Background to ASM’s Involvement

Argyle Street Management Limited (“ASM”) is an institutional investor headquartered in Hong Kong that manages approximately US$1.4 billion. ASM has been investing in Japan since 2006. Our mode of investment has been to invest in strong, well-managed businesses with progressive management teams. We have invested in Japanese companies across various sectors such as property, technology, life insurance, construction, engineering etc. We seek to support management efforts through regular engagement and constructive dialogue.
The Japanese government is pushing for corporate competitiveness reforms and developments in Japan’s Corporate Governance Code (the “CGC”), as a part of Abenomics. ASM is fully supportive of the underlying principles set out in the CGC and strongly urge listed Japanese companies to adopt the guidelines set out within the CGC.
ASM believes that publicly listed companies are responsible to shareholders to achieve an adequate return on equity (ROE). The Ito Review highlights that “the first step in receiving recognition from global investors is for a company to commit to achieving a minimum ROE of 8%, while continually seeking to generate an ROE higher than 8%”. Institutional Shareholder Services (ISS), the proxy advisory firm, sets a voting guideline to vote against top executives at a company that has underperformed in terms of capital efficiency (i.e., when the company has posted average ROE of less than five percent over the last five fiscal years), unless an improvement is observed.
ASM sees itself as a long term committed shareholder of Chofu Seisakusho Ltd (“Chofu” or the “Company”). We have invested in shares of Chofu as we are attracted by the Company’s long history of market leadership in water heaters (particularly oil-fired water heaters) in the Japan market going back since the 1960s, strong balance sheet, and track record of progressive management and innovation.
We note that despite the cyclical nature of the industry, the Company has been profitable for every year for the last twenty years. This has allowed the Company to build up an impressive balance sheet with a net cash position (including investment securities) of more than JPY93 billion and retained earnings of more than JPY110 billion.