Leadership Roundtable

From early January to the end of December 2025, our share price rose 5%, underperforming both the Nikkei Stock Average at 28% and the chemicals sector average at 7%. Over the past three years or so, capital has increasingly concentrated in AI-related stocks. In this environment, investors have tended to focus their attention and capital on thematic sectors such as AI and semiconductors. Many investors perceive higher returns to be more readily achievable in these sectors than in the steady-growth paint and coatings industry.

While some investors remain concerned about slower growth in our existing businesses, more attention is now being placed on the performance of NIPSEA Except China in Asia. This is natural, as the segment now exceeds NIPSEA China in revenue growth, profit growth, and contribution to consolidated earnings.

Part of the reason is that the strengths of the Asset Assembler model are not yet fully understood. More broadly, some investors may see it as becoming a conglomerate and therefore associate it with lower capital efficiency and profitability. In reality, our M&A activities are strictly focused on chemical fields where we have deep knowledge and expertise, and we apply disciplined acquisition criteria. We target businesses with high asset efficiency, reflected in measures such as RNOA (Return on Net Operating Assets), as well as strong cash generation, while maintaining overall business quality.

In general, EPS Compounders share several common characteristics: (1) two highly profitable growth drivers, organic and inorganic growth, (2) strong cash generation and the ability to reinvest at high returns, (3) an autonomous and decentralized business model, (4) the capability to source and execute acquisitions at attractive valuations, (5) exposure to a broad portfolio of small and midsized private companies across multiple end markets, and (6) management teams with strong capital allocation discipline.

Recently, overseas investors have suggested that our management model may be similar to that of Danaher in the United States. Danaher Business System (DBS) has its roots in the Japanese kaizen concept of the Toyota Production System. It is more than a method for operational improvement; it serves as an integration platform for rapidly transforming acquired companies into efficient Danaher-style organizations. Our Asset Assembler model, by contrast, is an autonomous and decentralized platform that allows acquired companies to use management resources from across the Group to accelerate growth, with headquarters providing support. The approaches differ, but both are platforms designed to make acquired companies better businesses.

Correlation analyses we regularly use in our discussions show that both revenue growth and ROIC have relatively strong correlations with PER. More specifically, compared with peers, we can be viewed as trading at a discount in terms of revenue growth versus PER, while trading at a premium in terms of ROIC versus PER.

One reason we appear to trade at a premium on ROIC versus PER is that our management model is more active in M&A than those of our peers. The resulting increase in goodwill affects reported ROIC. We may argue that such comparisons are not apples-to-apples, but the reality is that investors do not always examine the accounting details to that extent.

As Mr. Nakamura mentioned earlier, we will continue to monitor ROIC closely as an important management indicator. At the same time, some investors view RNOA as a measure that better reflects the actual efficiency of the business, without being heavily affected by accounting factors. We therefore intend to further improve our communication so that investors can better understand the strong asset efficiency and cash-generating capabilities of both our existing businesses and acquired companies.

Limited liquidity also reduces our opportunities for inclusion in major indices such as the Nikkei Stock Average. Inclusion generally requires daily trading value of approximately ¥9.0–9.5 billion, and current trading levels fall short of that threshold. As a result, we are unable to benefit from the passive inflows associated with index inclusion. More importantly, this issue goes beyond lower trading activity in our shares. If low liquidity and a weak share price continue for an extended period, they could eventually affect our future M&A strategy itself.

In our investor outreach efforts, we have shifted our focus from the traditional chemicals and paints investor base to investors focused on EPS Compounders. In fact, some European investors have told us that they agreed to meet with us specifically because Nippon Paint is viewed as an EPS Compounder. We therefore intend to continue strengthening our overseas IR activities. At the same time, we will increase our outreach to domestic retail investors, as well as technical and quantitative hedge funds. Through these efforts, we aim to broaden investor perception of our Company from that of a paint manufacturer to that of a company capable of delivering compounded EPS growth through superior capital allocation.

We have upgraded our IR materials starting with our third-quarter 2025 results. To help investors better understand our underlying earnings power through historical trends, we updated the way we present our information. We sharpened our headlines and introduced adjusted operating profit and adjusted EPS to better highlight our cash-generating capability. We also presented our organic and inorganic growth track record in a single view. At IR DAY in November 2025, in addition to AOC, we provided the latest update on NIPSEA from Mr. Wee, together with an explanation of our M&A strategy. We also held an investor tour and CTO session at the Tokyo Innovation Center in October 2025, to demonstrate that our strengths extend beyond brand and distribution and also include strong technological capabilities.

After considering these factors, we also executed share repurchases starting in October 2025. The rationale was fourfold: first, to send a clear signal that we believed our share price was significantly undervalued; second, to increase actual buying interest in the market; third, to discourage short selling; and fourth, to demonstrate the strength of our cash-generating capability. Ultimately, we concluded that repurchasing our shares at this PER was justified as a financial decision based on our view of future EPS growth. While it did not lead to a sharp rise in the share price, we believe buying back our shares at undervalued levels was sound capital allocation. From a medium- to long-term perspective, we believe this contributes to MSV. At the same time, the primary focus of our capital allocation strategy remains M&A that contributes to MSV, and we will continue pursuing such opportunities.