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14/May/2024 – Shareholder proposal for TBS HOLDINGS, INC

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On April 20th, Hibiki Path Value Fund (hereinafter referred to as “HPVF”), which has a discretionary investment contract with Hibiki Path Advisors (hereinafter referred to as “we” or “Hibiki”) Inc., submitted a shareholder proposal to TBS Holdings (hereinafter referred to as “TBS” or “the company”), one of our core portfolio holdings and it was duly accepted. On 14th May, the company has released its opposition stance to our proposal. As reference, we attach the proposal document from HPVF below this post and explain the background leading to the shareholder proposal.

We, through our funds, have been TBS shareholder since early last year and has been engaging with the company as well as encouraging them to aim higher in various forms. On May 9th, 2023, we sent a proposal letter to enhance its corporate value to the Board of Directors of TBS and made it available to the public, as well as released an explanatory video on our key proposal points.

The company has the ability to produce exceptionally high-quality dramas that strongly capture people’s hearts, and in 2022, it established a new drama production subsidiary called THE SEVEN, Inc. with a staggering 30 billion yen budget in order to further pursue this height, sharpening its strength as a media company with unique capability to create new IPs. As a shareholder, we are excited about the company’s proactive approach of “refining and leveraging its strengths.

However, from a corporate financial perspective, as of the end of December 2023, the company has investment securities of more than 800 billion yen (more than 80% of its net assets), resulting in overcapitalization of its balance sheet, and thus ROE has never achieved more than 8% in their past 10 years history which is referred to as the minimum threshold in the “Ito Report” issued in 2014. This has similarly been the case with all the major TV broadcasters in Japan. Below is an April 2024 updated version of Figure 1 in the said proposal letter, and due to a significant rise in stock price, market capitalization is finally above the net liquid assets of the company (cash and investment securities minus total liabilities) with the positive difference of 174.0 billion yen. Although it is now positive, when the estimated value of real estate is taken into account, we believe that the market capitalization is still below the value of the actual assets held by TBS, and continues to be undervalued by the market. Additionally, P/B ratio is still below 1x as well.

Source: The Company’s 2024/3Q Financial Results Report, Bloomberg

Therefore, in order to continuously improve the company’s capital efficiency and significantly improve stock valuation, HPVF has made a shareholder proposal to significantly increase the annual dividend to 360 yen (approximately 10 times the past 3 years average). As indicated on p. 11 of the aforementioned proposal, we believe that only by continuing this level of dividends for 10 years, the company will be able to reduce net assets in a disciplined manner which will lead to continuous and meaningful improvement in ROE.

We have invested in TBS with a strong hope that the company should be the leader the media industry in Japan not only in terms of business transformation but also in terms of appreciation from capital markets. We feel that now is the time for TBS to respond to such expectations from shareholders, and with a sense of encouragement and urging for improvement, we have made this shareholder proposal.

Shareholder Proposal TBS HOLDINGS, INC

This post does not constitute a solicitation for an offer to acquire or recommend the purchase or sale of specific securities, or advice on investment, legal, tax, accounting, or any other matters.