Nippon Paint : Q&A Summary

A1Wee Siew Kim
I thank you for commenting us that we are successful, but I believe we can do a lot more. I always have said that Nippon Paint Group, and even NIPSEA Group, we are fairly diversified.

Although we start to talk straightaway about China but in reality, if you look at Nippon Paint Group itself, it is actually fairly diversified in geographic presence. Its concentration is really in the decorative space, where I think decorative is probably 64% of our business as Nippon Paint Group, and it's by choice because we actually feel that decorative is an area we know very well. It's an area that is very stable. It's an area that is usually very cash generative. It's an area where we can leverage our brand strength a lot and make a lot of headways. By choice, we are actually slightly biased towards the decorative area. But that's not to say that we don't like the non-decorative area.

As you can see, maybe 12%, 13% of our top line is actually on the automotive area. Automotive area has actually come off the lows of the COVID lockdowns and the supply chain and part shortages. Actually, this year, automotive volume has bounced back, especially in Japan, where we see the uplift in the Japanese auto OEM production really giving us a tailwind. Decorative, Automotive, and of course, other industrials form the entire portfolio.

Back to the question of NIPSEA Group, I started talking about the rest of the group mainly because I just want to sort of put in perspective that we are actually very diversified. Although in most discussions, two thirds of the time we talk about NIPSEA China, but in reality, I'm glad you brought up the question of NIPSEA Group outside China because it makes my other non-Chinese leaders, well, at least feel that somebody is paying attention to them.

We do pay a lot of attention to them, and you're right that this year, they have been fairly successful and the diversified base of NIPSEA Group actually helps us that when one engine or one cylinder in the engine doesn't fire properly, hopefully, the other cylinders fire and, hopefully, year on year, NIPSEA Group as a whole continues to generate growth. Sometimes, one part is growing faster than the other, but overall, we always are consistently delivering growth to the market.

If you look at NIPSEA Group outside of China, of course, the two big entities are Indonesia, PT NIPSEA as well as Betek Boya.

Indonesia has always mystified people because it tends to have fairly good margins. Every time you ask, can you keep it going? Of course, I wish I could keep it going. Why is it so high?

I think last year I did say that, well, if you look back 40 years, Indonesian margins have never been high. It's just that after repeated crisis, we have rational players who continue to focus on maintaining profitability. It ends up that a couple of sizable players in the Indonesian market continue to maintain almost the same level of profitability. That signals to us that there is a fair bit of rationality at work in that market and people focus on delivering value to the consumers and the market as opposed to trying to take share from each other by just undercutting each other.

In Indonesia, why are we successful?

Well, it is a growing market. It is a market where our brand is also strong. It is a market where we are having very good distribution and we have a good team. But more importantly is that we also have a market leader that we are chasing. It also helps that our market leader is a publicly listed company where we can benchmark every parameter. I can actually gladly say that our Indonesian team has actually closed the gap with our rival in terms on the distance to overtake.

I'm not saying that they're not going to pull ahead anytime soon, but we are definitely closing the gap. If you look at the last three, four quarters, we outgrew them. I think the trends are promising, but like I say, it is a rational market. We hope that everybody continues to stay rational, deliver good value to the consumers, and we all continue to make good money.

Again, there's no magic in this business. Be sensible. Build on your strength. Build on your distribution. Continue to deliver what the customer wants, which in today's world means that the customer wants a much broader product offering. If you are a one SKU paint company, it is going to be very, very hard to make a headway in such a market. I think in Indonesia, there's still a lot of growth we had. We are hopeful we continue to build upon our success there.

Now, we'll talk about Turkey.

Turkey is a very different proposition. If you remember what Wakatsuki mentioned in the last results announcement, IAS 29, which is hyperinflationary accounting, actually hurts our actual currency adjusted numbers because we are affected by the need to apply IAS 29. Our top line gets inflated by that and our bottom line gets deflated by IAS 29, so it works in the opposite direction. But nonetheless, we believe that we are making headways. In a high inflationary environment, where everybody tries to pass on the costs as fast as they can, revenue growth numbers sometimes may be very misleading.

As a result, when we look at the Turkey market and how we perform vis-à-vis our competitors in that market, we actually look back and fall back on market share. We look back the last three years and vis-à-vis the public numbers that we can get which are the listed Turkish competitors, we actually saw that we have gained market share in the last three years, whereas our two other competitors have actually lost market share. From that standpoint, we believe that in a challenging market like Turkey, we continue to make headway, especially from the market share perspective.

We can do that mainly because we believe that in NIPSEA, and our Turkish colleagues at Betek Boya continue to do the right thing for the long term and not to take short-term measures. We continue to build the brand, and in Turkey, unlike some other markets, we have a multi-brand strategy. In a multi-brand strategy, you have the top-tier brand, which is Betek Boya. We have the mid-market brand, which is Fawori, and we have the economy brand, which is Tempo.

On top of that, we also have a very successful ETICS business, which is the Exterior Thermal Insulation System, which, coupled with the offering, we can leverage on the entire strong distribution chain and be able to sell both the coatings and ETICS offering. ETICS is not an insignificant business for us in Turkey, because it is roughly 20% to 25% of our entire turnover. It's a significant business. It's a business where we have actually built the market on the back of government legislation for external insulation.

We actually want to be the market leader, in that we put the technology forefront. That very persistent attention to this strategy actually enables us to almost have a 50% market share of the ETICS business in Turkey.

How we make it successful?

We inherited a good team. When we acquired Betek Boya in 2019, we continue to maintain this team, and coupled with what the rest of Nippon Paint Group can bring to Turkey, we strengthened the group and we have also strengthened their balance sheet so that in an environment where it's hyperinflationary, they do not have balance-sheet concerns. They continue to focus on the block and tackle of doing well in the market.

We believe that Turkey will come out of this dire situation. It's just a matter of when, and when it does come out, we believe we are actually going to come out a lot stronger, and when the dust settles, hopefully, we will emerge smelling really good. Well, but time will tell. I think just keep watch, and hopefully, we'll continue to perform.

You asked about Kazakhstan.

Kazakhstan is not a new market for us. Our Turkish colleagues have always exported into Kazakhstan. We know a little bit about the Kazakhstan market. Now, when the number one player in Kazakhstan becomes available, our people, of course, are very excited about it. I'm very happy that even in a beauty contest, where I know the seller wants to get the best price, NIPSEA and Betek Boya become their partner of choice. We have signed the agreement. We are going through anti-competition and governmental and regulatory approvals. Hopefully, we'll close on a deal, well, in the first half of this coming year.

Kazakhstan is a substantial market for us from several standpoints. One is we are actually acquiring the market leader, so we are building on a very strong base. In most of our acquisitions, we hope that we also inherit a good team, which also comes with Alina. It comes with a good market position. It comes with a solid management team, and what is also very different about Kazakhstan is that Alina, which is the acquired entity in Kazakhstan, is actually very strong in the dry mix part. They are, I believe, almost like a 40% player in the dry mix area, but a smaller player in the paints and coatings part.

Exactly where we can bring our strength to leverage on the paints and coatings through Alina and build upon it, and on the base of a very strong entire business that is anchored also by the dry mix.

Kazakhstan also promises for us to be our beachhead into the entire Central Asia region. Kazakhstan, a country of 20 million, GDP per capita about US dollar 14,000 to 15,000, which is not small. It allows us to penetrate into all the nearby countries, whether it's Kyrgyzstan, Turkmenistan, and allows us to build that base. We believe that the acquisition of Kazakhstan, not only is Kazakhstan for us, but builds another very strong geographic base of operations for us in Central Asia.

We talked about Indonesia, we talked about Turkey, we talked about Kazakhstan, but let's not forget that we have what we call the Singapore Group that operates in Singapore, Myanmar, Sri Lanka, and Vietnam. We also have the Malaysia Group that operates in Malaysia, in Thailand Decorative, in the Philippines Decorative, in Bangladesh. All of them actually are growing very nicely this year. In fact, I guess the only blemish in that record is actually Vietnam as the economy is not doing very well. We are facing headwinds there, but we believe that that is all macro driven as far as market conditions are. But overall, NIPSEA Group, outside of China, is actually performing very well this year.