TAIPEI, April 24, 2020 /PRNewswire/ — PJ Asset Management Company (“PJAM”) today issued a letter in response to the feedback received from a number of other shareholders of TECO Electric and Machinery Co., Ltd. (“TECO” or “the Company”, 1504.TT) regarding PJAM’s recent press release urging shareholders’ full support of its proposal of a 10% capital reduction that would return cash to shareholders. PJAM and its subsidiary, Jaryuan Investment Co. Ltd., together make up TECO’s single largest shareholder, holding more than 21% of the Company’s common stock.

PJAM appreciates various shareholders’ attention to this matter and issues this third letter, as follows, to clarify its investment philosophy and code of ethics:

To all TECO shareholders,

PJAM issued a letter on April 21, 2020, cautioning all shareholders of TECO on the Company’s proposed amendment to its Articles of Incorporation (“AOI”) and urging their full support of PJAM’s proposal of a 10% capital reduction that would return cash to shareholders. Within just a few days, PJAM received much feedback, including from some of the major global institutional investors, and acknowledges the noted concerns. Placing great importance on active communication with all stakeholders, PJAM issues this third letter to clarify the firm’s investment philosophy and rationale behind the shareholder proposal.

PJAM is committed to be a long-term investor

Ever since PJAM was established in 2017, a long-term valuation approach has been the key pillar of PJAM’s investment philosophy. Most of our investments started in the firm’s early days and have lasted for at least two to three years thus far, and several investments still remain on the book. With a significant 21% stake in TECO, PJAM’s focus on the Company’s long-term interests supersede perhaps that of any other investor. Institutional investors would not “flip” such big stake in a short time, and PJAM has no intention do so.

PJAM seeks to collaborate as partners with its investee companies

All along the stake-building process, PJAM has proactively approached TECO’s board and management team to pitch our Value Enhancement Plan and suggestive solutions, aiming to enhance the Company’s overall business performance. PJAM has emphasized its respect for and concerns on TECO’s long-term wellbeing and offered support for the Company’s sustainable business growth. Because shareholder advocacy remains uncommon for Taiwan’s listed companies, PJAM’s engagement attempts may have been misinterpreted by TECO.

Irrespective of the outcome of the capital repayment proposal, PJAM intends to continue the dialog with TECO’s board and management team in an amiable way. Believing that improved corporate governance and board effectiveness can help to enhance overall business performance, PJAM will not rule out the possibility of nominating one or more directors. We may even consider a candidate with significant and relevant industry experience for independent director, to monitor the Company in a supervisory role.

TECO has multiple means to remain sufficiently well-funded

Should the capital repayment proceed, the cash return would only take up TWD2 billion of TECO’s abundant cash reserve. TECO’s financial reports and recent announcements through the Market Observation Post System (MOPS) clearly show the Company has sufficient tools to deploy for any possible business expansion and adequate capital return to common shareholders. TECO has no difficulty in raising extra cash at a much cheaper level and avoiding any impact to its depressed ROE.

• TECO retained over TWD16 billion of undistributed earnings on the balance sheet as of December 31, 2019, a majority portion of which is held by its overseas subsidiaries. PJAM has never asked the Company to repatriate capital from the US and incur a significant tax drag; rather, we have strongly suggested that the Company reserve that capital for potential global M&A. On the other hand, nearly TWD5 billion in retained earnings and other equity interests remaining in its wholly-owned subsidiary in Taiwan, TECO Capital Investment Co., Ltd. (Tong-An), should be allocated for efficient usage. As a reminder, the resolution by the board of directors of TECO Capital Investment on March 19, 2020, to subscribe to TWD0.5 billion in a mutual fund issued by Yuanta Investment Trust indicated sufficient cash reserves held by TECO’s various subsidiaries in Taiwan. It is, therefore, hard to see the group CFO’s claim that he has no capability to manage the group’s overall cashflow in a consolidated and more efficient way.
• TECO’s board has resolved the first issuance of TWD5 billion in Domestic Unsecured Corporate Bonds in 2020. TECO’s superior twA+ long-term credit rating allows the Company to obtain cheap funding at around 1% for five to seven years, while its debt ratio remained at relatively reasonable level 37.7% as of December 31, 2019. That contrasts with the average debt ratio 43.40% of the electric machinery industry in Taiwan.
• Furthermore, TECO has continuously accumulated a higher level of cash on its balance sheet; its cash equivalent position was TWD19.1 billion as of December 31, 2019.

At PJAM, we cherish all shareholders’ rights and benefits and urge all fellow investors to duly exercise your empowered right. Our proposal is based on the thorough analysis of TECO, with the aim of growing TECO’s long-term value, rather than diminishing it. Your voting decision at the AGM on May 11, 2020, to bring about positive change in TECO will also be crucial to protecting all shareholders’ benefits.

Therefore, we strongly urge all shareholders to vote as follows in these key items:

Best Regards,

PJ Asset Management Co., Ltd.

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