JAPAN ACTIVIST INSIGHTS

May 2023

Interview with Taro Hirano
President, Chief Portfolio Manager
Japan Catalyst, Inc.

TARO HIRANO is the President and Chief Portfolio Manager of Japan Catalyst, Inc. Taro started his career at
The Sumitomo Bank, Limited, and worked on regulatory matters and invested in hedge funds and equities. He
moved to McKinsey & Company, Inc. in 1998 where his main projects were to conduct strategic business
transformation, organizational reform and strategic execution over the years with top management of Japanesecompanies. In 2003, he joined AllianceBernstein as an equity analyst. He received high reputation on his analysis
in a wide range of sectors including capital goods, technology, telecommunications, energy, transportation,commodities and consumer goods. He was a major shareholder in many investment cases, discussing corporate
strategies with the management of leading Japanese companies and making capital policy recommendations. He
was responsible for Asian equities as well as Japanese equities, was a leader in the global capital goods andtransport sector, and played a central role in value investment. Taro received his B.A. in Mathematics from Tokyo
University and MBA from INSEAD.

Q. What are the key characteristics of your investment strategy, andhow does your approach differ from your peers?
Hirano: Our investment strategy is firmly rooted in the belief that optimizing corporate strategies andgovernance in Japanese listed companies can significantly enhance productivity and capital efficiency.
This, we believe, is the key to unlocking the potential value that lies within Japan’s corporate sector. We
particularly focus on strategically reallocating management resources, such as capital and humanresources, that may have been misaligned or underutilized. By doing so, we aim to improve return on
equity, as a key metric of capital efficiency, thereby enhancing our target companies’ competitiveness.
To achieve this, we take a “constructive” activist approach. We actively engage with the management
teams of target companies that are seeking growth and transformation. Our primary goal is to help thesecompanies implement internal reforms and drive long-term corporate value, ultimately benefiting all
stakeholders involved.

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What specifically distinguishes us is our direct access to top-level management within Japanesecompanies. Oki Matsumoto, Chairman of Japan Catalyst, Inc and CIO of the Japan Catalyst Fund, has bothan incredibly wide and deep network across the corporate landscape, developed over his 20+ years ofexperience as the CEO of a listed company. Since launching our strategy in 2020, we’ve had the privilege
to meet with almost every target company's CEO, regardless of the size of our equity stake, in a timely
manner. As a respected member of Japan’s corporate community, we are able to engage in deep, trustbased discussions with key decision-makers early in our engagement process. This level of access to CEOsand management is quite uncommon in Japan and gives us a distinct edge over those that tend to speakwith IR and other executives who are not the key “decision makers” in a Japanese company.
Our deep local expertise is another key strength. Our team, all based in Japan, has extensive financial
industry experience and a deep understanding of the Japanese corporate sector, business and culturalcontext, and regulatory environment. I bring to the team more than 20 years of investment experience,
including 16 years as a value investor at AllianceBernstein, where I led the global industrial sector teamand engaged in extensive dialogues with the senior management of Japanese and global companies. This
expertise allows us to hold meaningful and constructive dialogues with top management at target
companies, focusing on themes that enhance return on equity and foster long-term corporate value creation.
I believe that our unique combination of a constructive approach, access to top-level management, andlocal expertise positions us well to unlock value and deliver alpha to our investors.

Q. What are the key attributes you look for when seeking investment
opportunities?
We seek out companies that have a solid, competitive core business and growth trajectory but for somereason, remain undervalued by the market, despite their promising potential. Our attention is especiallydrawn to companies facing challenges in capital efficiency, discipline, and governance – areas where ourteam’s finance-oriented expertise can truly make a difference. What’s key for us is the potential upsidethat our active engagement could catalyze. We diligently analyze each opportunity to determine how ourinvolvement could address specific issues and unlock latent value, leading to substantial returns.
The factors contributing to a company’s undervaluation can vary, but we often identify issues such as loose
balance sheets, insufficient corporate governance, sub-optimal business portfolios, or ineffective
investor relations.
When assessing loose balance sheets, we specifically focus on EV / EBITDA in relation to earnings power.
Our interest isn’t just in low multiples but also in the quality of the business – ideally, we are looking for
quality businesses that are firmly on their growth track and demonstrating robust cash generation
capabilities.
Another area of focus is the potential for improving business portfolio management. Historically, many
Japanese companies have struggled to exit low-profit businesses due to the lifetime employment system,
resulting in the persistence of these legacy businesses remaining under the conglomerate umbrella. Somecompanies may be overlooked by the market due to their size, or because management hasn’t been fullycommitted to investor communications.
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Furthermore, we measure top management’s open-mindedness and willingness to change, as thesequalities are crucial in driving successful transformations. This is possible given our access to the real
“decision makers”. This lets us evaluate the quality and likelihood of positive change before we establish
substantial positions.
In essence, our goal is to act as a catalyst for transformation, ensuring that our investments are poised todeliver positive returns.

Q. Do you have any focus on specific sectors or market cap?
We maintain a sector-agnostic approach but tend to find ourselves favoring certain sectors, such as capital
goods, over time. It is within these sectors that we often come across exceptional, long-standing companies
with robust core businesses, reflecting Japan’s rich manufacturing heritage. However, these companies also
face governance challenges stemming from adherence to traditional practices. Recently, we are witnessing
a faster pace of leadership transition in these companies, with younger management increasingly open toembracing global standards and best practices in their management style. This evolving environment
presents us with abundant opportunities for our engagement strategy. That being said, we always ensuresector diversification within our portfolio.
In terms of market cap, our range typically spans from USD 500 million to several billion. We generally
do not target micro or small cap companies with a market cap of USD 100 million or less, due to liquidity
considerations. Currently, the typical target size is around USD 1-5 billion. Our access to management isbased on our network and credibility, so we do not require a large position in target companies to initiate
our productive engagement.

Q. Can you walk us through your investment processes, from idea
generation to portfolio construction?
Our investment process begins with a strong emphasis on fundamentals. We conduct thorough bottomup research and quantitative screening, gathering insights through companies’ public disclosures and directinteractions with their investor relations or management teams. We also engage in conversations with othermanagers, such as U.S. long-only managers or our activist peers, which often spark interesting investment
ideas. To ensure a comprehensive assessment, we evaluate opportunities from multiple angles, consideringfactors such as the discount from intrinsic value, the time value in industry cycle, and the potential upsidefrom engagement, all aimed at avoiding value traps.
Once our team identifies a company with potential value enhancement through engagement, I bring theidea to Oki and Jesper for an in-depth discussion. We then formulate our investment decisions in theInvestment Advisory Committee. After initiating a toehold position, primarily Oki or myself start engaging
with top management, including the CEO or board members, to gain deeper insight into the company’s
inner workings and assess the feasibility and validity of further engagement. Oki takes the lead in this stage,
leveraging his network to establish direct lines of communication with corporate executives and evaluate
the readiness of management and the board’s openness to change.
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In Japan, executives tend to be hesitant to meet with investors, unlike their U.S. counterparts, and evenwhen they do, they often prefer to talk only with larger stakeholders. However, thanks to our team’s
established presence in Japan and Oki’s network, we are usually able to start conversations with top
management within a few weeks to a couple of months after an idea takes shape. The respect executives
have for Oki, viewing him as a peer CEO, substantially enhances the impact of our communication andengagement efforts.
As our dialogue deepens and we gain more confidence in the fundamentals and the potential for change inmanagement or strategy, we increase our position. As our engagement evolves and our conviction in theprobabilities of corporate actions grows, we move forward and further increase our stake to build core
positions.

Q. Can you give us an overview of the strategy in 2022, along with somekey factors that influenced it?
Our core strategy is to drive internal reform within companies and unlock hidden value. We
strategically concentrate on companies that, despite their traditionally conservative nature, are now led byforward-looking management teams ready to embrace transformation.
In 2022, leaders across Japan faced numerous external challenges including the crisis in Ukraine, surging
energy prices, accelerating inflation, and volatile currency fluctuations. These pressures pushed many
companies back into a more conservative stance, leading to reactive rather than proactive decision-making.
Through our continuous dialogues with top-tier executives, we discovered that leaders recognized thepressing need for change but struggled to find a starting point due to the overwhelming task of navigatingthese external challenges.
However, despite the complexities of achieving engagement outcomes in such a climate, we maintained ourintensive dialogues with target companies. This commitment has allowed us to deepen our understandingof these companies and identify opportunities and catalysts for change. We believe 2023 presents a morefavorable environment for management to work on internal reforms, fueled by regulatory tailwinds,
and we are ramping up our engagement activities to capitalize on this favorable landscape.

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Q. How have recent developments in Japan’s corporate landscape
impacted your engagement strategy?
Japan’s ongoing corporate governance reforms have been laying the groundwork for transformativechanges in the corporate sector, and we are excited to see tangible, significant shifts among bothmanagement and investors. Take, for instance, the Tokyo Stock Exchange’s new rule, implemented in
March 2023. Now companies with a low PBR are required to publicly disclose their strategies andinitiatives for improvement. Considering that half of the listed companies are trading below book value,
this new rule is making waves, putting pressure on the management of companies with structuralproblems to take decisive action. A notable number of issuers have already begun to announce newcorporate actions, including share buybacks.
Another pivotal shift occurred in 2022 when ISS and Glass Lewis tightened their voting criteria forcompanies that maintain a certain level of cross-shareholdings. Major domestic asset managers followed
their lead, adopting similar rules. These changes have also placed considerable pressure on management todrive reform, as failing to do so could result in a sharp drop in approval rating for their own CEO
appointments. This shift provides strong tailwinds for our engagement strategy. CEOs are becoming more
receptive to shareholders and are actively looking for trusted partners to drive internal reforms andtransform business and capital structures, and given that we actively target the CEO, this definitely plays toour strengths.
In light of these dynamic developments, we have intensified our engagement activities and increased
our high conviction positions over the last few months. Our investment team is also evolving to better
seize opportunities. In January 2023, Oki made a strategic shift by stepping down as Chairman of Monex,
Inc, a core subsidiary of Monex Group, to dedicate more time to his role as Chairman of Japan Catalyst.
This has enabled us to accelerate our research and engagement activities with target companies. In March
2023, we welcomed Takahiro Kusakari, the former CIO of a major Japanese mutual fund with over USD
2.5 billion in AUM, as a new Portfolio Manager. With our strengthened team and the evolving market
environment, we are further expanding our engagement efforts, using every tool at our disposal tounlock hidden value and generate alpha for investors.

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About Japan Catalyst
Japan Catalyst, Inc. was established as a part of Monex Group, Inc. with the goal of transforming theJapanese capital market and corporate sector. As the business environment rapidly evolves, there is a
growing need for changes in corporate management, and companies are seeking to transform. By offering
support through long-term investment and engagement, we aim to act as a catalyst for positive change inJapanese companies.
Company Website (English) https://www.japancatalyst.com/index-en.html

CONTACT

Ayaka Matsui
Japan Catalyst, Inc.
ir@japancatalyst.com+81-3-5657-9970

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