PJ Asset Management Urges Shareholders of TECO Electric and
TAIPEI, April 7, 2020 /PRNewswire/ -- PJ Asset Management Company ("PJAM") today issued a letter urging all shareholders of TECO Electric and Machinery Co., Ltd. ("TECO" or "Company", 1504.TT) to support PJAM's proposal of a 10% capital reduction that would return cash to shareholders. This proposed resolution, included among the "Matters for Discussion" at TECO's upcoming AGM, follows a series of attempts to engage the Company and is aimed at right-sizing its overcapitalized balance sheet. PJAM and its subsidiary, Jaryuan Investment Co. Ltd., together make up TECO's single largest shareholder, holding more than 20% of its common stock.
The original letter in Chinese can be found at: http://www.pjam.com.tw/index.php?route=newsblog/article&article_id=43&lang=zh-TW
The corresponding English version is provided below:
To all TECO's shareholders,
PJAM has engaged TECO over several months by delivering two letters and proposing a Value Enhancement Plan (VEP) to the Company and its shareholders detailing our concerns over its capital management and operational efficiency. Our proactive engagement with TECO's management team and board of directors has been the preferred approach to help the Company achieve better outcomes. These efforts, however, have been met with resistance, including a perplexing fund-raising plan that counteracts PJAM's proposed 10% capital reduction and would further lower the Company's depressed ROE.
Therefore, we strongly urge all shareholders to vote as follows in these key matters:
Board of directors resolved to issue common shares private placement (MOPS, or Market Observations Post System, published by TECO on April 6, 2020)
Board of directors resolved to issue preferred shares private placement (MOPS, or Market Observations Post System, published by TECO on April 6, 2020)
Proposal on capital reduction by returning cash to shareholders (MOPS published by TECO on April 1, 2020)
In our VEP, we clearly indicated how years of TECO's conservative business strategy have led to its sufficient yet inefficient cash balance and disappointing ROE.
TECO has ignored this recommendation and announced at its March 20, 2020 Investor Relations Meeting its expected 2020 capital expenditure of TWD1.4 billion, a modest level showing no intent for robust expansion. The Company has taken two other recent actions, as follows, further muddling its cash management goals:
1. On March 19, 2020, the board of directors of TECO Capital Investment, a TECO wholly-owned subsidiary, resolved to subscribe to TWD0.5 billion in a mutual fund issued by Yuanta Investment Trust.
The fund subscription, announced just one day prior to the following bond issuance, was a counterintuitive action that added ambiguity to the overall picture. With a six-month lock-up period, the subscription goes against TECO's stated objective of delivering results to its investors.
2. On March 20, 2020, TECO's board resolved the first issuance of TWD5 billion in Domestic Unsecured Corporate Bonds in 2020.
We appreciate TECO's effort made to replace its short-term loan with a debenture term of five to seven years longer at the current low interest rate environment. If its board and management decide to change course in favor of aggressive expansion or reserve buffer for any possible coronavirus impact, this move would offer TECO plenty of liquidity on top of its abundant cash balance.
Then, on April 1, 2020, TECO proposed to issue 190,000,000 shares of combined common stock and/or preferred stock by private placement. It should be noted that the abrupt proposal, with little advance notice, is likely to breach shareholders' rights and raise concerns as follows:
- If the proposal is approved by shareholders, TECO's board of directors is authorized to designate the actual pricing date and price of the privately placed common stock and/or preferred stock at no lower than 80% of the formulated market price based on market conditions and the "situation of strategic investors", according to TECO's MOPS document as published. Yet the situation of strategic investors would be subject to the Company's discretion.
- The resolution, if approved, would mean a blanket approval granting the incumbent major shareholder the privilege to perpetuate a systemic favoritism and unfairly dilute all other shareholders' rights.
- As for the approximately TWD4 billion funds from the capital increase, TECO provides no explicit explanation regarding the utilization, expected benefit and other related matters.
On the whole, TECO's recent actions taken in succession show flaws in rationale, decision-making and execution. The Company has not only avoided any meaningful explanation for its actions, but also missed the opportunity to appropriately address the proposals laid out in PJAM's VEP, which focused on TECO's need to raise its profit ratio and operating margins. The Company's actions addressed neither concern while further lowering capital efficiency in ROE terms.
TECO has made inefficient use of free cash flow over the years and has continuously accumulated a higher level of cash flow on its balance sheet without deploying that for any meaningful investment activity, as the Company's annual reports show. Its gross cash of around TWD17 billion (approximately USD563 million) after 10% cash capital return would more than sufficiently meet liquidity and potential M&A needs. Despite TECO's claim to reserve buffer capital to cover any potential coronavirus impact, the one-time capital reduction, though moderate, is a first step in right-sizing the Company's balance sheet and further improving its underperforming ROE.
PJAM believes that the landmark resolution to be put forth for consideration at the AGM on May 11, 2020 will be crucial for your best judgement and be vital to protecting all shareholders' benefit.
PJAM's presentation on TECO's Value Enhancement Plan can be found here: http://www.pjam.com.tw/index.php?route=newsblog/article&article_id=42&lang=en-gb
PJ Asset Management Co., Ltd.
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SOURCE PJ Asset Management