki Matsumoto
Executive Director
• 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

TSE's "Request" Is a Catalyst for a Final Decision on the Foundation of Years of Engagement

I would like to discuss the March 22 Nikkei article, "One Year to Go Until the Expiration of TSE Transitional Measures: 9% of Companies Fail to...

Metrical Inc

Keisei Electric Railway's Problems Are Part of a Cross-Shareholding Dissolution Process

I would like to discuss the issues on the March 15 Nikkei article, "Keisei Electric Railway's ownership of OLC shares declines to 19.13%."

Metrical Inc

Few Companies Have Started to Move Yet, but Can They Raise R & D Investment to Regain Pricing Power?

I would like to discuss the issues on the March 5 Nikkei article, "Prices Have Changed, How About Companies? Improvement of "earning power" is...

Metrical Inc