April 20, 2017 6:29 am JST

Tsugami's China unit set to leave nest with Hong Kong listing

Market oversight seen bolstering corporate governance at subsidiary

TAKESHI KIKUCHI, Nikkei staff writer

Tsugami moved production from Japan to China in the wake of the global financial crisis.

TOKYO -- Machine tool maker Tsugami plans to list a subsidiary handling Chinese operations on the Hong Kong market, a move that will expand fundraising options but impose new burdens as the parent addresses growing governance risks.

The Japanese company on Friday said it has applied to the bourse to list Precision Tsugami (China), a wholly owned Cayman Islands-based holding company for a production unit. A debut will come as early as this fiscal year if all goes well.

This is not Tsugami's first attempt at a Hong Kong listing for the business. It moved in a similar direction around the summer of 2015, but decided to shelve the plan at the last minute after a sharp devaluation of the yuan rattled financial markets. With Hong Kong's benchmark Hang Seng Index having almost fully recovered from the shock, Tsugami decided to take another crack at a listing.

The company apparently estimated in 2015 that an initial public offering for the China unit would bring in nearly 10 billion yen ($91.8 million at current rates). The current market environment suggests that the proceeds now would be about the same or slightly lower.

But this would come at the price of new responsibilities for Tsugami, which would become accountable to the unit's investors and have to ensure shareholder returns are paid out. Yet the company is intent on a listing despite this added burden.

President Takao Nishijima cited good corporate governance at the subsidiary as a major goal of the move. As it expands and grows more localized, Precision Tsugami will need to exhibit proper governance in keeping with its size, regardless of its status as a subsidiary.

Soon after the global financial crisis struck, Tsugami shifted production of machine tools, particularly general-purpose models, from Japan to China. Its Chinese sales swelled from 1.9 billion yen in April-December 2009 to 13 billion yen in the same period of 2016 on brisk demand for tools for smartphone production and the auto industry.

Nishijima has been Tsugami's president for 14 years. "Even if I'm no longer here in the future, I want to ensure that the market can keep an eye on [Precision Tsugami] and that it can operate independently," he said. "The subsidiary listing is part of my work to put my affairs in order as president."

Japanese companies with foreign units have common challenges that Tsugami will need to consider. At Lixil Group, for example, inappropriate accounting was discovered in 2015 at a subsidiary handling Chinese operations. Toshiba recently suffered massive losses stemming from a U.S. nuclear company it had acquired.

Unlike global giants with trillions of yen in annual sales, Tsugami generates sales of only 40 billion yen or so. The listing of Precision Tsugami is likely to serve as a test case for a relatively small company entrusting oversight of a foreign unit to markets.

Few Japanese companies have units listed in Hong Kong, with precedents limited to such cases as the 2013 debut of Digital Garage subsidiary Econtext Asia. But more businesses are looking into the possibility, said an IPO specialist at a major auditing firm.

Tsugami Corp.

Japan

Market(Ticker): TKS(6101)
Sector:
Industry:
Producer Manufacturing
Industrial Machinery
Market cap(USD): 563.78M
Shares: 64.91M

LIXIL Group Corp.

Japan

Market(Ticker): TKS(5938)
Sector:
Industry:
Producer Manufacturing
Building Products
Market cap(USD): 8,360.23M
Shares: 313.05M

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 11,434.04M
Shares: 4,237.60M

Digital Garage, Inc.

Japan

Market(Ticker): TKS(4819)
Sector:
Industry:
Technology Services
Internet Software/Services
Market cap(USD): 907.20M
Shares: 47.29M

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