Asset Value Investors has launched a campaign calling for the board of Aichi Corporation, a listed subsidiary of Toyota Industries, to dissolve its listed subsidiary structure after years of poor valuation and weak corporate governance and failure to achieve meaningful synergies.
AVI is a specialist in Japanese equities, managing Japan share portfolios for more than 35 years. Among other funds, it manages AVI Global Trust [LON:AGT] which has approximately GBP 1.3bn invested in Japanese stocks.
AVI has been a shareholder of Aichi, the number-one aerial work platform manufacturer in Japan, since 2019. Currently holding 1.7% of the company’s issued shares, AVI says it has been trying to engage with the Aichi board to encourage fundamental reforms during this period, with all engagement so far carried out in private. AVI’s client funds are also shareholders in Toyota Industries, holding 0.1% of its issued shares.
AVI said it has also sent a letter to the board of Toyota Industries and met the company several times to suggest actions that can enhance the corporate value of Aichi, actions which should naturally be favourable to the controlling shareholder. According to AVI, Toyota Industries is also to blame for Aichi’s longstanding undervaluation, having not added value as a controlling shareholder “by failing to generate meaningful synergies, in part, due to Aichi being non-core” (Aichi accounts for 2% of Toyota Industries’ overall sales).
- Share Tip: Korean video games developer expands its portfolio with Japan deal
- Schroder Japan following Japan’s comeback trail
- Nikkei 225 probes new highs in Japanese equity bull market
Joe Bauernfreund, CEO of AVI, said: “Aichi is one of the most profitable companies in the unique AWP space, with an attractive business model and potential global growth opportunity. Our intention has been to support the company in becoming a best-in-class AWP company by accelerating its global growth over the next ten years. But the reality today is that Aichi trades at a valuation discount to peers. Trading on a lowly 4.9x EV/EBIT multiple vs 9.0x for its listed global peers is a symptom of Aichi’s underlying issues that need urgently addressing.”
Why is Aichi underperforming?
AVI has outlined several key issues that explain the reasons for Aichi’s underperformance.
Strategy issues: Aichi’s core domestic business has hit a growth ceiling. The overseas business is stagnant with management failing to leverage its domestic competitiveness. Aichi lacks a long-term vision and has been unambitious in its growth investments.
Low capital efficiency: An excessive amount of shareholder equity due to years of under-investment in capex/M&A, is leading to a depressed ROE relative to global peers. This is further exacerbated by an excess of cross-shareholdings which management have failed to make a compelling case for. Aichi also lacks a rigorous and transparent capital policy.
Poor shareholder communications: A vague mid-term plan lacks detail and substance, with the China segment disclosure inadequate, no earnings call and insufficient English disclosure.
Weak corporate governance: Structurally weak governance due to listed subsidiary structure with Toyota Industries with a board that lacks independence and diversity. The board is composed of ex-TICO/Toyota Motor Corporation employees raising questions about whether the board is biased towards Toyota group interests rather than minority shareholders.
In light of Aichi’s “sleepy attitude” towards addressing the aforementioned issues, AVI said it believes that fundamental reform is not possible with the current listed subsidiary structure, in which Toyota Industries holds 54% of Aichi’s shares outstanding.
“The listed subsidiary structure is the cause of dysfunctional corporate governance in Japanese companies, where at best, controlling shareholders fail to adequately support a subsidiary growth and, at worst, creates serious conflicts of interest,” AVI said in a statement last week. “All this is to the detriment of minority shareholders.”
AVI is urging the board of Aichi, with the support of Toyota Industries, to seriously consider dissolving its parent-subsidiary structure, either by:
- Option A: Aichi buying back and cancelling all the 54% shares that Toyota Indistries holds
- Option B: Inviting a capital partner to take Aichi private
- Option C: Toyota Industries to acquire 100% of Aichi
Bauernfreund said: “After years of persistent undervaluation, we conclude that the current parent-subsidiary listing structurally inhibits Aichi from taking much needed reforms and driving long-term sustainable growth. We believe the timing for the dissolution of the parent/subsidiary structure is opportune amid the recent activities by Toyota Motor Corporation, TICO, and other group companies in unwinding cross-shareholdings.”
Bauernfreund added that as a shareholder of both Aichi and TICO, AVI has had many constructive discussions with both management over the past five years.
“While we are encouraged that Aichi discontinued depositing cash with TICO in March 2024, the company’s transformation has been slower and more modest than we had hoped,” he said. “We believe that by taking our concerns public it will help to shine light on the issues with parent-subsidiary structures and pave the way for fundamental change in the corporate governance of Japanese companies.”
