Nippon Paint : Q&A Summary

A1MSV, or Maximization of Shareholder Value, is a function of both EPS and PER. To achieve MSV, both factors must be maximized.

Our emphasis on expanding EPS arises from the recognition that focusing solely on "corporate value enhancement" might justify suboptimal investment decisions. Merely increasing the size of the company could potentially improve corporate value while undermining shareholder value. Therefore, we consider new share issuances beneficial only when they contribute to an increase in EPS, which in turn supports MSV. Moreover, PER reflects the capital markets' expectations of this EPS growth. Our strategy to achieve MSV involves enhancing both EPS and PER effectively.

If our sole focus were on EPS expansion, a viable strategy might involve share buybacks to decrease the total number of shares, thereby increasing the EPS. However, given our dissatisfaction with the current stock price level, while our capital is unlimited, the appeal of issuing new shares at this price is diminished. So, instead of pursuing equity financing, we are opting to maintain a robust cash reserve and utilize debt financing. While share buybacks might offer a short-term boost in EPS, we see greater, more sustainable opportunities for EPS growth through asset acquisitions. Therefore, our strategy to maximize EPS centers on growth-focused investments, such as mergers and acquisitions (M&A).

Continual share buybacks, funded by our generated cash flows, could potentially enhance our PER. However, we recognize a link between growth potential and PER. Our objective is to demonstrate to the capital markets our capability to consistently increase EPS through strategic asset accumulation as part of our steadfast pursuit of growth. We expect this strategy to ultimately result in a higher PER.

Although we cannot control the PER, we acknowledge that various factors influence our current stock price level. Feedback from the capital markets has raised concerns about our operations in China, which account for approximately 35% of our total business portfolio. We have consistently communicated the strong growth potential and cash-generating capabilities of our business in China. However, the challenging economic conditions there may be causing some hesitancy among investors, given the significant share of our operations in that market. Additionally, while China's growth potential was highly valued in 2020-2021, its recent economic issues seem to be adversely affecting investor sentiment.

We have established a consolidated medium-term CAGR target of approximately +8-9% for revenue growth and +10-12% for EPS growth. Our analysis indicates that the analysts covering our company might be slightly undervaluing our growth potential.

We anticipate a long-term increase in per-capita GDP for countries with substantial populations, including China. This economic growth, combined with the robust demand in the paint market, underscores significant growth opportunities. Considering the strong prospects for an economic recovery, we expect our long-term growth potential to bolster investor confidence, potentially enhancing our PER. Consequently, our goal is to continuously strengthen trust in our management.

While we can predict EPS growth with considerable certainty, PER reflects the collective outlook of the capital markets. Therefore, we are committed to improving our communication with market participants.