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Shin-Etsu Chemical's weak returns leave investors cold

TOKYO -- Investors have not fully embraced Shin-Etsu Chemical despite its rock-solid earnings, turned off by a languid return on equity as well as an overly cautious attitude toward shareholder returns.

The Japanese chemical company said Tuesday that it will keep its annual dividend at 110 yen this fiscal year, disappointing investors. Shin-Etsu had left its dividend at 100 yen for seven straight years through fiscal 2014 before bumping it up last fiscal year. This apparent change of heart had fueled hopes of another major hike.

Shin-Etsu "should provide a road map for investment in medium- to long-term growth, or if it can't, it should put money toward shareholder returns," said Mikiya Yamada of Mizuho Securities.

The company's finances are strong. Liquidity on hand, including cash, deposits and short-term securities, totaled 831.9 billion yen ($7.93 billion) at the end of June -- equivalent to about 40% of shareholders' equity. Shin-Etsu sees its net profit margin climbing to 14% this fiscal year.

But this is a factor behind its stagnant ROE of around 7%. Annual capital spending comes to only about 80 billion yen to 130 billion yen a year, causing cash to pile up.

Earnings are solid, with net profit up 20% on the year to 45.3 billion yen in the April-June quarter on a 4% drop in sales to 300.7 billion yen. Investment in production capacity has boosted sales volume for polyvinyl chloride. Profitability has improved in the chip wafer business amid growing demand, particularly for high-value-added products.

Fiscal 2016 earnings forecasts released Tuesday have sales sinking 8% to 1.18 trillion yen and net profit growing 7% to 160 billion yen. The company assumes 100 yen to the dollar from July onward. Though yen appreciation is a concern, mainstay businesses will likely perform well.

Shin-Etsu aims to build up a cash hoard that it can deploy flexibly for major growth investments and can use to avoid dividend cuts. But it seems to be trying to pay more attention to investors. While the company will focus on increasing profits first, it will think about dividends, too, new President Yasuhiko Saitoh said in an analysts' call.

Analysts agree that ROE should be in the double digits. Shin-Etsu's shares have slumped to 6,189 yen, down roughly 30% from the December 2014 peak of 8,529 yen. Market players are watching to see how far the company will go to meet expectations.

(Nikkei)

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