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【TEJ Dictionary】Evergreen Marine Corporation implements dramatic capital reduction. What is the impact on the index?

Evergreen Marine (2603) last year’s consolidated revenue in 2021 was about NT$489.4 billion, an annual increase of 136.34%, of which operating profit was about NT$284.8 billion, and EPS was NT$45.57. The former One Piece announced a substantial capital reduction in the second half of 2022.

Evergreen Marine Corporation implements dramatic capital reduction. What is the impact on the index?

According to Taiwan Stock Exchange, Evergreen Marin (2603) will reduce its capital by 60% in cash, and shareholders can get back NT$6 in cash dividends per share. The new shares began trading on September 19th. The closing price on the day before the suspension of trading (September 6th) was NT$80.80, and the reference price for resumption of trading was NT$187. The capital reduction will reduce the share capital by about NT$31.7 billion, and the total number of shares will be reduced from the original 5,291,050 thousand shares to 2,116,420 thousand. However, what is the purpose of Evergreen Marin’s capital reduction, and how does it affect the TAIEX? This article takes you through the impact of capital reduction.

Keywords: Evergreen Marin, capital reduction, market index, TAIEX

Highlights

📍 Types of capital reduction

📍 Evergreen Marin reduction plan

📍 Impact on TAIEX

Types of capital reduction

Capital reduction is a method of reducing the number of outstanding shares to achieve the purpose of financial adjustment by reducing the amount of paid-in capital. The capital reduction will not harm the rights and interests of shareholders. The stock price has risen due to the decrease in outstanding shares. Generally speaking, the shareholders’ rights and interests have not changed. For the company, reducing the share capital helps improve EPS, ROE, and NAVPS. There are three main types of capital reduction and introduction is as follows:

  1. Capital reduction to writing off accumulated losses

The primary purpose is to eliminate past losses, cancel the number of outstanding shares, and reduce the share capital held by the company. Under the condition that the company’s share capital is reduced and shareholders’ equity remains unchanged, the NAVPS can be increased. According to the regulations of TWSE, if the NAVPS is lower than the par (NT$10), the credit trading will be suspended from the next business day. If the NAVPS is lower than NT$5, it will be considered a fully-delivered share. Once a company is considered a “full-delivery stock” and “prohibited credit trading,” the company will be significantly affected by market sentiment and often slump. Therefore, the company will use the method of making up for losses and reducing capital to beautify the company’s financial ratio.

2. Cash refund capital reduction

The cash refund capital reduction and the capital reduction to writing off accumulated losses are the same as the cancellation of the number of outstanding shares. The difference is that the cash refund capital reduction will return cash to the shareholders, and the other will not. As mentioned earlier in the cash refund capital reduction of Evergreen Marin, shareholders can receive a cash dividend of NT$6. The cash obtained by shareholders through the capital reduction is legally returned and therefore does not need to be taxed. Shareholders receiving cash from capital reductions are less taxable than profiting from cash dividends.

3. Capital reduction by stock repurchases

The capital reduction by stock repurchases is to buy back the outstanding shares with the company’s internal funds and cancel them. However, the capital reduction of treasury shares is not applicable in all cases. According to the provisions of the Securities and Exchange Act, treasury shares can be repurchased only when the treasury shares are transferred to employees, equity conversion, and to maintain the company’s credit and shareholders’ rights and interests, and with the consent of the board of directors. In addition to beautifying the financial report, the capital reduction by stock repurchases has also proposed many execution motives in the literature. For example, the company’s internal managers believe that the company’s stock price is undervalued, buying back the stock to protect shareholders’ rights or adjust the company’s financial structure.

summary

Capital reduction can help companies beautify their financial ratios and also provide opportunities for capital structure adjustment and the role of sending a message to the market. However, capital reduction is only a means and cannot improve the company’s physique, profit model, or operating conditions. Compare the advantages and disadvantages of the three capital reduction methods; simultaneously, the company’s motivation and profile should be considered to make the most objective analysis of the company.

Evergreen Marin reduction plan

Evergreen Marin was full of profits in 2021. It has given out a year-end bonus for 40 months. One Piece is full of cash. This year, it announced a capital reduction of 60%. Observe the two critical points of this plan and implementation of the capital reduction:

  1. Dispose of idle funds with cash refund capital reduction

According to Evergreen Marin’s second-quarter consolidated financial report, revenue increased by 75% compared to last year’s period. Cash and cash equivalents also increased by 354% compared with the same period of last year, of which time deposits are the largest. Although the amount of investment has increased, there is still much idle cash. The signal released by the cash refund capital reduction in the taxation system in recent years is that the company disposes of idle funds and returns excess cash to shareholders, which can solve the taxation problem for shareholders and adjust the financial structure to beautify the financial ratio.

2. Rapid reversal of shipping boom

Compared with the market situation before the decision to reduce capital in the year’s first half, the container shipping boom in the second half of 2022 has turned sharply downward. Due to the high inventory of the terminal demand and the inflation, the demand of manufacturers to pull goods has decreased. Evergreen Marine will have more than NT$100 billion shipbuilding expenditures in the future. After implementing capital reduction, we must deeply observe Evergreen Marin’s financial adjustment.

Impact on TAIEX

Smart must doubt, “Would the company be excluded from TAIEX after the capital reduction?

According to TWSE, the index constituent stocks of the capitalization-weighted index (TAIXE) are all listed common stocks (excluding companies listed on the Innovation Board or the first listed companies on the Innovation Board). It is deleted from the constituent shares if the companies stop trading. However, suppose the company stops trading due to capital reduction to writing off accumulated losses, cash refund capital reduction, or capital reduction by stock repurchases. In that case, they can still be retained as constituent shares!

Therefore, the company will not be excluded from the capitalization-weighted index (TAIXE), whether it is a capital reduction to compensate for a loss or a cash capital reduction. Since it will not be eliminated, what will impact TAIEX?

There are two market index calculation methods: the market capitalization-weighted index and the price-weighted index.

“Capitalization Weighted Index” is to multiply the stock price of each constituent stock in the index by the total number of outstanding shares and use the market capitalization as the weight to calculate the index. A typical example is TAIXE. “Price-weighted index” is to divide the total of each stock price in the index by the number of all stocks and compile it with price as the weight, such as the Dow Jones Industrial Index (DJIA) in the US.

It is emphasized here that capital reduction has no impact on shareholders’ equity, whether to make up for loss or cash capital reduction. To help everyone understand, the calculation method is summarized as follows, taking cash refund capital reduction as an example. As mentioned earlier, the most significant difference between capital reduction to writing off accumulated losses and cash refund capital reduction is whether the funds will be returned to shareholders. This action changes the company’s market value in the stock market.

share’s equity
▲ Schematic diagram of shareholders’ equity before and after the cash reduction

After the “cash refund capital reduction,” part of the value is converted into cash and given to shareholders, and the overall market value of the stock market (the stock price after the capital reduction × the number of outstanding shares) will decrease. However, there is no return of funds for the “capital reduction to writing off accumulated losses,” that is, the stock price after the capital reduction. The cash return in the molecular is 0, which does not affect the market value of the stock market. Therefore, the cash refund capital reduction of Evergreen Marin (2603) will reduce the market value of the stock market due to the return of cash, and the proportion of the constituent stocks in TAIEX will decrease. The influence on the index will also become smaller.

Where to get more info?

Click Taiwan Finance Database→TEJ Company DB→ Corporation Action

You can obtain the most complete historical equity changes, allowing investors to do in-depth analysis.

TEJ data bank
▲ TEJ Corporate Action

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TEJ 台灣經濟新報

TEJ 台灣經濟新報

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TEJ 為台灣本土第一大財經資訊公司,成立於 1990 年,提供金融市場基本分析所需資訊,以及信用風險、法遵科技、資產評價、量化分析及 ESG 等解決方案及顧問服務。鑒於財務金融領域日趨多元與複雜,TEJ 結合實務與學術界的精英人才,致力於開發機器學習、人工智慧 AI 及自然語言處理 NLP 等新技術,持續提供創新服務