Nippon Paint Group New Medium-Term Plan (FY2021-2021) Presentation

Q&A Summary

March 5, 2021

  • Questions by Takashi Enomoto, BofA Securities Japan Co., Ltd.

Q1 Please give us your forecasts for FY2021-2023 for the China decorative paints business on pages 12-13 of the presentation. Please explain your forecasts for market share and the competitive landscape for the DIY and Project segments.

A1 As shown on page 43 of the presentation, we target revenue growth of approximately 10% for NIPSEA China overall (total of decorative, automotive, and industrial). The growth forecast is higher for Project than for DIY.

Q2 Please explain your outlook for the global paint market over the next three to five years with major realignments such as M&A going on in the industry.

A2 Following the takeover battles in recent years, the multiples have gone up, resulting in high valuations in the decorative paints market worldwide. However, I have been contacted about a variety of acquisitions. I feel that M&A activities have started to pick up. I believe paint manufacturers, particularly major ones, have formulated and started implementing strategies to divest some of their businesses and acquire new businesses based on the assessment of business portfolios. I cannot go into details, but we are continuing to discuss M&A opportunities.

Q3 Your competitors are also increasing revenue significantly in the Chinese market. What actions are you going to take to increase your market share in China?

A3 Some competitors have strengths in the Project segment of the decorative paints market. We will strengthen relationships with leading real estate developers and expand business with them by fully taking into consideration credit risk. We are working on increasing our market share by taking actions such as establishing partnerships with customers in selected market segments, rather than pursuing business expansion mainly by engaging in price competition. Competitors have increased their market shares more than we did recently. However, our basic policy is to do business at prices that can generate adequate profits.

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We are dedicated to the Maximization of Shareholder Value (MSV) as I have stated repeatedly on various occasions. Therefore, we will not aim to capture market share merely by cutting prices. The Project business will continue growing steadily during the next few years. In that sense, I believe our approach has even greater potential due to the growth prospects for this business.

  • Questions by Shohei Nishigori, Nikkan Kogyo Shimbun, Ltd.

Q1 The presentation lists your strategies for the automotive coatings business for FY2021-2023, such as increasing market share in China, strengthening partnerships in Asia, and utilizing overseas factories. Please give us more details. I would also like to know your market share target for China.

A1 We believe that we currently rank fourth in the Chinese automotive coatings market. I cannot give you market share data.

One of the reasons for establishing Nippon Paint Automotive Coatings (NPAC) is the strong performance of the NIPSEA team in the automotive coatings business in China. NIPSEA's strong marketing capabilities have given us a significant advantage over competitors with regard to approaching Chinese automobile manufacturers. I cannot disclose specific names, but we have a few cases in which the Nippon Paint Group has succeeded in increasing its market share among Chinese customers thanks to NIPSEA China's assistance.

Our Group's technology and product development capabilities in Japan support NIPSEA China's marketing activities. We must be able to accurately meet the broad range of needs of automotive coatings customers. One of the key missions of NPAC is to securely link our Group's technical development capabilities in Japan with marketing capabilities in China.

Japanese automakers have the largest share of the global automobile market. We will aim to capture contracts for automotive coatings in China from Japanese OEM manufacturers through discussions with their head offices in Japan. Our goal is to strengthen our Group's capabilities by having our Japan and Chinese teams work closely together. The key to success in this is close coordination within our Group. This coordination is already starting to produce benefits.

Q2 Are all factories in the Major Investment Projects on page 34 new factories?

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A2 All of these factories are basically new and already have customers. This is because we planned these projects while holding discussions with customers. The paint factory in Okayama, which uses state-of-the-art technologies, will replace our factory in Hiroshima. The Okayama factory project is about to break ground. When completed, this factory will reduce staffing requirements by nearly 50 percent. Therefore, all factories on page 34 are new facilities because we plan to build more smart factories of this type.

  • Questions by Tomotaro Sano, JP Morgan Securities Co., Ltd.

Q1 Page 38 says that your financial discipline includes maintaining sufficient room for leverage. Please tell us how much leverage you think is suitable.

A1 Page 45 shows our cash flows and capital allocation. As you can see from the graph on the left side, our leverage will improve gradually assuming that we do not engage in any M&A deals and use cash flows to repay debts. Our current leverage is not high, so I basically believe that we should use borrowings to finance M&A. I think we should determine the proper level of leverage case by case. One important criterion is to maintain leverage at a level that can preserve our current credit rating.

Q2 Regarding the realignment of the Tokyo Stock Exchange (TSE), one of the requirements for companies to transition to TSE's Prime market is to have a tradable share ratio of 35% or more. In your case, the major shareholder owns nearly 60% of your stock. Please tell us if you will take some action if you cannot achieve a tradable share ratio of 35%, or you are not necessarily interested in a Prime market listing?

A2 We know that we need a tradable share ratio of 35% or more to move to the Prime market. This 35% requirement is based on the number of listed share certificates, etc. and the number of tradable shares as of the end of the most recent business year, which is at the end of 2020 for us. We believe we cleared the threshold of 35% as of this date. We also know that we will need to take into consideration the increase of Wuthelam's ownership to 58.7% in 2021 to determine our fulfillment of the qualification requirement in the future.

I expect cross-holdings by companies and financial institutions will generally decrease gradually. We will continually consider what actions to take by taking into consideration progress with sales of these cross-holdings.

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  • Questions by Megumi Iwano, Nikkei Inc.

Q1 You used the Okayama and Hiroshima factories as an example to explain your factory restructuring projects in Japan. I have heard you mention your plan to consolidate the Aichi factory. Please explain this plan.

A1 Regarding the restructuring of our factories in Japan, we have established a very thorough master plan covering about 20 years, as I stated earlier. This master plan changes every time we review it. The restructuring of the Okayama and Hiroshima factories is expected to take place during the new Medium-Term Plan. In addition, we have been looking for sites to relocate two factories in Aichi, Taketoyo and Takahama, due to aging of production facilities and lack of space for new equipment. These projects will be launched after the current Medium-Term Plan.

We have narrowed down potential sites to a few locations. If things will go as we hope, the relocation sites will be in Aichi prefecture. Our plan is to consolidate the automotive coatings business with paint for plastic bumpers (paint for auto body and plastic bumpers) and establish R&D facilities by relocating facilities from these two factories or establishing new ones where necessary.

The new factories will not start operating until after the current Medium- Term Plan because of the time required for site preparation and construction.

Q2 What is your rough image of the master plan 20 years from now?

A2 The master plan has all the components of capital expenditure for factory equipment and these components are assigned priorities. The master plan is a matrix with production facilities in columns and a timeline of 20 years in rows. This matrix shows how much capital investments are needed and in what time span. We need to prioritize updating older production facilities. Priorities are set according to ESG requirements, local regulations and other factors.

The order of priorities may change every time the master plan is reviewed. For instance, a project without prospects for the acquisition of land naturally takes a backseat to another project with good prospects for acquiring land.

Q3 Do you have a similar 20-year master plan for your Group companies outside Japan as well?

A3 We do not have a 20-year plan for our Group companies outside Japan. For

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instance, NIPSEA has a strategy of building factories in areas where they have customers and business opportunities. They look at their balance sheet and profit and loss statement to determine the timing and size of capital investments.

In China, regulations may create an urgent need to relocate a factory. As a result, our capital investment plan allows for urgent relocations. NIPSEA takes steps such as monitoring overall capital investments to ensure that their financial discipline is maintained.

  • Questions by Atsushi Ikeda, Goldman Sachs Japan Co., Ltd.

Q1 Looking at your outlook for the Project market on page 13, your market growth forecast of 5%, which is lower than China's growth rate, appears rather low considering that renovation demand is taking off. We forecast 30- 40% growth in the Project market. Please give as the reasons for the slow growth forecast. Also, I would like to know why the growth forecast is the same for the DIY and Project markets even though demand in the decorative paints market is clearly shifting from the DIY segment to the Project segment. Your growth forecast for NIPSEA China during the Medium-Term Plan is the same at around 10% both in FY2021 and in FY2022 onwards. Does that mean you will prioritize profitability over market share growth?

A1 The market growth rate forecasts on pages 12 and 13 are the same at 5% because these figures show our growth forecasts for the overall decorative paints market. Please note that a growth rate of 5% means growth of 5% CAGR here. We expect that the overall decorative paints market in China will grow at this rate. I believe this is a fairly high growth rate when compared with growth forecasts for other markets around the world.

The structure of the Chinese decorative paints market has been changing. The Project segment, which had previously been rather small, has recently been growing rapidly. For instance, the Xiong'an New Area is a new area developed by the government in suburban Beijing. Many people are expected to relocate from Beijing to Xiong'an in the future. As this example shows, very big business opportunities are being created throughout China.

The important strategy is to grow by forming partnerships with leading local construction companies with sound financial positions. We are pursuing growth of both overall revenue and volume rather than using a price offensive.

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Nippon Paint Holdings Co. Ltd. published this content on 23 March 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 31 March 2021 12:33:03 UTC.