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”), submitted a shareholder proposal to Kinden Corporation (hereinafter referred to as “Kinden” or “the company”), one of our core portfolio holdings, and was duly accepted. On 20th May, Kinden has released the 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 have been engaging with Kinden as one of the shareholders. Last October, we sent a “Proposal for Corporate Value Enhancement Measures” to the Board of Directors and publicly disclosed the key points of that proposal through the explanatory video. We would welcome any interested shareholders who support the enhancement of Kinden’s corporate value to take a look at them.
Kinden, as a leading company in the electrical engineering industry, has undertaken numerous mission-critical projects while consistently achieving industry-leading profit margins. We have invested in the company not only based on the past great track record but also with high expectations for further growth, as a central player in the era of fast-growing renewable energy penetration.
Although Kinden has such strong businesses, the average ROE over the past three years has been 5.5%¹, falling below the industry average of 7.9%². We believe that there are issues with the balance sheet management. In Kinden’s most recent March 2024 financials, approximately ¥290.4 billion is held in short-term and long-term securities³, representing 36% and 51% of total assets and total net assets respectively. Additionally, as of March 2023 (last year), most of the cross-shareholdings were unilaterally owned by Kinden, along with holdings of 116 various corporate bonds (with a balance of ¥46.5 billion), and approximately ¥140 billion in transferable deposits classified as marketable securities.
While investment in bonds and transferable deposits cannot be denied in full⁴, from corporate governance perspective, we find it hard to justify investing approximately 25% of the total assets in other companies’ bonds and deposits that offer minimal returns and that fail to surpass the cost of capital hurdle. We expressed a similar concern regarding investment in financial products in our letter ‘Recommendations for measures to improve Corporate Value and ROE of Zenkoku Hosho Co. Ltd.’ in 2022 (pages 17-18). We believe this practice significantly destroys shareholder value.
We believe, as a result of these factors, that Kinden share price remains significantly below the intrinsic value which we outlined in the aforementioned proposal letter last year. We are determined to say that significant improvement in ROE is a requisite, and to achieve this, the intended reduction in net assets, driven by a reduction in investment securities, is the essential factor.
With that said, in order to strategically and steadily improve ROE, HPVF has proposed an annual fixed dividend of ¥106 per share. Additionally, we strongly ask that the company continue this fixed dividend of ¥106 per share for at least 10 years and achieve sustainable improvement in ROE. As outlined in pages 6 to 7 of the aforementioned proposal letter, we believe that this dividend policy won’t negatively impact Kinden’s financial health.
We hold high expectations that Kinden will implement more proactive financial and capital strategies and strive towards maximizing corporate value. However, if Kinden keeps its current stance to maintain the 50-60% total payout ratio (dividend + buy back) as mentioned in its opposition press release, shareholders’ equity will keep increasing, and in order to implement continued improvement in ROE, net income needs to keep increasing at a FASTER pace which, in our view, imposes higher degree of difficulty to achieve. Hence, with the simple goal of achieving higher ROE in a sustainable manner, we believe that our shareholder proposal makes reasonable sense.
We seek broad acknowledgment from the shareholders of Kinden by making this proposal aiming to significantly enhance capital efficiency and stock valuation. We sincerely request fair consideration from all shareholders who truly support the enhancement of Kinden shareholder value. Thank you for your attention to this matter.
Shareholder Proposal KINDEN CORPORATION
¹ Hibiki calculated the average ROE based on the past three fiscal year-ends without averaging over the year
² Industry average ROE was determined by taking the simple average of the past three years’ ROE for 47 peer companies, retrieved from Bloomberg as of May 2024
³ Earnings summary 2024/3
⁴ Please refer to pages 42 to 49 of the 109th annual securities report (using the previous year as a substitute since the securities report for March FY 2024 has not yet been submitted)
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.