Q&A Summary: M&A Strategy

Questions from Participant A

• Q1 There has been news about a possible integration between two of your competitors. Do you have any thoughts or feelings about this matter from your company’s perspective? In 2017, Nippon Paint made an acquisition proposal to one of these companies, but I believe the situation has changed quite a bit since then. Do you have any comments on that as well?
  
  Looking at this competitor’s business portfolio, it is clear that automotive refinish and mobility OEM are the larger segments, whereas for the other competitor there is a higher weighting in decorative business, and I think the two companies overlap to some extent in the industrial segment. If they do go ahead and integrate, is there anything that might be carved out or spill over from that integration that your company would currently be interested in?

  A1I actually get many questions on the situation involving the integration of these two competitors, and of course every banker is pitching to me many, many ideas. I do not comment in any specificity with respect to an individual potential situation. Anything could happen we may do or may not do. So there is nothing that I can comment further.
  
  Your second question refers to the 2017 situation. I have to say that our management is totally different. I have actually openly stated that in those times the rumored price was on an adjusted basis maybe even in the mid-teens but the real net income for one of the two competitors was less than 100 million dollars. Thereby, if we were going to pay 15 billion dollars for that, that means we were going to pay 150 times P/E or more. That usually doesn't make sense. And I cannot comment on what the previous management was thinking. But in our arena when MSV is our one and only mission, we will not go for 150 times P/E. Base line numbers may be different. So it's a meaningless comparison against 2017.
  
  Eventually any M&A should make sense with respect to MSV. So the only criterion is, does it make sense? Anything could happen, be it whatever you call it, including any assets that may come out of this combination.
  
  I do believe that the combination in of itself would not really pose a significant threat to our business portfolio because seemingly there are not too many fields that would change the competitive dynamics with the combination. We compete with respectively, like auto OEM with one of these players, but you know, the other player doesn't have an auto OEM business. We are less global in auto refinish. I don't think we're in any direct competition.
  
  One of the competitor does not have a deco business in Asia and Europe. All in all, I don't think it poses us any threat through the combination as we envision it; it may pose an opportunity for us as you say, if some assets are available.But as I clearly stated in my statement, there is no “must do, I have to do this, do or die deal.” It's all about does it make sense and that includes valuation, that includes any synergies that we can derive. So anything is on the table but there's nothing that I can comment any further.

• Q2 I believe one of the competitors’ EV is at 9.4 billion dollars. Does that sound too expensive to you?

  A2No comment about that.

Questions from Participant B

• Q1 My question is related to the valuation trend in the paint and coatings industry. You always say that your share price is low and has been trending low as well. But I see a similar trend across the industry for the past couple of years. What is your take? Your share price or valuation being low means your competitor's valuation is also low. Do you think there is an increasing attraction of M&A in this industry?

  A1You rightly say that our value is extremely low and I feel so very strongly. But you're also right in that generally speaking, maybe with the exception of very few players that could be very dominant in certain regions, their valuations have generally come down as well.
  
  In a sense, does that mean there could be meaningful opportunities? I think again, value matters. One of the reasons we have really expanded our universe is on the back of a very high valuation, more so in the deco space, but maybe generally in the paint and coatings sector.
  
  Starting from 2023 and maybe even 2022 when we quoted ourself as an Asset Assembler going into Sealants, Adhesives & Fillers and Construction Chemicals. It is a matter of the value that we pay and what value we can provide to our shareholders. That is a very important consideration.
  
  Bearing in mind that maybe the general chemical space is also lower in valuation. If I have AOC being available at 8 times EBITDA, I think that's a very good return over any Deco assets which would probably not trade at 8 times. I'm not saying 8 times is the magic number, but it's all about relative value that we can derive.
  
  If we have a paint asset that would trade at a meaningfully low multiple, and in this case be able to derive synergies, why not? But bearing in mind that I think it's all relative and I'm always open to any ideas.

Questions from Participant C

• Q1 DuluxGroup in Australia and AOC are, so to speak, operating in areas adjacent to paint, or in adjacencies business. If, for example, Nippon Paint is aiming to become a company like Berkshire Hathaway, would you also consider moving into fields that are quite different from paint – in other words, completely unrelated areas. From an MSV perspective, can that be a reasonable option?
  
  If that were the case, while of course Mr. Wakatsuki is a well-known former banker and you would have an advantage there, I imagine there could still be questions about how the market would react. Within the arena you have just mentioned, could you share your view on this?

  A1Since 2024, I have made it clear that there is no limit to acquisition targets. And I always say that I probably would not buy a bank. Why not? It's because we would likely not make money. It's probably a bit more strategic national asset thereby maybe exposed to regulations and even cross-border issues. I also say maybe at that time I would not go for a steel company because it gets very political sometimes, which means that we always try to stay a little bit lower than those radar screens. I do think there are ample opportunities in the chemical space that fit into our criteria.
  
  Maybe AOC was a little bit closer to our sort of formulations or the coatings business and we thought that was going to be a good sort of a deviation from the traditional paint player. I think going forward we would again continue to look for assets that would continuously grow, have good margin, good management, and good cash generation.
  
  Eventually when I talk about serving for MSV, it not only consists of EPS but also PER, and PER again results from many factors, ROIC probably one, and conviction level from the investors another. We take all these things into consideration.
  
  I'm not answering your question in any details, but I think that's the philosophy that we have very strict in our mind.

Questions from Participant D

• Q1 Regarding the turning point in your M&A direction, I have an impression that prior to 2019, Nippon Paint’s M&A activities were not that large in scale. From 2019 onward, however, there seems to have been a significant change in direction. Could you explain the background to this recent move toward large-scale M&A, or in other words, the background to the change in your M&A policy around 2019–2020?
  
  My impression is that from 2019 onward you anticipated a considerable slowdown in China and therefore began to pursue M&A outside China. Could you explain the background to this change in direction?

  A1You say there may be a turning point around 2019 and I think I have openly stated the change in 2018, when there was a shareholder proposal from Wuthelam Group to effectuate a business oriented Board solely focusing on MSV. That was really the first time that we started to state MSV as our mission, and it remains our one and only mission.
  
  I don't think we have really deviated from that statement ever after 2018 we then had five new Independent Directors, all business first and well versed into the MSV agenda and of course they have all clearly stated that their role is to promote MSV but also to protect minority shareholders.
  
  You mentioned that things have become larger but bear in mind before that at least we were attempting for a 15 billion dollar deal in 2017. It's not that a lot of things in terms of size capabilities have changed but I think the aspiration about M&A has shifted from, let's say 150 times or more PER company to a much more stable and fast-growing, sort of less cyclical company.
  
  That was first observed in the 2019 DuluxGroup acquisition who was dominant in the Australian decorative market. Even though Australia is not the fastest growing market, they have shown consistent growth throughout the years, roughly a five percent plus or minus sales growth with operating leverage giving 7, 8 percent bottom line growth. These are the type of companies that we like. Betek Boya again, in the Decorative space, we have actually completed the acquisition of NIPSEA Group’s remaining 49 percent stake and 100% of Indonesia business, which was 80:20 Deco versus Industrial.
  
  All in all, I think as MSV became our one and only mission, our focus definitely did change and we have really opted for much safer, stable, good assets, less cyclical compared to maybe the old days.
  
  You actually asked whether we were trying to deviate from China? I don't think that's the right way to look at it. We are not saying that because Japan is not growing we need to grow internationally. That is not how we see it. We see areas of potential growth through acquisition opportunities and that's why we pursue it.
  
  It's as simple as that. So if there's a growth opportunity in China, we would look for it but is there a meaningful opportunity to place our capital in China? The answer has been no so far because valuations may be high, and availability may be limited. It's only a consequence of us going maybe to other regions where there were opportunities and eventually maybe China became smaller percentage in our overall portfolio.
  
  There is absolutely no agenda within our portfolio to say, let's grow this less and let's grow this more. China, as you heard from Wee Siew Kim, is going to continue to grow. They're going to make profitable growth and so will other regions. New M&A will also contribute to our continued growth. It is very important to note that our thinking is not like “I need to do something outside China”. We're looking for all opportunities possible and that's as good as it gets.

• Q2 Looking ahead, is there a likelihood of a TOB by the parent company, an MBO, or potential disposals of businesses in regions where profitability has long been unsatisfactory. Are these kinds of scenarios something you already see as possible at this stage, or would you only start to consider them after conducting a more in depth review? I would appreciate any comments you can share on how you view these possibilities.

  A2You mentioned maybe three scenarios. I may have missed the first and second but maybe collectively, I usually do not make too definitive statements but I may just say that number one and number two, definitely not going to happen.
  
  It is very important to understand that Wuthelam as a 58.7 percent shareholder is a family asset management company who aspires to have our economic improvemen-MSV agenda. They share the agenda as a publicly listed company the value to go up as much as possible. Furthermore, as a family asset management company, liquidity is very important. It doesn't make sense at all to get us into a private zone.
  
  We are also willing to use the capital markets to further grow through acquisitions, making sure that it is meaningfully accretive post any issuance. I am very open about saying those things and that's our strategy.
  
  Number three I think you asked about the portfolio revisiting. As I mentioned, all of our assets virtually are generating cash and they are contributing to the bottom line now and I am not in desperate need for additional capital. For now, if I sell a business, I may get back some capital but would only return to my debt holders and reduce the interest by a very small fraction which would make the transaction dilutive to EPS.
  
  So for that matter, we're always open to ideas. It's again a financial decision looking for the future and maybe that's as good as it gets.

Questions from Participant C

• Q1 May I understand more about the KPI for the M&A team, as well as the management that is responsible for M&A?

  A1Our KPI is MSV. I just want to make sure that our M&A team is very small, including myself I only have two others, maybe one more. We do have M&A teams in NIPSEA, DuluxGroup, and AOC, so they also look into bolt-on opportunities. Executing a deal is not the objective.
  
  I want to make that very clear and eventually if we are successful in M&A, that serves for MSV. If we are unsuccessful post M&A closure, then that's a negative. It's as simple as that. We track assumed ROICs versus actuals as part of the evaluation. We want to make sure that our track record is consistent with what we have planned and approved for. If it doesn't go as planned, it will potentially hurt some people's compensation here and there.
  
  There is nothing mechanical about these things and we have to be very mindful of some of the risk appetite that we have versus being too bureaucratic and too number oriented.

• Q2 I think you mentioned that there's no one single metric like a multiple or even our ROIC that we're targeting. Is there like a minimal hurdle in terms of expected return or hurdle rate from M&A that we have?

  A2We actually evaluate very carefully and we don't have any magic hurdle rate. But in general, I say our weighted average cost of capital on a Japanese yen basis is maybe 5 to 6 percent. Our M&A has to exceed that, if not in year 1. I say EPS accretion definitely from year 1 but from a ROIC standpoint, hopefully we can exceed that in year 3. So that's a general guidance. It's not a hard line and it depends on where we stand.
  
  As I mentioned, in the old days when our share price was so high, we were less strict on imposing hurdle rates. However, nowadays we're much stricter and as I stated, AOC’s ROIC is over 6 percent from year one. So there is an evolution there too.