MOUNT LAUREL, N.J., June 8, 2016 /PRNewswire/ --
Star Asia Partners II Limited
125 Gaither Drive, Suite L
Mount Laurel, NJ 08054 USA
Star Asia Partners II Limited has been an investor in Japan Asset Marketing Co., Ltd. (Tokyo Mothers: 8922 JP, the "Company") since May 2014, and currently is the largest outside investor, owning 6.31% of the Company's shares. We highly value the business model, and the currently unrealized potential in the enterprise value and shareholder value of the Company. As we expected, the Company's operating performance has been impressively strong, however the Company's share price and shareholder value have been severely depressed, in our opinion, due to a series of important concerns. We have outlined below our Concerns and Proposals.
Since June 27, 2014, we have had several seemingly constructive meetings with the management (Messrs. Naoki, Yoshida, Takayuki Koezuka, and Yosuke Shindo) of the Company and of Don Quijote Holdings Co., Ltd. (TSE 1st Section: 7572 JP, the "Controlling Shareholder"), discussing various strategies including our concerns and proposals to unlock the Company's potential and currently hidden shareholder value. On April 20, 2016, we sent a letter to all members of the Board of Directors of the Company, clearly explaining our significant concerns relating to its massively dilutive financing, the financial health of the Company and the lack of corporate governance along with our proposal and a few specific questions. Unfortunately, the written responses from Mr. Takayuki Koezuka which we received on May 11, 2016, do not lead us to believe that the management of the Company sincerely addressed our concerns or seriously considered our proposals in order to improve and unlock the Company's true shareholder value.
At this point, we believe that it is important to share our critically important concerns and proposals with other existing and potential shareholders of the Company. We sincerely hope that this becomes a catalyst for the Company's management, independently from the Controlling Shareholder, to seriously formulate and implement the strategies as soon as possible in order to improve shareholder value for the benefit of all of its shareholders, including the minority shareholders. We hereby request the Company's management that, if not agreeing to our shareholder friendly proposals, they present their concrete alternative value-enhancing strategies by June 29, 2016.
On November 27, 2014, the Company announced that it would issue JPY25 billion of convertible bonds (168.9 million potential shares at JPY148 conversion price), and warrants (67.5 million potential shares at JPY148 exercise price) to the Controlling Shareholder. The payment and settlement of JPY25.06 billion was completed on December 12, 2014 (the "Financing Arrangement"). The Company stated that it would raise approximately JPY35 billion assuming the exercise of the warrants, and apply JPY14.5 billion to repay the borrowings from the Controlling Shareholder and JPY20.5 billion for acquisition of new real estate properties. According to the Company's announcement as of November 27, 2014 regarding the execution of Financing Arrangement (the "Announcement"), the Company clearly indicated that this Financing Arrangement was advantageous to the Company as it was a quick and flexible fund raising at the time of the issuance as well as in the future based on the Company's funding needs, the Company maintains its ability to prepay the convertible bonds and buy back the remaining warrants if more advantageous financing becomes available, it would not cause immediate dilution if share conversions takes place gradually and it gave consideration to dilution of existing shareholders as the Company controls the exercise of the warrants, the warrants exercise would improve the Company's capital ratio, and the convertible bonds have zero interest rate. The Company also stated that the Financing Arrangement would contribute to the improvement of enterprise and shareholder value and that it would be consistent with the interest of its existing shareholders.
- After the execution of the Financing Arrangement, the Company's stock price has significantly declined and has remained depressed, with closing price on March 31, 2016 at JPY118. Since the beginning of the warrant exercise period on July 1, 2015, the average stock price has been JPY116. The Company's stock price has never reached the exercise price of JPY148 since the beginning of the warrant exercise period, despite the Company's stock traded above that price over several months in 2014 and 2015. Instead the price hit a low of JPY87 in the first quarter of 2016 and has traded down approximately 35% over the last 12 months.
- Since the stock price has been depressed for such a prolonged period of time as discussed above, neither the conversion of the convertible bonds nor the exercise of the warrants have occurred. As a result, the funds raised through the Financing Arrangement has been limited to only the JPY25 billion from the issuance of the convertible bonds and JPY58.05 million from the issuance of the warrants, despite JPY35 billion fund raise was originally announced. On the other hand, given that JPY14.5 billion of the JPY25 billion was applied to repay borrowings from the Controlling Shareholder, the net additional funds raised by the Company (before deducting the issuance expenses) was only limited to approximately JPY10.5 billion. Furthermore, despite that the Company stated the improving capital ratio as one of the benefits of the Financing Arrangement, the Company has not raised any equity capital as none of the convertible bonds or warrants have been converted or exercised.
- Separately, despite the poor stock price performance, the Company's operations continue to be very strong. Based on the full year statements as of March 31, 2016, the Company had JPY16.0 billion revenues and JPY5.6 billion in net income (JPY20.3 in net income per share). As the Company does not pay any dividends, the Company added its almost entire cumulative net income to its net assets, achieving JPY13.5 billion in net assets as of March 31, 2016 (+71% vs. same period previous year). The capital ratio improved from 8.4% as of March 31, 2015 to 12.4% as of March 31, 2016.
- Based on the full-year result as of March 31, 2016, the Company has generated approximately JPY13.9 billion in cash flow from its operations and applied approximately JPY14.3 billion to the acquisition of new tangible fixed assets, mostly real estate properties. Furthermore, we believe the Company has repaid approximately JPY7.6 billion in asset-based borrowings that require heavy principal amortization. However, the Company has made additional borrowings increasing its total liabilities by approximate JPY9.5 billion during the full-year ending March 31, 2016.
Despite the Company's continued strong operating results, the Company's share price has remained very depressed and its enterprise and shareholder value have not been fairly recognized by the market participants since the execution of the Financing Arrangement. The closing price of the Company's shares as of March 31, 2016 was JPY116, valued at 5.7x P/E ratio (assuming JPY20.3 in net income per share for full year ending March 31, 2016), which is an excessively low valuation considering the Company's strong operating results. For example, as of March 31, 2016, the Tokyo Stock Exchange Real Estate Index (TPREAL) and the Tokyo Stock Exchange REIT Index (TSEREIT) were valued at 20.9x and 32.8x P/E ratios, respectively. If one were to apply the TPREAL and the TSEREIT P/E ratios to the Company's per share net income for the full year ending March 31, 2016, the Company would be theoretically valued at JPY424 and JPY666 per share, respectively. These represent significant discounts of 73% and 83%, respectively. The Company's share price trading at such a massive discount coupled with thin trading volumes since the execution of the Financing Arrangement are the obvious problem that needs to be resolved in order to improve and maximize the Company's enterprise and shareholder value.
History of Company Stock Price
We have significant concerns that the large overhang created by the convertible bonds and warrants that would result in massive 85.5% potential dilution to the total number of the Company's issued share and were issued to the Controlling Shareholder without consulting with the Company's shareholders at a low conversion/exercise price of JPY148 is a detrimental and destructive cap on the Company's stock price. Furthermore, the Company's priority in accelerating real estate property acquisitions at the expense of its financial health of the Company is also contributing to the depressed stock price, enterprise value and shareholder value. Above all, we have significant concerns whether the Company's series of transactions with the Controlling Shareholder are truly accretive to the Company's enterprise and shareholder values and are in the best interest of the minority shareholders, given that most of the Company's directors are affiliated with the Controlling Shareholder and the Company's revenues are heavily dependent on the Controlling Shareholder (97.2%, March 2015 Company's annual report). If the interest of the Controlling Shareholder has been prioritized at the expense of the Company or the minority shareholders, the Directors of the Company could be liable for the breach of their fiduciary duty or giving benefits on exercise of shareholder's right, therefore we believe it is imperative that the Board of Directors give sufficient explanation to the minority shareholders that such unfair dealings have not occurred at the series of the transactions with the Controlling Shareholder. Furthermore, we highly doubt that institutional investors will invest in the Company's shares given that most investors require board independence, elimination of potential conflicts, and an alignment of interest between the Controlling Shareholder and minority shareholders.
In summary, the Financing Arrangement has clearly depressed the stock price for a prolonged period of time, has not improved the Company's capital ratio, and has rather inhibited the maximization of enterprise and shareholder value which were all the main objectives of the Financing Arrangement.
The Financing Arrangement has not improved the Company's capital ratio, one of the important objectives of the Financing Arrangement, and has clearly led to depressed enterprise and shareholder value. The Company should urgently formulate and publicly announce its mid-term business plan (5 years) that contains the following specific measures in order to improve its financial health, and enterprise and shareholder values:
1. The Company shall take following measures in order to improve its financial health:
- Temporally halt its real estate property acquisitions and focus on maintaining, managing, developing and enhancing the value of its existing real estate properties. Apply its cash flow from the operations to repay its liabilities (especially asset-based borrowings) thereby prioritizing improving its financial health.
- Exercise its stated right to buy back all the warrants before maturity for the issue price (total JPY58.05 million). Convert the convertible bonds into interest-bearing bonds through negotiation with the Controlling Shareholder
2. The Company shall also take the following measures after observing certain improvement in its financial health:
- Apply its profits available for distribution to dividends to its shareholders.
- Gradually issue new shares at higher stock prices through public offerings, and improve its borrowing capacity and financial health.
- Repay remaining, if any, asset-based borrowings in full.
- Re-start and accelerate acquisition of new income-producing real estate properties by applying its cash flow from operations as well as the funds from issuance of new share and borrowings.
3. The Company shall appoint a minimum of 2 independent directors, by fully examining the qualification of such independent outside directors as well as giving sufficient considerations to the degree of "outside" and "independence" in order to strengthen its corporate governance. We are considering nominating or dispatching qualified candidates.
The Company is capable of generating approximately JPY9.0 billion in cash flow from operations from its existing real estate properties even if it halted the acquisition of new real estate properties. This would allow the Company to rapidly improve its capital ratio and the financial health by applying such cash flow to repay its borrowings (especially asset-based borrowings). By publicly announcing these 3 measures as part of its mid-term business plan, the Company should be able to eliminate the market's concerns over its massive dilution, financial health, and corporate governance. These strategies should help realize fair recognition of the Company's enterprise and shareholder values in a very short period of time. Once the Company's share price achieves a fairer valuation, then the Company should be able to issue its new shares through a series of gradual public offerings, which will improve its borrowing capacity while managing the dilution of existing shareholders. The Company should then balance equity and debt financings, maintain and improve its financial health, and re-start and accelerate its new real estate property acquisitions, which should benefit both Controlling Shareholder and minority shareholders collectively and equally.
Star Asia Partners II Limited
/s/ Malcolm F. MacLean IV, Director
/s/ Taro Masuyama, Director
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SOURCE Star Asia Partners II Limited