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TECO Electric & Machinery (1504.TW)

PJ Asset Management Urges TECO Electric and Machinery Co., Ltd. (1504 TT) to Abide by its Self-disciplined Capital Management Approach

May 13 2020

PJ Asset Management Urges TECO Electric and Machinery Co., Ltd. (1504 TT) to Abide by its Self-disciplined Capital Management Approach


To all TECO shareholders,

 

The results of TECO’s Annual General Meeting (“AGM”) have been disclosed, and disappointingly the voting results of two agenda items in PJAM’s call for action were not in line with PJAM’s expectations. At the meeting, 55.52% participants approved TECO’s proposal to amend the Company’s Article of Incorporation (“AOI”). That proportion represented 49.66% of TECO’s voting shares. PJAM’s 10% capital reduction proposal received 37.19% approval rate, or 33.26% of the total voting shares. The meeting’s attendance ratio was 90.57% of the total voting shares.

 

PJAM had prior indications of those unfavorable outcomes from the AGM, as two prominent shareholder advisory firms, ISS and Glass Lewis, on April 29, 2020, supported TECO’s proposals in the proxy fight. However, our efforts in engaging the Company gave rise to several progressive points that proved the process worthwhile.

 

TECO took the initiative to apply self-discipline to its future capital increase activities

 

As a result of PJAM’s precautions – that TECO would potentially circumvent the capital raising proposal and bundle unprecedented favorable terms for preferred shares into the AOI amendment – several major institutional investors were alerted in time to keep the Company’s intentions in check.

 

We were pleased to see TECO’s public shareholder letter issued (in Chinese) on April 21, 2020, in which TECO committed to turn to all shareholders’ approval once its future capital raising activities exceed 10% of total issuing common shares, whether in the form of private placement or any type of capital increase. As such, PJAM’s concerns on the potential poison pill impact and blank check approval lessened on the account that TECO is willing to hold an extraordinary general meeting to ask for all shareholders’ backing regardless of whether the 10% capital increase is conducted through a public offering or share swap with any party.

 

Institutional investors’ notable influence in support of PJAM’s claim

 

To our surprise, nearly half of foreign institutional investors, who represent 40% of total voting shares and have long been faithful partners to TECO’s incumbent management team, agreed to PJAM’s claim and voted in its favor. However, PJAM wholly respects the recommendations of ISS and Glass Lewis, whose views in opposition will provide valued impetus for PJAM to build on greater details for a stronger case.

 

We are grateful for the time that so many of you took to listen to our views conveyed through our press releases or other correspondences, and we appreciate the support that we have received. PJAM relied mainly on the support of our own investment and of supportive fellow shareholders; in contrast, TECO barely claimed victory through the questionable practice of soliciting proxies from individual investors. Importantly, the voting results also showed that institutional investors’ decisions were influential. Going forward that translates into greater scrutiny on TECO’s corporate governance performance and brighter spotlight on PJAM’s shareholder activism.

 

Its long-term credit rating left unscathed, TECO remains sufficiently well-funded

 

Despite Chairman Chiu reiterating her concerns on the coronavirus pandemic impact to TECO’s business, PJAM was pleased to learn that the Company has nearly completed the first issuance of TWD5 billion in Domestic Unsecured Corporate Bonds in 2020 at an issuing rate of no higher than 0.7% for five to seven years. The successful issuance confirmed our view that TECO’s superior twA+ long-term credit rating did allow the Company to obtain much cheaper funding to deploy for any possible business expansion. TECO should avoid using expensive tools such as private placement or preferred shares issuance to further damage its depressed ROE, unless the potential strategic partner is a world-class enterprise that adds value to TECO’s expansion focus on business development in automation intelligence.

 

TECO without doubt is a premier company and has for years maintained a solid business platform. PJAM continues to admire the electromechanical team’s reputable know-how and brand value. Adhering to our commitment backed by our sizable 22% stake in TECO, PJAM’s focus on the Company’s long-term interests supersede perhaps that of any other investor. To reiterate our committed focus, PJAM has issued a letter in Chinese to TECO’s board on May 5 2020, emphasizing our intention to sustain our dialog with TECO’s team in an amiable way irrespective of the outcome of the capital repayment proposal. The AGM is an occasion not for a showdown but for progress, in our view, and we wish to pave the way for future periodic engagement opportunity.

 

The original letter in Chinese can be found on PJAM's website: http://www.pjam.com.tw/index.php?route=newsblog/article&article_id=47&lang=en-gb

 

We respectfully accept the AGM results and thank you again for your time and support. As TECO’s largest shareholder, we remain vigilant and committed to working together with our fellow shareholders for the long-term value of our investment. 

 

 

Best regards,

 

PJ Asset Management Co., Ltd.

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