For qualified institutional investors only

YOUR GOALS,OUR COMMITMENT.

Japan's cash-rich companies: harnessing
corporate reforms
Exploring hidden opportunities amid a push for more active cash use

Japan, a nation of “cash-rich” companies, is undergoing corporate reforms aimed at raisingvaluation of companies by improving their capital efficiency. This includes leveraging existing
corporate savings for shareholder distribution and investing for future growth. The reforms, alongwith cash-rich companies' historical outperformance and strategic options due to their ample cash
holdings, make these firms well worth exploring.
Yu Sato, Lead Portfolio Manager
22 July 2024

A country of cash-rich companies
With its firms having held a higher amount of savings than those in other developed economies over the past three
decades (Chart 1), Japan can be described as a country of “cash-rich” companies. As with many aspects of Japan’s
economy, the bursting of the asset bubble in the 1990s played a significant role in shaping corporate behaviour. Afterthe bubble burst, Japan entered a long period of economic stagnation during which corporate investment slowed.
Company profits were instead channelled into savings, turning many of them into net holders of cash.

12
10
8
6
4
2
0
-2
-4
-6
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021

(%)

Chart 1: Corporate net savings (% of GDP, 1994-2021)

Germany

Japan

UK

US

Source: OECD

YOUR GOALS, OUR COMMITMENT.

For qualified institutional investors only •en.nikkoam.com

JAPAN’S CASH-RICH COMPANIES: HARNESSING CORPORATE REFORMS

Japan went on to experience many years of deleveraging with corporate cash diverted to interest payments. This
resulted in the proliferation of cash-rich companies, often defined as firms whose holdings of cash & deposits andSecurities are greater than their interest-bearing debt (Exhibit 1).
Exhibit 1: Cash-rich companies

Source: Nikko AM

There are two sides to cash-rich companies. Having significant liquid assets means strong balance sheets forcompanies during market turbulence; it also enables them to be generous with dividend payments and sharebuybacks. On the other hand, shareholders can criticize cash-rich companies for hoarding and not investing enoughin their businesses—in other words, not putting their money to good use. However, Japan is undergoing significant
corporate governance reforms. Thanks to these policy tailwinds, potential changes in behaviour, such as more
actively using cash, are expected to unlock shareholders value and enhance the attractiveness of cash-rich companies.

How governance reforms were initiatedWith the bursting of the bubble, the influence in the Japanese equity market of financial institutions, saddled by
mountains of bad loans, waned, while the presence of activists and foreign investors increased in the recent years.
This led to increased scrutiny of corporate practices which had plagued Japan. These included “parent-subsidiary”
listings (when a parent company and its subsidiary are listed on the same exchange, often creating conflicts ofinterests between the parent companies and the minority shareholders), cross-shareholdings, use of takeover
defence measures and neglect of minority shareholders.
Against such a backdrop, the administration of then-Prime Minister Shinzo Abe declared in 2013 that corporate
governance reform would be one of the main agendas of its Abenomics policies intended to revive the economy after
two decades of stagnation. Japan followed through with the introduction of the Stewardship Code in 2014 and the
Corporate Governance Code in 2015.
The purpose of the Corporate Governance Code is to encourage engagement between companies and shareholders
to promote sustainable growth and increase corporate value, with changes in investor expectations now being
expressed via proxy voting. As a result, companies must become more efficient to maximize shareholder returns.
In March 2023, the TSE requested that listed companies improve their capital efficiency as return on equity (ROE) in
Japan has been historically low by international standards. This move successfully encouraged companies to set
targets (or projections) of dividends or share buybacks, especially in April and May 2024 to coincide with their fullyear earnings. This positive trend will likely continue to raise investment opportunities over the medium term. More
importantly, some listed companies announced projections to grow earnings through better use of capital, i.e.,
increase in capex to pursue earnings growth. The revival of the Japanese economy is expected to support thesegrowth opportunities over the medium term.

YOUR GOALS, OUR COMMITMENT.

2

For qualified institutional investors only •en.nikkoam.com

JAPAN’S CASH-RICH COMPANIES: HARNESSING CORPORATE REFORMS

We believe that the ongoing reforms could further result in many cash-rich firms engaging in the following measures:— Utilising excess cash: effectively improving companies’ earnings and/or shareholder
distribution— Addressing parent-subsidiary listings: unlocking value by divesting or by making it
into a fully consolidated subsidiary— Reduction in cross-shareholdings: unlocking value as it involves firms withnumerous cross-shareholdings buying back their own shares

Other features that make cash-rich companies attractive
In addition to the policy tailwinds mentioned above, there are three other characteristics that make Japan’s cash-richcompanies attractive.
1) Strong track record of outperformanceCash-rich companies have outperformed the market over the last 17 years, offering attractive returns even during
challenging market conditions (Chart 2).
Chart 2: Cash-rich companies have outperformed*Cash-rich company stocks: Portfolios composed from TOPIX constituents defined as cash-rich companies (cash & deposits + securities –interest-bearing debt ≥ 0)
The data shown represents past performance and is not a guarantee of future returns. Returns are Japanese yen based and are calculated
gross of advisory and management fees and custodial fees, but are net of transaction costs and include reinvestment of dividends and interest.
Source: Nikko AM based on data deemed reliable; TOPIX Total Return Index data from JPX Market Innovation & Research, Inc.

YOUR GOALS, OUR COMMITMENT.

3

For qualified institutional investors only •en.nikkoam.com

JAPAN’S CASH-RICH COMPANIES: HARNESSING CORPORATE REFORMS

2) Strategic options thanks to cash-rich companies’ ample cash
Cash-rich companies offer at least three investment scenario options: (1) “takeover targets”, (2) “shareholder returns”
and (3) “turnarounds”. In our view, any of these scenarios can potentially lead to investment returns.
Exhibit 2: Three investment scenario options cash-rich companies offer

Source: Nikko AM3) Downside protection
An investment strategy focused on cash-rich companies can not only keep pace during market upturns, but it canalso offer protection during downturns, offering a concave investment return profile.
Chart 3: Cash-rich strategy keeps pace with market upturns, offers protection in downturns

The data shown represents past performance and is not a guarantee of future returns. Returns are Japanese yen based and are calculated grossof advisory and management fees and custodial fees, but are net of transaction costs and include reinvestment of dividends and interest.
Source: Nikko AM; TOPIX Total Return Index data from JPX Market Innovation & Research, Inc.

Strategy focused on undervalued cash-rich companies
While the Japanese equity market has rallied since early 2023, with the Nikkei Stock Average rising to a record high inJuly this year, the recovery in share prices has not been even. For example, smaller cap stocks have been
underperforming larger caps since April 2023. Furthermore, some sectors have been lagging external demandoriented sectors.
YOUR GOALS, OUR COMMITMENT.

4

For qualified institutional investors only •en.nikkoam.com

JAPAN’S CASH-RICH COMPANIES: HARNESSING CORPORATE REFORMS

Nikko AM’s Japan Cash-Rich Company Equity strategy focuses on return opportunities where undervalued stocks,
notably small to mid-caps and beneficiaries of Japan’s improving inflation outlook, support earnings growth over the
medium term.
More specifically, the strategy is focused on undervalued cash-rich companies that are expected to improve their
ROEs. This investment focus captures rising beneficiaries of Japan’s revival with more companies starting to improvetheir capital efficiency amid ongoing corporate governance reforms. The strategy’s expected holding period of
portfolio stocks is three years, which helps to capitalise on the structural reform of corporate governance throughROE improvements. This approach gives the strategy the opportunity to leverage corporate actions to improveshareholder returns.
It is estimated that nearly half of TOPIX companies are not covered by sell-side analysts. This presents the strategy,
through its own proprietary research, with the opportunity to uncover undervalued smaller cap stocks that have goneunnoticed. The strategy gains first-hand information through one-on-one meetings with firms’ management teams
and key individuals. This process has succeeded in delivering attractive performance in the past. We believe that
actively managed funds are now in a better position than passive funds to capitalise on opportunities to be found inJapan.
Case study 1: Union Tool Co.

Case study 2: ASKA Pharmaceutical Holdings Co.

A manufacturer of precision machinery with a large
market share in printed circuit board drills.

A pharmaceutical manufacturer with strength ingynaecology.

The company is highly evaluated for the following
factors:

The company is highly evaluated for the following
factors:---

Demand is expected to increase for drills
needed to support the growth of generative AI.
Such drills require a high level of precision andare thereby products high in added value.
The company produces its own manufacturingmachinery in-house, differentiating it from its
peers.

-

The company’s products are highly growthoriented, designed to address social issues inJapan by contributing to the advancement of
women and tackling declining birthrates.
The company is actively making an effort toincrease shareholder returns and reduce crossshareholdings.

Summary
A significant number of Japanese companies became cash-rich after the bursting of the asset bubble in the 1990s as
many channelled profits into savings. Despite criticisms, these cash-rich companies have come to possess strong
balance sheets and have potential for generous dividend payments and share buybacks. Japan’s recent corporate
governance reforms have encouraged companies to increase their shareholders value by utilising their excess cash
and idle assets more proactively. These reforms, in addition to other factors, have enhanced the attractiveness ofJapan’s cash-rich companies, making it an opportune time to focus on these undervalued and oft under-researched
entities.

Any reference to a particular security is purely for illustrative purpose only and does not constitute a recommendation to buy, sell or hold any security.
Nor should it be relied upon as financial advice in any way. There can be no assurance that any performance will be achieved in any given market
condition or cycle. Past performance or any prediction, projection or forecast is not indicative of future performance.

YOUR GOALS, OUR COMMITMENT.

5

For qualified institutional investors only •en.nikkoam.com

JAPAN’S CASH-RICH COMPANIES: HARNESSING CORPORATE REFORMS

Important information: This document is prepared by Nikko Asset Management Co., Ltd. and/or its affiliates (Nikko AM) and is for distribution
only under such circumstances as may be permitted by applicable laws. This document does not constitute personal investment advice or apersonal recommendation and it does not consider in any way the objectives, financial situation or needs of any recipients. All recipients arerecommended to consult with their independent tax, financial and legal advisers prior to any investment.
This document is for information purposes only and is not intended to be an offer, or a solicitation of an offer, to buy or sell any investments orparticipate in any trading strategy. Moreover, the information in this document will not affect Nikko AM’s investment strategy in any way. The
information and opinions in this document have been derived from or reached from sources believed in good faith to be reliable but have notbeen independently verified. Nikko AM makes no guarantee, representation or warranty, express or implied, and accepts no responsibility or
liability for the accuracy or completeness of this document. No reliance should be placed on any assumptions, forecasts, projections, estimates orprospects contained within this document. This document should not be regarded by recipients as a substitute for the exercise of their own
judgment. Opinions stated in this document may change without notice.
In any investment, past performance is neither an indication nor guarantee of future performance and a loss of capital may occur. Estimates of
future performance are based on assumptions that may not be realised. Investors should be able to withstand the loss of any principal investment.
The mention of individual securities, sectors, regions or countries within this document does not imply a recommendation to buy or sell.
Nikko AM accepts no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this document, provided
that nothing herein excludes or restricts any liability of Nikko AM under applicable regulatory rules or requirements.
All information contained in this document is solely for the attention and use of the intended recipients. Any use beyond that intended by Nikko
AM is strictly prohibited.
Japan: The information contained in this document pertaining specifically to the investment products is not directed at persons in Japan nor is it
intended for distribution to persons in Japan. Registration Number: Director of the Kanto Local Finance Bureau (Financial Instruments firms) No.
368 Member Associations: The Investment Trusts Association, Japan/Japan Investment Advisers Association.
United Kingdom: This document is communicated by Nikko Asset Management Europe Ltd, which is authorised and regulated in the United
Kingdom by the Financial Conduct Authority (the FCA) (FRN 122084). This document constitutes a financial promotion for the purposes of the
Financial Services and Markets Act 2000 (as amended) (FSMA) and the rules of the FCA in the United Kingdom, and is directed at professional
clients as defined in the FCA Handbook of Rules and Guidance.
Luxembourg and Germany: This document is communicated by Nikko Asset Management Luxembourg S.A., which is authorised and regulated in
the Grand Duchy of Luxembourg by the Commission de Surveillance du Secteur Financier (the CSSF) as a management company authorised
under Chapter 15 of the Law of 17 December 2010 (No S00000717) and as an alternative investment fund manager according to the Law of 12 July
2013 (No. A00002630).
United States: This document may not be duplicated, quoted, discussed or otherwise shared without prior consent. An offering of any investments,
securities or investment advisory services with respect to securities may only be made by receipt of relevant and complete offering documentation
and agreements, as applicable. Any offering or distribution of a Fund in the United States may only be conducted via a licensed and registeredbroker-dealer or a duly qualified entity. Nikko Asset Management Americas, Inc. is a United States Registered Investment Adviser.
Singapore: This document is for information to institutional investors as defined in the Securities and Futures Act (Chapter 289), and intermediaries
only. Nikko Asset Management Asia Limited (Co. Reg. No. 198202562H) is regulated by the Monetary Authority of Singapore.
Hong Kong: This document is for information to professional investors as defined in the Securities and Futures Ordinance, and intermediaries only.
The contents of this document have not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong. Nikko
Asset Management Hong Kong Limited is a licensed corporation in Hong Kong.
New Zealand: This document is issued in New Zealand by Nikko Asset Management New Zealand Limited (Company No. 606057, FSP22562). It
is for the use of wholesale clients, researchers, licensed financial advisers and their authorised representatives only.
Kingdom of Bahrain: The document has not been approved by the Central Bank of Bahrain which takes no responsibility for its contents. No offerto the public to purchase the Strategy will be made in the Kingdom of Bahrain and this document is intended to be read by the addressee only
and must not be passed to, issued to, or shown to the public generally.
Kuwait: This document is not for general circulation to the public in Kuwait. The Strategy has not been licensed for offering in Kuwait by the Kuwaiti
Capital Markets Authority or any other relevant Kuwaiti government agency. The offering of the Strategy in Kuwait on the basis a private placement
or public offering is, therefore, restricted in accordance with Decree Law No. 7 of 2010 and the bylaws thereto (as amended). No private or public
offering of the Strategy is being made in Kuwait, and no agreement relating to the sale of the Strategy will be concluded in Kuwait. No marketingor solicitation or inducement activities are being used to offer or market the Strategy in Kuwait.
Kingdom of Saudi Arabia: This document is communicated by Nikko Asset Management Europe Ltd (Nikko AME), which is authorised and regulatedby the Financial Services and Markets Act 2000 (as amended) (FSMA) and the rules of the Financial Conduct Authority (the FCA) in the United
Kingdom (the FCA Rules). This document should not be reproduced, redistributed, or sent directly or indirectly to any other party or published infull or in part for any purpose whatsoever without a prior written permission from Nikko AME.
This document does not constitute investment advice or a personal recommendation and does not consider in any way the suitability or
appropriateness of the subject matter for the individual circumstances of any recipient. In providing a person with this document, Nikko AME is
not treating that person as a client for the purposes of the FCA Rules other than those relating to financial promotion and that person will nottherefore benefit from any protections that would be available to such clients.

YOUR GOALS, OUR COMMITMENT.

6

For qualified institutional investors only •en.nikkoam.com

JAPAN’S CASH-RICH COMPANIES: HARNESSING CORPORATE REFORMS

Nikko AME and its associates and/or its or their officers, directors or employees may have or have had positions or material interests, may at any
time make purchases and/or sales as principal or agent, may provide or have provided corporate finance services to issuers or may provide or
have provided significant advice or investment services in any investments referred to in this document or in related investments. Relevant
confidential information, if any, known within any company in the Nikko AM group or Sumitomo Mitsui Trust Holdings group and not available to
Nikko AME because of regulations or internal procedure is not reflected in this document. The investments mentioned in this document may not
be eligible for sale in some states or countries, and they may not be suitable for all types of investors.
Oman: The information contained in this document nether constitutes a public offer of securities in the Sultanate of Oman as contemplated by
the Commercial companies law of Oman (Royal decree 4/74) or the Capital Markets Law of Oman (Royal Decree80/98, nor does it constitute anoffer to sell, or the solicitation of any offer to buy non-Omani securities in the Sultanate of Oman as contemplated by Article 139 of the Executive
Regulations to the Capital Market law (issued by Decision No. 1/2009). This document is not intended to lead to the conclusion of any contract ofwhatsoever nature within the territory of the Sultanate of Oman.
Qatar (excluding QFC): The Strategies are only being offered to a limited number of investors who are willing and able to conduct an independent
investigation of the risks involved in an investment in such Strategies. The document does not constitute an offer to the public and should not be
reproduced, redistributed, or sent directly or indirectly to any other party or published in full or in part for any purpose whatsoever without a priorwritten permission from Nikko Asset Management Europe Ltd (Nikko AME). No transaction will be concluded in your jurisdiction and any inquiries
regarding the Strategies should be made to Nikko AME.
United Arab Emirates (excluding DIFC): This document and the information contained herein, do not constitute, and is not intended to constitute,a public offer of securities in the United Arab Emirates and accordingly should not be construed as such. The Strategy is only being offered to alimited number of investors in the UAE who are (a) willing and able to conduct an independent investigation of the risks involved in an investment
in such Strategy, and (b) upon their specific request.
The Strategy has not been approved by or licensed or registered with the UAE Central Bank, the Securities and Commodities Authority or any
other relevant licensing authorities or governmental agencies in the UAE. This document is for the use of the named addressee only and should
not be given or shown to any other person (other than employees, agents or consultants in connection with the addressee's consideration thereof).
No transaction will be concluded in the UAE and any inquiries regarding the Strategy should be made to Nikko Asset Management Europe Ltd.
Republic of Korea: This document is being provided for general information purposes only, and shall not, and under no circumstances is, to beconstrued as, an offering of financial investment products or services. Nikko AM is not making any representation with respect to the eligibility ofany person to acquire any financial investment product or service. The offering and sale of any financial investment product is subject to theapplicable regulations of the Republic of Korea. Any interests in a fund or collective investment scheme shall be sold after such fund is registeredunder the private placement registration regime in accordance with the applicable regulations of the Republic of Korea, and the offering of suchregistered fund shall be conducted only through a locally licensed distributor.
Canada: The information provide herein does not constitute any form of financial opinion or investment advice on the part of Nikko AM and it
should not be relied on as such. It does not constitute a prospectus, offering memorandum or private placement memorandum in Canada, andmay not be used in making any investment decision. It should not be considered a solicitation to buy or an offer to sell a security in Canada. This
information is provided for informational and educational use only.

YOUR GOALS, OUR COMMITMENT.

7

For qualified institutional investors only •en.nikkoam.com