61 slides from MIGO Opportunities Trust PLC GBP's proxy contest presentation, May 2024
Slide 1: Taking Aichi Higher
Taking Aichi Higher May 2024 Aichi Corporation (TSE:6345)
Slide 2: About AVI
About AVI Asset Value Investors Limited (AVI) • London-based Investment management company established in 1985 • Managing client funds and investing in global equities for over 35 years • Accepted the Principles for Responsible Institutional Investors (Japanese version of the Stewardship Code), and
Slide 3: AVI's engagement
AVI’s engagement • AVI holds 1.7% of outstanding voting shares in Aichi Corporation (Aichi), and 0.1% of Toyota Industries (TICO), on behalf of its clients. AVI has been shareholders of Aichi since November 2019 • We have engaged in constructive private dialogue with Aichi and TICO’s management over
Slide 4: Executive Summary
Executive Summary Company • Aichi operates within the aerial work platform (AWP) market, an industry with steady growth and an overview attractive business model. Due to its dominant domestic position, Aichi boasts exceptionally high profit margins compared to global peers • However, Aichi’s valuati
Slide 5: Executive Summary (Cont'd)
Executive Summary (Cont'd) Our • We believe the parent-subsidiary listing is the root cause of Aichi’s undervaluation and capped potential request • AVI therefore urges Aichi’s Board to consider dissolving the parent-subsidiary listing altogether ‒ Option A: Aichi buying back and cancelling all the
Slide 6: Agenda
1 Issues and AVI’s suggestion Agenda 2 Details of suggestion 6
Slide 7: Company overview
Company overview • Founded in 1962 in Nagoya, moving HQ to Ageo, Saitama, in 2004 • Market cap is c.Y80bn1. Aichi manufacturers and sells specially equipped vehicles (mainly Aerial Work Platform or AWPs), offers after-service work • Of Y61bn total sales, 80% are from the specially equipped vehicles
Slide 8: Global footprint
Global footprint • Headquartered in Ageo, Saitama, Aichi has 2 manufacturing plants in Gunma, and 11 branches / customer service centres in Japan • 2 manufacturing plants / sales offices in China, and 1 sales office in New Zealand Japan (>90% of company sales) Overseas (<10% of company sales) Hangzh
Slide 9: AWP global market
AWP global market • Sales of top 20 AWP OEMs grew by more than 5% CAGR over the period of 2013-2022 • Most of this sales increase can be attributed to the China market with vigorous property and public investments. Indeed, Chinese OEMs demonstrated 25%+ CAGR in this period • Going forward, expect to
Slide 10: Attractive business model
Attractive business model • High barriers to entry in AWP industry thanks to the importance of customer relationships, track records, safety, localisation of products and services, and the difficulty of building a supply chain • See minimal threat of emerging technology replacing AWP, while AWP is c
Slide 11: Aichi's competitiveness: Domestic market share
Aichi’s competitiveness: Domestic market share • Aichi has been the leader since inception, pioneering the truck-mounted AWPs industry in Japan • The company has 70% domestic market share, a positioning that no other peers can replicate • It has a strong foothold in electricity and telecom sectors,
Slide 12: Aichi's competitiveness (cont'd): High quality margin
Aichi’s competitiveness (cont’d): High quality margin • Aichi maintains a high margin even when compared to global peers due to its dominant position in Japan • While peers benefit from economies of scale, Aichi demonstrates an exceptionally high 10-15% EBIT margin despite its smaller scale (i.e. ab
Slide 13: Undervaluation
Undervaluation • However, in spite of its high margins and attractive business model, Aichi trades on valuation discount • Aichi has consistently traded at a discount against peers over the past 5 years Historical forward EV/EBIT multiple Forward EV/EBIT multiple (Apr 2019 – Mar 2024) 13.2x 25 11.6x
Slide 14: Explaining Aichi's low valuation
Explaining Aichi’s low valuation • Three key issues explain Aichi’s low valuation: (1) strategic issues that hinder future growth, (2) low capital efficiency that dampens shareholder returns, and (3) weak shareholder communications • The root cause of Aichi’s issues stem from weak corporate governan
Slide 15: Strategy issues
Strategy issues • Aichi’s core business is domestically focused, which is saturated and seeing low growth with Aichi’s domestic sales falling since FY2016 ending March 2017 • The company has expanded into overseas, but its China business is stagnant. Sales growth has been flat since FY2018 ending Ma
Slide 16: Low capital efficiency
Low capital efficiency • ROE is an indicator of a company’s profitability and its capital efficiency. Aichi’s ROE is 7.7%, which is inferior to 14.1% of global peers • ROE is composed of net profit margin, asset turnover ratio, and financial leverage. While Aichi’s net profit margin is higher than i
Slide 17: Poor shareholder communications
Poor shareholder communications • Investors require high quality, detailed IR materials when making decisions • Aichi’s IR disclosure is poorer than peers. This is evident from the number of pages in the mid-term plan, lack of capital markets days, frequency of earnings call, number of sell-side ana
Slide 18: Weak corporate governance
Weak corporate governance • Aichi is a listed subsidiary of Toyota Industries (TICO) which holds more than 50% of its shares. TICO is an affiliated company of Toyota Motors (Toyota) which holds 25% of TICO’s stakes • TICO is able to control Aichi as if it was a wholly owned company without owning 10
Slide 19: Toyota group unwinding cross-shareholdings
Toyota group unwinding cross-shareholdings • Toyota Motor and its affiliated companies have started to unwind cross-shareholdings • Toyota Motor announced that it would reduce group holdings to 20%, while Denso and Aisin announced that it will sell most of their cross-shareholdings to zero • On the
Slide 20: But Aichi and TICO making lacklustre progress
But Aichi and TICO making lucklustre progress • TICO’s lethargic stance on cross-shareholding is one sign of deeper governance problems of parent-sub listings • For example, until March 2024, Aichi held deposit (CMS1) with TICO. It took more than 20 years just to discontinue the archaic deposit prac
Slide 21: Certification misconduct and governance issue
Certification misconduct and governance issue • TICO announced engine certification misconduct in Jan 2024, following a forklift certification misconduct in 2023. Concurrently, Hino Motors and Daihatsu Motor have been found to have committed certification misconducts • As a result, Aichi’s productio
Slide 22: AVI's suggestions
AVI’s suggestions • AVI recommends the following to unlock Aichi’s full potential Strategy issues Low capital efficiency Poor shareholder comms • Improve domestic margin, • Undertake targeted Capex and • Increase transparency of MTP allocate cash to overseas M&A, returning residual cash to and have
Slide 23: AVI's request
AVI’s request • We attribute the root cause of Aichi’s underperformance to its listed subsidiary structure with TICO • Being under TICO’s control, despite TICO not owning 100%, we think it unlikely our suggestions will be implemented quickly • AVI therefore strongly requests Aichi’s Board to conside
Slide 24: Share buyback case study: Aichi's intrinsic value
Share buyback case study: Aichi’s intrinsic value • We see significant upside in Aichi’s share price. If Aichi were to acquire all of TICO’s holding as a buyback we estimate that Aichi’s share price could trade +140% higher Share price potential for Aichi (after share buybacks1) Y10bn ¥1,400 ¥2,500
Slide 25: Share buyback case study: Funding feasibility
Share buyback case study: Funding feasibility • Aichi’s cash at hand and proceeds of cross-shareholdings are more than the value of TICO’s holding in Aichi • After share buybacks, even if Aichi continues the high level of FY23 guidance Capex for three years, Aichi still has enough cash to fund divid
Slide 26: Agenda
1 Issues and AVI’s suggestion Agenda 2 Details of suggestion 26
Slide 27: Strategy issues
Strategy issues 27
Slide 28: Strategy issues
Strategy issues • Aichi’s core business is domestically focused, which is saturated and seeing low growth with Aichi’s domestic sales falling since FY2016 ending March 2017 • The company has expanded into overseas, but its China business is stagnant. Sales growth has been flat since FY2018 ending Ma
Slide 29: Strategy issues (Cont'd)
Strategy issues (Cont'd) • Based on our research and discussions with management, customers, suppliers, distributors, competitors, and industry experts, Aichi’s strategy issues stem from the following factors: Lack of long-term vision Poor overseas go-to-market strategy Stagnant China business
Slide 30: Lack of long-term vision: MTP lacking growth story
Lack of long-term vision: MTP lacking growth story • Aichi has outlined 5 initiatives in its mid-term plan (MTP) to increase growth • Typically, the first initiatives in a MTP are the featured points that a company aims to highlight. However, Aichi’s first 2 initiatives disappoint readers as they
Slide 31: Lack of long-term vision: Minimal growth investment
Lack of long-term vision: Minimal growth investment • Investors’ concerns about Aichi lack of a growth story are supported by Aichi’s history of subdued investment in growth initiatives • Aichi’s Capex as a % of sales is 1.4%, significantly lower than the 4.4% average of its global peers • M&A as
Slide 32: Lack of long-term vision: Need reconsideration on the latest Capex
Lack of long-term vision: Need reconsideration on the latest Capex • In FY23 ending March 2024, Aichi expects Capex of Y3bn, more than triple the amount from the previous year • Most of Capex will be allocated to the domestic business, including a new factory in Takasaki, Gunma • However, it seems
Slide 33: AVI suggestion (Introduction of portfolio strategy)
Lack of long-term vision: AVI suggestion (Introduction of portfolio strategy) • Using a portfolio matrix based on market share and growth is an effective method for allocating mgmt. resources • A company should earn cash in “Cash cow” businesses, which are high share but low growth segments, and,
Slide 34: Repeated entry and withdrawal from overseas
Poor overseas go-to-market strategy: Repeated entry and withdrawal from overseas • Aichi’s previous attempts to enter overseas markets have unfortunately ended in failure • Aichi established local subsidiaries in the US, Europe, and Australia, only to liquidate them in 2014, 2015, and 2023, respec
Slide 35: Attractive APAC market
Poor overseas go-to-market strategy: Attractive APAC market • Nevertheless, the overseas market remains attractive as sustainable growth is anticipated • Over 50% of the global AWP market is composed of the construction sector. The construction sector in the APAC region, including India and Indone
Slide 36: Market maturity of APAC
Poor overseas go-to-market strategy: Market maturity of APAC • The estimated size of the Asian AWP market was around 120,000 units in 2019 • Korean market is the most mature and by far the largest, with 60,000 units, followed by Singapore and Malaysia • In contrast, Indonesia and India have smalle
Slide 37: Product development and M&A
Poor overseas go-to-market strategy: Product development and M&A • There are two main product types in AWPs: truck-mounted and self-propelled • Aichi’s strength lies in truck-mounted AWPs, while self-propelled AWPs benefit from global sales. However, Aichi’s lineup of self-propelled AWPs is signif
Slide 38: Distribution / Services and partnership strategy
Poor overseas go-to-market strategy: Distribution / Services and partnership strategy • Construction rental companies are an important sales channel in SEA and India, often serving as sales distributors • Leading OEMs such as JLG and Genie are now accelerating their partnerships with reputable loc
Slide 39: AVI suggestion
Poor overseas go-to-market strategy: AVI suggestion • Utilise external research vendors, conduct thorough market research in APAC, and identify prioritized 3-5 countries • Next, complete in-depth market research on the supply chain, sales channel, and competitive landscape of the countries identif
Slide 40: Aichi's inferior China business
Stagnant China business: Aichi’s inferior China business • Aichi has 2 subsidiaries in China that manufacture AWP locally • Aichi’s China business experienced sales growth of just 4% p.a. from 2016-2022, while Chinese competitors experienced significant growth during the same period • Aichi’s infe
Slide 41: China market environment worsening
Stagnant China business: China market environment worsening • Making matters worse for Aichi is the deteriorating market environment in China • According to the IMF’s country report in February 2024, housing investment is projected to decline by an average of 45% and remain subdued thereafter • Al
Slide 42: AVI suggestion (Exit strategy from China)
Stagnant China business: AVI suggestion (Exit strategy from China) • Along with declining market environment in China, the disclosure of Aichi’s China business in its MTP has toned down significantly. In the presentation released in Nov 2023, the reference to China business was removed • Due to th
Slide 43: Low capital efficiency
Low capital efficiency 43
Slide 44: Low capital efficiency
Low capital efficiency • ROE is an indicator of a company’s profitability and its capital efficiency. Aichi’s ROE of 7.7% is inferior to the 14.1% average of its global peers • ROE is composed of net profit margin, asset turnover ratio, and financial leverage. While Aichi’s net profit margin is high
Slide 45: Too much equity, too little debt
Too much equity, too little debt • Finding the right balance between debt and equity is a key component of financial management • Aichi’s equity to total assets ratio is 85%, while its debt to total assets ratio is 0%, indicating that Aichi relies entirely on equity, which typically carries a higher
Slide 46: Historically small allocation to growth investments
Historically small allocation to growth investments • The excessive equity can be attributed to the lack of discipline in Aichi’s capital policy • Aichi has allocated only 13% of its past 5-year cash flow to growth investment, whereas global peers allocated well over 50% to Capex and M&A • As a resu
Slide 47: An excess in cross-shareholdings
An excess in cross-shareholdings • The Japanese Corporate Governance Code requests companies to disclose their policies concerning the reduction of cross-shareholdings • Aichi holds stakes in 12 listed companies with a combined market value of Y7bn • Aichi’s investment securities represent 8.1% of t
Slide 48: Lack of capital policy
Lack of capital policy • It is essential to have plans for not only the income statement but also cash flow and balance sheet to drive capital efficiency and achieve returns that meet investors’ expectations • According to the list released by the TSE in 2024, Aichi is alleged to have already disclo
Slide 49: AVI proposals to improve capital efficiency
AVI proposals to improve capital efficiency Reduce • Aichi has too much equity, harming capital efficiency excess equity ‒ Aichi’s 7.7% ROE is inferior to the 14/1% average of its global peers ‒ The low ROE is due to excess shareholders equity, rather than a low profit margin. With zero debt, the co
Slide 50: Poor shareholder comms
@ Poor shareholder comms AV | Asset Value Investors
Slide 51: Poor shareholder communications
Poor shareholder communications • Investors require high quality, detailed IR materials when making decisions • Aichi’s IR disclosure is poorer than that of its peers. This is evident from factors such as the number of pages in the mid-term plan, absence of capital markets days, infrequent earnings
Slide 52: MTP not transparent
MTP not transparent • Companies are encouraged to provide overview of the present state and demonstrate timely progress of the plan • Aichi’s MTP lacks consistency in its timeline and KPIs, and sometimes undergoes modifications without sufficient explanation. This makes it difficult for investors to
Slide 53: Segment disclosure problem
Segment disclosure problem • Public companies have discretion in how they segment business units in disclosures. The segmentation “cuts” should aid investors decision making, with a focus on profit contribution • Currently, Aichi only discloses 3 segments (specially equipped vehicles, parts & repair
Slide 54: AVI suggestions to improve IR communications
AVI suggestions to improve IR communications Increase • Enhance information disclosure in MTP and demonstrate consistency transparency ‒ The timeline and KPI’s in Aichi’s MTP are inconsistent. The related contents are often of MTP changed without due explanation ‒ Aichi should provide clear disclosu
Slide 55: Weak corporate governance
Weak corporate governance 55
Slide 56: Weak corporate governance
Weak corporate governance • Aichi is a listed subsidiary of Toyota Industries (TICO), which holds more than 50% of Aichi’s shares. TICO is an affiliated company of Toyota Motors (Toyota), which holds a 25% stake in TICO • TICO is able to exert control over Aichi as if it was a wholly owned entity, d
Slide 57: Problems with Board structure (parent-subsidiary)
Problems with Board structure (parent-subsidiary) • 50% of Aichi’s Board have either a background at TICO or Toyota • President Mr Yamagishi is from TICO, and is a member of the Nomination and Compensation Advisory Committee • It seems Aichi’s Board prioritise balanced selection of members with back
Slide 58: Problems with Board structure (independence, diversity)
Problems with Board structure (independence, diversity) • The Aichi Board has several problems, aside from background in parents • As a listed subsidiary, the board is expected to have high independence, however, independent outside directors compose only 38% of the board • The Board lacks diversity
Slide 59: Low independence of the Board
Low independence of the Board • 38% of Aichi’s Board directors are independent, compared to many global peers with >50% • Listed subsidiaries are requested by the TSE to have higher independence of the board • Aichi has established a special committee to deliberate and review potential conflicts of
Slide 60: No female representation
No female representation • Aichi has no female directors on the Board, an urgent issue not faced by any global peers Female board composition (2023) 43% 33% 33% 33% 20% 11% 0% Haulotte Manitou Linamar Terex Oshkosh Tadano Aichi 60 Source: Company disclosure
Slide 61: Disclaimer
Disclaimer • This document (including all information contained herein; hereinafter the same) was prepared solely for the purpose of providing information to stakeholders of Aichi Corporation (the “Company”). Asset Value Investors Limited (“AVI”) is the investment manager of AVI Japan Opportunity Tr