IR DAY 2024 Q&A Summary

A question from Participant A

• Q1 I understand that that DuluxGroup has strong brands each with a brand philosophy, and the profitability of each brand has increased from a single digit to double digit after acquisition.
  
  My question is, what is the commonly shared philosophy for all the brands and operations within DuluxGroup as a whole? What kind of improvements have you been making?

  A1So the common philosophy in all the brands we manage is linked to the fact that we have a consumer that’s doing a task infrequently -- do it once, do it right --therefore, a bias against risk and for reassurance and how we then think this manifests itself, if I think in terms of a profit and loss statement because in my experience on the Australian Securities Exchange (ASX), that’s how investors think.
  
  Our market typically grows about 1% in volume per annum and then we get a little bit extra revenue from getting market share expansion. If you have 40% market share, one on 40, i.e. another one point of market share is 2.5% extra on revenue. Then typically, we get a little bit from price and that’s not just putting up a price rise but by mix and innovation and the things we do to support that. In a market where volume grows by 1%, that will give us approx. mid-single digit percentage revenue growth.
  
  In all of our businesses that are mature, we have very stable, appropriate and healthy gross margins. When we’re at that point, we simply look for the price component to cover the input cost component. If input costs go up 2% and our price goes up 2%, our input costs hold so our gross margin dollars grow at the same rate as our revenue.
  
  Then on top of that, we manage our fixed costs in line with inflation and salaries and wages in Australia that typically go up 3%. But I mentioned earlier we disproportionately invest in marketing. If revenue goes up 5%, marketing costs goes up 5%.
  
  When we get a business that might have an operating profit margin of, say 15 percent, we might look to strategically hold that margin and keep growing share or building a position where we can then bolt on some adjacencies to it.
  
  If a business had, say an 8% operating margin and a 20% share, we would expect it to grow both its share and its operating margin.
  
  But the end game is to get to this position where you have healthy leading market share and good solid, consistent operating margins and then you just continue to grow it through that philosophy.
  
  On top of that, as you can see from our presentation, we have never limited ourselves to simply what we are today.
  
  So, the fact that we had Dulux decorative paint business and we grew into wood-care, and we grew into protective coatings, and we grew into powder coatings, and we’re now doing SAF, construction chemicals.
  
  We acquired Selleys sealants and adhesives, and then we went into Yates garden products. Now we’ve acquired Seasol garden products then we’re now thinking about garden commercial products.
  
  So, this granularity of growth is also another dimension to our philosophy.

Questions from Participant B

• Q1 My question is about marketing. Specifically, how you spend advertising costs. I believe the current market climate is not very brisk in many areas.
  But recently you have had a major rebranding initiative. Compared with the past, has there been any changes to your advertising spending policy?
  
  Additionally, do you recognize any challenges for improving the efficiency of advertising spends? Could you elaborate on this point?

  A1I suppose the biggest contrast has been the introduction of digital because in a traditional non-digital world, in the old days we would probably spend a third of our marketing spend on advertising and communication and that might have been as simple as putting a good television ad on TV on the Sunday night movie. A third of our marketing spend in the color material because when you go into, for example, a Bunnings store, you can take color samples home with you and that’s a big part of it. And then a third of it would be involved in all the other things that came together from market research to the personnel expenses, etc.
  
  Obviously in the last decade, everything’s just continued to accelerate on digital. Taking Trade Painter as an example, it’s the fact that we’ve now launched on the iPhone, the Dulux Trade app where a painter can come online and to my words earlier, buy anything, anytime, anywhere. This is the single biggest change and the fact is that consumers / homeowners can come online and have a live chat with a color consultant. In this manner, we’re disproportionately invested in that space.
  
  However, we still do television advertising because to this day it is the best form of mainstream communication reach, certainly in our markets.
  
  In some ways, probably nothing too new in what I’m saying here but it’s really a blend of the old ways and some of these fantastic new opportunities that digital has brought about.

• Q2 You mentioned that the biggest contrast is acceleration of digital but you still have advertising spend on TV. As a result of this, do you think the ratio of cost on revenue, especially marketing costs is on an upward trend or a declining trend, or you expect it to be flattish going forward?

  A2Our whole philosophy is to continue to outperform the market both on volume and value. If we do that, we get the disproportionate revenue growth and we will increase our marketing costs in line with that.
  
  So, if you want to think of it this way, our marketing investment is consistent as a percentage of sales. I don’t see the marketing percent to sales ratio changing, but as we grow the top line, the marketing dollars available will change and that gives us a lot of flexibility.
  
  If we can successfully implement marketing investment, we get a sort of virtuous cycle of reinvestment going on in that space.
  
  Then we leave it to each of the marketing directors in each of our different businesses to look at the optimal balance of that spend as they have to with prioritization. You know, their choices in digital and television and the other activities I mentioned before.
  
  To conclude, marketing percent of sales holding but marketing absolute dollar investment increasing in line with top line growth.

A question from Participant C

• Q1 You delisted in 2019 following the acquisition by Nippon Paint Holdings. What is the background of this acquisition and what is the benefits of being a part of Nippon Paint Group? When you become a member of Nippon Paint Group, what kind of benefits are offered to grow your businesses, and what synergies are observed at present and expected to be realized in the future?

  A1When we were listed on the ASX, we weren’t looking to sell the company. We were top performing, which is not often the situation when being acquired by another company. This history goes to show you can be an outperformer and be acquired. We were acquired for different reasons.
  
  When Goh Hup Jin and Wee Siew Kim and other executives from Nippon Paint approached our shareholders, who ultimately overwhelmingly took the offer, I remember meeting with Mr. Goh who asked me what we the management team wanted to do and why, and with Nippon Paint as the shareholder and as long as our ambition was consistent with the mission of Maximization of Shareholder Value (MSV), Nippon Paint would help us do so.
  
  Based on Asset Assembler model, which is about decentralized management, Nippon Paint talks about let 1,000 flowers bloom, the role of the partner company, and they talked a lot about having the autonomy along with the accountability. I think this is really important.
  
  In turn I came back to my management team, and we took this philosophy and this has really been embraced by our top 200 leaders, of whom most of them are still with us today five years later. This shows people love the culture, love the opportunity.
  
  We still have rigor. We still run a whole lot of things to the standard of our ASX company on Audit and Risk committee, Remuneration and HR committee, Safety and Sustainability committee.
  
  But we’re really focused on that support of the partner company model from Nippon Paint Group. We try to get the best of the knowledge we accumulated during the period when we were owned by ICI Plc, our knowledge as an ASX listed company, and now the support and autonomy and accountability within Nippon Paint Group.

A question from Participant A

• Q1 Thank you for introducing all the brand promotion initiatives and programs. Your presentation has deepened my understanding.
  
  My question is about the brand power and customer engagement. How are you measuring the cost effectiveness of brand promotion initiatives?
  
  Additionally, if the cost effectiveness does not meet your expectations, what is your discipline to control the spending?

  A1Gladys Goh
  I think it's very challenging to provide an exact answer due to the diversity of the market. However, we must evaluate the potential return on investment (ROI) for any markets we enter. Before making any investment, we need to be very clear about the ROI we aim to achieve.
  
  When we evaluate the cost effectiveness of the program, it largely depends on whether it involves on-ground activation. For on-ground activation, we measure ROI by the number of people who visit the booth, as well as brand conversion rates from these interactions. It’s challenging to pinpoint cost effectiveness from a single metric, as different touchpoints - whether digital advertising or on-ground promotions, each requires its own evaluation criteria.
  
  From an advertising perspective, we assess cost effectiveness based on our ability to achieve the highest awareness, reach, or frequency within the budget allocated.
  
  We will measure the effectiveness of a digital program by tracking metrics such as the number of clicks, how many people search for our brand, and the conversion rates if there is an e-commerce link included. We evaluate whether these interactions lead to conversions and if they complete the customer journey. The evaluation depends greatly on the specific type of marketing vehicle we are investing in at a particular point in time.

A question from Participant B

• Q1 My question relates to the page with the market share chart. In which market do you see the strongest growth, and where do you expect to gain more market share?
  
  Specifically, in Malaysia and Singapore, where you already have very strong market share, it seems difficult to gain more share. My impression is that Indonesia presents a growing market with significant market share potential.
  
  Could you provide more details about market share gains and market growth in the most promising markets?

  A1Gladys Goh
  We have very diverse markets, so some markets still have a lot of room for us to build market share where we are not yet dominant. The key focus is how we grow market share in those markets. However, as you pointed out, in markets where we already have a strong position, we are now looking at how we can leverage our market share to deepen our engagement and sell more products to our existing customers.
  
  For example, beyond just paint, we are looking at selling construction materials and painting tools. It's not just about gaining market share alone but about increasing the size of the wallet of our customers. We aim to sell more within the same customer base where we already have strong brand engagement and are already selling paint.
  
  This requires different strategies in different markets. In markets where we have a dominant share, like Singapore, Malaysia, and Türkiye, we focus on selling higher-value products, such as high-functional paint, and expanding our offerings beyond paint. In developing markets where we have not yet attained a dominant market share, we focus on gaining market share.
  
  In markets where we are already dominant, our growth strategy will focus on increasing the amount that customers spend on our paint, as well as other related product categories. The growth strategy involves deepening customer spend in dominant markets by offering more products, while in developing markets, we concentrate on increasing our market share.
  
  Yuichiro Wakatsuki
  It is very important to note, as mentioned in the presentation on DuluxGroup Brand Strategy by Patric Houlihan, that even in non-growing markets, we can increase revenue through pricing and market share gains.
  
  Therefore, it’s not just about gaining more market share, especially when we already have a high market share, such as 75%. As Gladys Goh mentioned, we can also focus on selling products beyond paint. There is significant potential to leverage our current portfolio.
  
  I want to emphasize that having a high market share in a particular region does not limit our growth potential.

A question from Participant C

• Q1 You mentioned that computerized color matching (CCM) machines have been installed at over 48,000 stores, and how much room is there to grow this number? I expect competitors are also introducing such automatic color matching machines. What is your differentiator from your competitors?

  A1Gladys Goh
  There’s certainly more room for us to grow by expanding our dealer network. When we enter new markets or bring on new dealers, we are aware that we are not dominant in every single market. We are also active in developing markets where we have good opportunities to open new stores and install our machines.
  
  The real differentiator for our CCM machines is that Nippon Paint offers the widest range of products compatible with our CCM machines. This sets us apart from competitors who typically focus only on specific types of paint, such as exterior, interior, or wood materials. Nippon Paint is the first to focus on both water-based and solvent-based products with our industrial CCM machines.
  
  Beyond just walls, wood trimmings, and doors, our CCM machines can even provide the same colors for roofs, flooring, and protective or industrial coatings. Another key advantage is the consistency of our color collaterals and color codes across multiple countries. For example, whether you are in Singapore or Malaysia, you can use the same color code. Therefore, our CCM machines have been a very important tool for accelerating the adoption of our paint and colors across multiple countries in Asia.

Questions from Participant A

• Q1 Could you give us insights into the business environment and your approaches in Tier 1 and 2 cities compared to Tier 3-6 cities?

  A1We are very dominant in Tier 1 and 2 cities and just as broad splits; the Tier 1 and 2 cities really constitute about 80 percent of our sales today. And we see a big growth potential in the Tier 3-6 cities, which now account for 20 percent of our sales and are growing very rapidly.
  
  We understand that for the Tier 3-6 cities, we need a more localized approach with more targeted and differentiated product segments, competing against a different set of local competitors. Over the last three years, as we have pivoted towards the Tier 3-6 cities, we have started to implement structured and organized operations.
  
  Additionally, some of the Phoenix dealers and partners are actually local competitors in the past. They have now committed significant resources and are providing us with access to their distribution channels. They are utilizing our brands and product technologies, enhancing our cost competitiveness in the market. Together, we are jointly pursuing and developing market opportunities.

• Q2 As a follow-up question, could you provide us with an overview of the Total Addressable Market (TAM) for newly built and refurbishing projects in the Tier 3-6 cities?
  
  I understand that the local competitors are very strong in this segment. To further enhance the distribution channel and the brand recognition going forward, what measures are you going to take?
  
  How are you going to focus on the paint sales distribution channels, including exclusive distributors, multi-brand and home stores and interior furnishing stores, and how will you increase your market share beyond paint in interior furnishings? In China, unlike in other countries, DIY is not really DIY; it’s more akin to B2B. For painters, how are you going to enhance the recognition of your paint brands? I assume that homeowners are not the final decision maker.
  
  Could you please elaborate on the branding strategy targeting them separating if possible in Tier 1 and 2, as well as in Tier 3-6 cities?

  A2The Top of Mind of Nippon Paint is 51% across all tiers, all age groups and all products and prices, which shows that we are building on strengths. As you have pointed out, traditional strengths of foreign brands and international brands like Nippon Paint in China has been in the big metros, but what differentiates Nippon Paint from the rest of the international competitors is that we are having a Top of Mind awareness across all these prices, cities, and product sectors. When we decide to shift the focus out of the traditional strongholds of the Tier 1 and 2 cities, we bring a lot of strength because the Nippon Paint brand is recognized across China.
  
  What is important when we go out is not only to enhance the brand but also to build the distribution. The key to winning in the Tier 3-6 cities is to continue maintaining the strong brand awareness through (i) advertising and outreach and (ii) also color leadership. To build the distribution, which is not only putting more boots on the ground, but also to get local partners to work alongside us to quickly build up the speed to market and the penetration and also to ensure that we have the right product portfolio at the right price point, and they can compete in this slightly different local markets.
  
  Shown in page 16 of the presentation are some of the dedicated products made available in Tier 3-6 cities. These products are focused on the rural farming areas designed to turn rural properties into beautiful homes. This leads to the head-to-head competition by local competitors.
  
  The last point I’d like to make is that although we view China as one market, we recognize that it is actually very diverse. Through our ability to understand and gain insights, we are able to develop slightly differentiated strategies beyond the broad national strategies targeted for this segment.
  
  We believe some of these strategies are gaining traction. If you break down the rough proportion, Tier 1 and 2 cities account for 80% of revenue and Tier 3-6 cities account for 20%, that 20% is actually growing very rapidly. However, what is holding us back is our belief that China is currently a market in recovery; it is still in the doldrums.
  
  We’re not holding our breath because we believe that even if the property market does turn around, it will likely recover much faster in Tier 1 and 2 cities, with some lag before the Tier 3-6 cities pick up. Therefore, we continue to lay the groundwork by developing our products, building our partnerships, and strengthening our teams. This way, when the market truly picks up in Tier 3-6 cities, we can significantly improve upon the growth rates we are seeing today.

A question from Participant B

• Q1 You explained the strength and innovations happening in the markets. I may be short sighted but how are you controlling the costs for marketing, innovation and branding that you’ve just mentioned? I believe these efforts are made to enhance your strength as a marketer.
  
  However, as reflected in the September financial results, there are times when you need to control marketing costs depending on the revenue situation. When you increase or decrease marketing expenses, how you decide those timings? There are also long-term marketing efforts, so what are the standards for deciding whether to accelerate or apply the brakes in NIPSEA Group and DuluxGroup? You have excellent management, but from an investor’s point of view, it would be reassuring if you could provide clear standards on how you decide on marketing expenditures.

  A1When you saw my charts about reaching new customers, participating in exhibitions, and engaging new stakeholders, you might be concerned that our marketing expenses could go into overdrive.
  
  What is important for us is our belief in the market and learning from the past three years in China, as well as from our competitors. Over the last three to four years, there has been a significant shift away from large national property developers toward different segments. Some competitors, traditionally strong in the property sector, have pivoted to commercial sectors where short-term growth is evident.
  
  There is strong price competitiveness in the B2C market, which raises concerns among our investors. In a competitive market, costs might increase due to higher marketing budgets, or prices might be cut to gain market share. This is the reality in China today.
  
  At Nippon Paint China, we focus on maintaining cost competitiveness. Our stronghold is retail emulsion, which constitutes close to 50% of our business and maintains high double-digit margins. However, our overall margins have decreased quarter-on-quarter, driven by changes in product mix including a larger volume of lower-priced products. Additionally, there is a shift in our product mix because some suppliers are now looking to us to provide raw materials. This results in higher trading revenue from finished and semi-finished goods, which are not paint products.
  
  Moreover, the decorative non-paint segments of our business, such as putty and accessories, are growing, further changing the paint/non-paint product mix. Despite these shifts, we remain confident by focusing on our profitable retail emulsion segment, where margins have not changed year-on-year.
  
  We ensure the right mix of brand investments by maintaining cost efficiencies in other areas of the business. This includes controlling formulation costs, buying raw materials at the best prices, optimizing logistical efficiency, and keeping our SG&A controlled. Cost efficiency is multi-faceted and brand building and marketing only represent two to three percent of the entire cost structure.

A question from Participant C

• Q1 In your paint and coatings business, and particularly in NIPSEA Group, you have high stability and profitability. Currently, there are various risk factors in the business environment. Could you explain what measures are taken to enhance resilience, reduce costs, and improve efficiency?
  
  Additionally, are you planning, or do you see any rooms for any restructuring or structural reforms within NIPSEA Group?

  A1Earlier, I discussed the chart showing the compounded growth rates of both NIPSEA China and NIPSEA Except China for operating profit and margins over the last three years. From 2021 to 2023, the world was beset with the COVID, and in China, particularly with the extreme pressures put on everyone by the zero COVID policy. We faced supply disruptions, the cost of the wars, and raw material price volatility. These were risks we had to manage.
  
  We believe there is no one-size-fits-all approach to mitigating risks, which aligns with our management strategy for NIPSEA Group and the larger Nippon Paint Group. We listen carefully to our competent local management, granting them with autonomy and independence while providing group assistance. This decentralized approach helps mitigate risk, ensuring no single unit can significantly affect the entire Group.
  
  This risk management approach is hardwired even into new partner companies. As Mr. Patrick Houlihan mentioned, when we bring in new teams, they quickly adapt and show progress. Our mantra is MSV (Maximization of Shareholder Value), focusing on making money and creating shareholder value.
  
  We recognize potential global discontinuities, such as technological and trade decoupling, which are already happening to some extent. We are structured to withstand such challenges. For example, NIPSEA China and the Malaysia Group within NIPSEA Group operate distinctly apart, including separate IT systems and different approaches to stakeholder interactions. This structure prepares us for possible decoupling scenarios.
  
  Regarding structural reforms, we are always changing and flexible. For example, three years ago, we decided to divest our India operations and European auto operations due to their risk to the Nippon Paint Group. After two years, we found that the India businesses now meet our criteria, so we bought them back. The European auto business is still under observation, but we maintain connections with European Auto OEMs through this relationship. We continuously adapt based on what aligns with our MSV philosophy.

Questions from Participant D

• Q1 My question has two parts. First, we are seeing more integration between construction materials and paints. Could you elaborate on what has happened in the past five to ten years? Previously, construction materials and paints were two separate categories with different competitors, but now we see more integration and competition in the same categories. What is driving this change?
  
  Second, could you elaborate on the competition in India, where new entrants are entering the dominant decorative paints market? Could this happen in China or Malaysia in the future? If not, what are the barriers to entry in these markets?

  A1The first part of your question is about the integration of paint and coatings with construction chemicals. Traditionally, these were separate categories with different competitors. However, in the past 5 to 10 years, we’ve seen players from the paint and coatings sector move into construction chemicals, and vice versa. For example, in India, there is a company that is very strong in sealants and adhesives and construction chemicals, and is now entering paint and coatings. Similarly, in China, a company known for waterproofing is also moving into paint and coatings.
  
  So even in Nippon Paint Group five years ago before we actually put forth even a wider Asset Assembler approach, we actually thought in terms of a Paint++ approach. This strategy leverages our expertise in paint and coatings, utilize common chemistry, distribution channels, and market insights. DuluxGroup’s integration into our fold further strengthened our capabilities, particularly with their strong SAF segment and the Selley’s brand.
  
  In China and Malaysia, we’ve expanded capabilities. We acquired Vital Technical in Malaysia and built up our dry mix mortar and putty businesses. This Paint++strategy lowers risk by building on our existing strengths.
  
  Five years ago, when we first considered the Paint++ strategy, the SAF segment was particularly attractive. We pivoted and asked the group to focus on growing SAF, driven by the integration of the DuluxGroup into our fold. The DuluxGroup brought a strong SAF segment, underpinned by the Selleys brand, which we then integrated into the NIPSEA Group. This led to the development of capabilities in China, and in Malaysia, we acquired Vital Technical in the SAF area. We subsequently acquired CMI, building up the dry mix, mortar, and putty segments.
  
  The Paint++ approach is seen as a lower-risk strategy because it leverages our strengths in chemistry, distribution channels, and the support of the DuluxGroup. While we do consider further expansion into construction chemicals, it involves moving slightly away from our core chemistry and channels. For example, in China, we’ve developed construction chemicals adjacent to the paint and coatings business by leveraging existing distribution channels. However, some paint and coatings distributors have struggled to adapt, leading us to establish dedicated segmental dealers specializing in areas like adhesives and waterproofing. This diversification increases our market access.
  
  In summary, the two sectors are converging, and we are learning and investing in both acquisitions and market-building efforts.
  
  Regarding competition, India has seen the entry of two to three significant new players in the organized market, with 2024 being their first year of market activity. This will intensify competition. However, the NIPSEA Group has a smaller presence in India, making us less affected. If a similar scenario were to occur in China or Malaysia, the impact would differ. In China, the market is consolidating, and the traditional customer base is changing, making it less likely for new entrants without a background in paints and coatings to succeed. The competition is more likely from local Chinese players expanding their market presence.
  
  In Malaysia, the risk of new entrants is lower due to the diverse dynamics of the nine separate countries and regions within the group. Each must be treated differently.
  
  Let me give you an example that is quite positive. We entered Pakistan in 2006, initially focusing on the decorative sector, where we experienced good growth. However, today, the automotive sector is our major growth area. Currently, we hold approximately 80-85 percent of the market share in automotive parts. This success is due to our ability to capitalize on the opportunity created when a major partnership in the market dissolved, leaving a significant void. This rapid growth demonstrates our ability to capitalize on market opportunities.
  
  With strong support from our Japanese colleagues, we were able to increase our market share from around 15 percent to over 80 percent in just 18 months. This might raise concerns about what could happen if a similar situation occurred for Nippon Paint. Could a competitor step in and capture a large market share? While it’s possible, we are prepared to defend our position vigorously and will not simply allow competitors to take over our market share.

• Q2 As a follow-up, how do you look at the B2B business in China? I believe investors have considerable confidence in your B2C business strategies and track record. However, for the B2B sector, we see competitors exiting the larger B2B segment, including the housing developer related businesses focusing more on the factory, schools and smaller businesses.
  
  What is your strategy for housing development-related businesses? Do you see any signs of bottoming out?

  A2I have a chart that indicates how we are adapting to the new market environment in China. Today, we target three groups: the public sector, businesses, and consumers. Your question focuses on the public sector and business, which we see as new addressable markets. Before 2020, our primary focus was on large property developers, which was a thriving market at the time and a necessary area for us to compete in. However, that market has since declined.
  
  Since 2020, we have taken the opportunity presented by this market hiatus to strengthen our capabilities. We have started to explore the public sector, including new district rejuvenation and new factories. In the business sector, we are addressing specific needs in the electronics, food processing, and pharmaceutical industries. Each sector has unique requirements, and we are building solutions to meet these needs.
  
  It has been both enlightening and humbling that we have not overlooked this substantial market. The downturn from 2020 awakened us to opportunities we had neglected. In several charts during my presentation, I showcased our efforts over the past three years, which are beginning to show success as we attract new customers.
  
  Although we are growing from a lower base, we believe we can compensate for the downturn in the large property developer market.
  
  Despite a significant reduction in our TUB business, which catered largely to big property developers, NIPSEA China has not seen a decline in revenue. We have offset this with other revenue streams.
  
  We hope this transition will give us enough time to grow and succeed in these new segments.

A question from Participant E

• Q1 In NIPSEA, as a foreign brand in China, do you recognize any potential future risks? SKSHU is a completely local brand, whereas your brand is seen as one originating from Singapore or Japan.
  
  Are there any political risks associated with this, and how are you hedging against them? This could be considered a Black Swan event, and it may be difficult to predict, but do you see any signs of such risks for a foreign brand? I recognize the strong brand power you have, but I would appreciate your insights on this matter.

  A1Since we entered China in 1992, the risk of being a foreign brand has always been present. It is difficult to argue whether this risk is higher or lower nowadays. Since 1992, we have always projected ourselves in the Chinese market with our Chinese name, LiBang, rather than Nippon Paint. When consumers think of our brand, LiBang is at the top of their minds.
  
  We have taken great care to present ourselves as an international brand rather than solely a Japanese brand. This does not mean we shy away from our Japanese heritage. In fact, in our automotive business, we leverage our Japanese heritage significantly. However, we cannot entirely discount the possibility of a Black Swan event.
  
  To mitigate this risk, we position ourselves as an international brand deeply connected with China. At the recent China International Import Export (CIIE), the theme was “In China, for China.” We showcased products developed in collaboration with Chinese partners, enhancing them with global expertise. One example is our photocatalytic product designed to address air quality issues in Chinese cities. This technology was co-developed with two Chinese universities.
  
  We showcased this product prominently at our booth during the CIIE. The response was overwhelmingly positive; many provincial administrators who visited our booth expressed a strong interest in the product. They were keen to take samples back with them to explore how they could integrate it into their local budgets and initiatives.
  
  What particularly appealed to these administrators was the fact that our company, despite being international, works very closely within China to develop products specifically customized for the Chinese market. They appreciated that we understand China’s unique needs and produce everything locally, “In China, for China.” This approach not only underscores our commitment to the Chinese market but also enhances our credibility and trustworthiness as a partner in local development projects.
  
  By aligning our product development and production closely with local requirements and collaborating with local institutions, we aim to mitigate potential geopolitical risks and reinforce our position as a valuable contributor to China’s growth and innovation.
  
  This approach resonates with provincial administrators who visited our booth and expressed interest in integrating such innovations into their budgets. They appreciated seeing an international company working closely with China to develop customized products. By focusing on China-specific needs and producing locally, we aim to mitigate the potential impact of Black Swan event.

Questions from Participant A

• Q1 I understand that you have MSV as the target, but when we look at the results over the past several years, I think it’s been challenging to achieve enhancement of MSV. As the Board Chair or the person in charge of organizing discussions at the Board, what do you think were the challenges that hampered the stock price increase over the past two years?
  
  Could you please explain your position or take on why you think the share price hasn’t been performing as expected? What kind of additional measures do you need to take in order to enhance MSV?

  A1Masayoshi Nakamura
  This is one of the topics we’ve been talking at the Board. Going back to a couple of years ago or even before 2018, our stock price has been enjoying the so-called China market premium. No question about that. But then, after completion of the 100% integration of the Asian JVs, and a couple of years later, we saw the China premium no longer support our stock price.
  
  Then, the situation unfortunately has shifted from merely losing the China premium to what could be described as a China market discount, so to speak. This is despite our China business performing well relative to our competitors, and we will continue to do so as Wee Siew Kim mentioned and explained.
  
  However, unfortunately, our stock has been perceived as one of the China-related names within the Japanese stock market. As Siew Kim and Yuichiro Wakatsuki mentioned, we’re continuously working on expanding our business in China. I believe that our efforts in the China business will continue to positively impact our EPS performance. Simultaneously, DuluxGroup as well as Dunn-Edwards have been performing well, and Japan Group is rebounding.
  
  The acquisition of AOC was one of the strategies we employed to improve our stock price performance, and ultimately, this will positively impact our mission to pursue MSV.
  
  The stock market moves according to its own dynamics, which is why we are making additional efforts to help the capital markets appreciate our initiatives. I believe that sooner or later, we will see the results of these efforts. This perspective is consistent with the discussions and position of our Board members.

• Q2 Is it correct to understand that the objective of the recently announced acquisition of AOC is to reduce your dependence on the China market?

  A2Masayoshi Nakamura
  The China market continues to present growth potential, and we may be able to mitigate the China discount. Whether it is reasonable for us to have such expectations may vary on a case-by-case basis.
  
  Maximizing the residual value of the company after fulfilling our obligations to the stakeholders, our business in China has positively impacted our EPS. Additionally, we anticipate a positive impact from the AOC transaction. Our strategy, particularly in terms of portfolio management, is solely focused on MSV, whether or not these businesses immediately contribute to our EPS growth, in both the short term and long term. In terms of the cash management, our China business significantly contributes to cash generation and EPS growth. They are also self-financing their expansion efforts in China. This demonstrates that our China operations are robust. We are continually seeking other well-managed businesses that can positively impact our EPS accretion.
  
  Our primary focus is not geographical expansion or becoming No.1 in any specific region, but rather on how much EPS growth we can achieve. We hope that our efforts will eventually mitigate the current China discount, leading to a more positive outlook.
  
  Despite the current challenges, we believe the overall business of the Company will improve as the China market rebounds. Even under present conditions, our China operations are performing well and are expected to perform even better in the medium term.
  
  Yuichiro Wakatsuki
  I want to ensure everyone understands that while MSV is about EPS maximization, it is also about PER maximization. As mentioned at the outset, we believe there is a gap between the capital markets’ perception of us and the reality of our business across Nippon Paint Group.
  
  We are adding another valuable asset, AOC, with the objective not to lessen our dependence on the China business but to enhance overall profitability. Our M&A strategy may be more focused on non-China assets, which could result in a perceived dilution of our China exposure. However, our primary goal remains profitability enhancement, or MSV.
  
  To clarify, we are committed to continued growth in China, but our focus is on the overall business. I urge analysts and investors to adopt a broader perspective when evaluating our strategy. While it is important to address questions about China, it is equally important to recognize our mission to be an EPS Compounding Machine that ultimately benefits our shareholders.

A question from Participant B

• Q1 Recently you announced the acquisition of AOC. I understand that you have carefully considered various risks and that your Board members are well-versed in M&A. Could you please elaborate on the key factors that encouraged you to proceed with this acquisition, particularly in terms of business risks and management potential?

  A1Masayoshi Nakamura
  The question pertains to the AOC acquisition, specifically how the Board discussed it and evaluated the risks and management potential of AOC. The idea of acquiring AOC was introduced to all Board members around mid to late July this year.
  
  Let me explain how the Board reviewed this opportunity in a somewhat chronological manner. In mid-July, we became aware that the management team was reviewing AOC in a highly serious manner. Although AOC is not exactly in the paint and coatings space, it is within our field. At that time, the management team was also considering other opportunities, including potential transactions from DuluxGroup and other Group companies.
  
  We were reviewing more than a couple of M&A transactions simultaneously and had to determine which one should be our highest priority. Our review focused primarily on how EPS-accretive each opportunity would be in the short term, medium term, and long term, as well as the quality of each business’s management team.
  
  We considered all available opportunities and narrowed them down to two or three potential ideas. We continued to evaluate these options until we made a final decision. This process involved comparing the potential risks of each business with our existing operations, while consultants highlighted an optimistic outlook for the market.
  
  We relied on our knowledge and experience to assess these opportunities, scrutinizing the proposed projects and other factors. Throughout this process, our management team engaged with the target company’s management, raised numerous questions, and conducted thorough due diligence.
  
  Eventually, we determined that AOC represented the best opportunity for us. While acknowledging a certain level of risk, we encouraged our management to take this risk. Importantly, the management of the company to be acquired was also prepared to take on further risks acceptable to us.
  
  This is how we have been reviewing potential acquisition opportunities. Following the announcement, we held a Board meeting in November, where we began reviewing other potential opportunities. This demonstrates our ongoing efforts to explore M&A opportunities and reach informed decisions.
  
  Yuichiro Wakatsuki
  I checked the records and found that we initially brought the AOC opportunity to the Board in May, not July. We had broader spectrum discussions during our brainstorming session in March and even the prior year. Specifically, among the many projects we reviewed, I mentioned multiple projects in our Board report where either I or the other side decided not to proceed. The Board has had a very busy schedule evaluating many opportunities presented by the executive team.

Questions from Participant C

• Q1 My first question is about the acquisition of AOC. Looking ahead, do you plan to consider these types of transactions frequently, or rather once every year or two? I noted that there was a positive market response to the share price following the announcement of the AOC deal. How often does the Board intend to review such potential acquisitions?
  
  Additionally, in terms of skill sets, what, if any, are the missing competencies necessary to effectively evaluate potential M&A deals? I understand the Board has an excellent matrix of skill sets, as reflected in the Board’s curricula vitae, but please mention if there are any gaps in the current skill sets.

  A1Masayoshi Nakamura
  First of all, your understanding is correct. We will continuously review and aim to consummate transactions, including those like AOC and potentially even larger or in different fields.
  
  As for the skill sets among our nine Board members, I do not currently see any gaps. However, if we require specific knowledge, such as market insights or technological expertise, we will certainly hire external advisors to ensure we are as informed as possible in making our decisions.
  
  Based on my observations and our ongoing evaluations, I do not believe we are missing any essential skills at this moment.

• Q2 My second question pertains to the Board’s Initiatives for FY2025 in the presentation material, specifically the third point about the audit structure.
  
  In your company’s Governance Report, I believe there was mention of enhancing and fine-tuning the audit framework to better suit your Asset Assembler model as one of the Board’s initiatives.
  
  Does this mean that the audit accounting system will be adapted for your audit model? Could you please elaborate on what you mean by “Audit on Audit”?

  A2Masayoshi Nakamura
  If I may return to your first question, I have been considering it and would like to add that while our Board members possess significant skills in running businesses, we must be cautious about relying too heavily on past experiences. Although each Board member has substantial experience managing their own businesses, the current business environment is different. Our decentralized model delegates autonomy based on trust and accountability, which differs from how they operated in the past.
  
  It’s not just about having the right skill sets, but also about being careful in how we apply our past experiences, given the different circumstances and business environment today. This is a delicate balance, as each member’s experience is valuable but may not always align with today’s circumstances. This is one of the challenges for me as the Board Chair to keep focusing on the strategic discussion, given that all members have had corporate management experience.
  
  Regarding your question about “Audit on Audit” and whether anything is missing to efficiently run the business, the concept entails that each Group company has its own audit management organization. They conduct their audits at various levels (first line, second line, and third line). At the holding company level, we receive reports from these third-line audits and organize them through our risk management systems, which include several components such as the Whistleblowing Hotline, Control Self-Assessments, and our Global Code of Conduct. We deliver these to our Group companies through third-line audits to gather information and ensure we manage risks in a reasonable manner.
  
  Fine-tuning our audit framework involves reflecting on past practices. We used to have internal auditors at headquarters who would occasionally visit business units within the Group. Our current “Audit on Audit” model aims to redefine the role of the headquarters’ audit department and the Audit Committee, determining the extent to which we rely on the audits conducted by each business unit based on trust and accountability.
  
  With acquisitions like AOC, which is a significant asset addition alongside NIPSEA Group, DuluxGroup, Dunn-Edwards, and Japan Group, our decentralized approach necessitates that headquarters be ready to listen and address any issues that arise in our Group companies. We aim to solve these problems rather than actively seeking them out, as identifying and resolving on-the-ground issues helps us expand our business.
  
  The holding company’s Audit Committee and audit department, along with the Co-Presidents, work together to resolve these issues. This collaborative approach provides valuable insights for expanding our future business and ensuring sustainability.