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:
Vote
|
Proposed
by
|
Discussion
Matter
|
NO
|
TECO
|
Board of directors
resolved to issue common shares
private placement (MOPS, or Market Observations Post System,
published by TECO on April 6, 2020)
|
NO
|
TECO
|
Board of directors
resolved to issue preferred shares
private placement (MOPS, or Market Observations Post System,
published by TECO on April 6, 2020)
|
YES
|
PJAM
|
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
Best Regards,
PJ Asset Management Co., Ltd.
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SOURCE PJ Asset Management