Executive Director, Metrical Inc

Aki Matsumoto

Executive Director

Independent Leading Corporate Governance Research

Metrical Inc

METRICAL INC. is an independent leading Corporate Governance research firm in Japan where Corporate Governance is increasingly recognized as an important element on corporate management in these days. Thus, CG research and solutions would become an essential component of global capital markets and play important to contribute to transparency of the markets and maximize shareholders’ value in Japan. 

METRICAL INC. provides Corporate Governance research and analysis including rating services, and  also offers investment research and IR services with solutions and customized profound research on CG and IR issues.

<p>In my previous articles, "Parent-Subsidiary Listing and ENEOS Holdings, Toho Titanium, Hitachi Construction Machinery Update" and "Parent-Subsidiary Listing Dissolution and ROIC," I discussed the options for Hitachi Construction Machinery (6305), a subsidiary of Hitachi, Ltd. (6501) for dissolving the parent-subsidiary listing, including making the company a wholly owned subsidiary, selling shares, and going private. I attended Hitachi Construction Machinery's analyst meeting on Tuesday, October 26 and small meeting on Friday, October 29, as well as Hitachi, Ltd.'s analyst meeting on Wednesday, October 27, and would like to update my views on this matter.</p>

In my previous articles, "Parent-Subsidiary Listing and ENEOS Holdings, Toho Titanium, Hitachi Construction Machinery Update" and "Parent-Subsidiary Listing Dissolution and ROIC," I discussed the options for Hitachi Construction Machinery (6305), a subsidiary of Hitachi, Ltd. (6501) for dissolving the parent-subsidiary listing, including making the company a wholly owned subsidiary, selling shares, and going private. I attended Hitachi Construction Machinery's analyst meeting on Tuesday, October 26 and small meeting on Friday, October 29, as well as Hitachi, Ltd.'s analyst meeting on Wednesday, October 27, and would like to update my views on this matter.

Japan's Governance: Parent-Subsidiary Listing and Hitachi Construction Machinery (6305): Update

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

<p>On Friday we warned that Fanuc might come through with a surprise downgrade as a result of weakness in its Robomachine division. We said that FA and Robot sales were likely flattish QoQ (-0.8% QoQ and +6.1% QoQ respectively) but that the Robomachine division could see sales collapse to about ¥28bn from ¥53.2bn in the last quarter. They did, falling to ¥27.8bn. What remains to be seen is how far ahead of the clueless and oblivious sellside (which projected a 1.6% QoQ rise in sales) the market was. For now though…</p><p><iframe src="//www.youtube.com/embed/gbGfhT1yehw" width="640" height="360"></iframe></p>

On Friday we warned that Fanuc might come through with a surprise downgrade as a result of weakness in its Robomachine division. We said that FA and Robot sales were likely flattish QoQ (-0.8% QoQ and +6.1% QoQ respectively) but that the Robomachine division could see sales collapse to about ¥28bn from ¥53.2bn in the last quarter. They did, falling to ¥27.8bn. What remains to be seen is how far ahead of the clueless and oblivious sellside (which projected a 1.6% QoQ rise in sales) the market was. For now though…

Hitachi Construction Machinery / Equity Bottom-Up

<p>HCM 2QFY21 results were strong with ¥246bn in revenue (+7.6% QoQ, +28.7% YoY) and OP of ¥26bn (OPM of 10.7% compared to 3.2% and 5.2% respectively in 2QFY21 and 1QFY22). FY guidance was revised up to revenue of ¥920bn (+4.5% vs. previous guidance) and OP of ¥62bn (+19.4% but implying an OPM of 8% in 2HFY22).</p>

HCM 2QFY21 results were strong with ¥246bn in revenue (+7.6% QoQ, +28.7% YoY) and OP of ¥26bn (OPM of 10.7% compared to 3.2% and 5.2% respectively in 2QFY21 and 1QFY22). FY guidance was revised up to revenue of ¥920bn (+4.5% vs. previous guidance) and OP of ¥62bn (+19.4% but implying an OPM of 8% in 2HFY22).

HCM – Could Retest All-Time Highs Given Time But…

<p>HCM announced slightly concerning 1Q results yesterday as despite a strong revenue beat (12% above consensus), OP missed by 10%. This is a result of gross margin continuing to undershoot and it is unclear when this issue might be resolved.</p>

HCM announced slightly concerning 1Q results yesterday as despite a strong revenue beat (12% above consensus), OP missed by 10%. This is a result of gross margin continuing to undershoot and it is unclear when this issue might be resolved.

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>A few years ago I started this series, and I updated it last year. Since last year, it has been a top 10 insight in terms of views. </p><p>I personally think it is important for investors of all types to understand WHO OWNS WHAT. </p><p>Many fundamental investors are reticent to spend any time on this but there are many reasons why active investors in Japan should be interested in understanding the ownership and shareholder dynamics of passive investors in Japan.</p><div><p>Some of the places active investors will see their influence are:</p></div><div>
<ul style="list-style-type: disc;">
<li>Stories intermittently published about the BOJ's presence in Japanese ETFs (especially the fact that it owns 85+% of the outstanding ETF market),</li>
<li>Relatively constant interest in Nikkei 225 rebalances like the one we saw in July 2020, which helped push up <a href="https://www.smartkarma.com/entities/japan-exchange-group-inc" target="_blank" data-smartkarma-citation="entities:11266:1" rel="noopener">Japan Exchange Group (8697 JP)</a> by 30+% from May to July, then helped it slide 13% in a week, or the changes in the Nikkei 225 review rules published earlier this year which may change what happens this September to a few large caps, and the announcement of the BOJ that it would no longer buy Nikkei 225 ETFs which started a long slide in <a href="https://www.smartkarma.com/entities/fast-retailing-co-ltd" target="_blank" data-smartkarma-citation="entities:751:1" rel="noopener">Fast Retailing (9983 JP)</a> shares against comps and the Nikkei itself. Long "held up" by 'market inventory' and Nikkei 225 ETF buying, when the BOJ stopped, it removed the cushion and existing inventory holders had to sell out. </li>
<li>Then if you look at the shareholder structure of Fast Retailing today, you will see that it is STILL fundamentally a serious problem for large foreign active investors who would actually wish to take an <em>active</em> (but not activist) position. <em>Real World Float</em> on the stock is, by my calculation, less than 15% of shares outstanding. </li>
<li>The relatively recent policy of increased stewardship regarding the passive management portion of the GPIF (the Government Pension Investment Fund) - an investing heavyweight in Japan.</li>
<li>The timing and quantum of after-event support or overhang on corporate actions such as buybacks, secondary offerings, primary offerings, mergers, etc. </li>
<li>Index inclusions mean big flows. If you follow the insights on <strong><a href="https://www.smartkarma.com/collections/topix-inclusion/insights?item=54585" target="_blank" rel="noopener">TOPIX Inclusions</a></strong> by <a href="https://www.smartkarma.com/profiles/janaghan-jeyakumar-cfa" target="_blank" data-smartkarma-citation="accounts:3173" rel="noopener">Janaghan Jeyakumar, CFA</a> and myself, you will often see big moves. Sometimes these stocks move 50% between when we write about them and when they go into the index. If you own them and are considering an exit, you need to know when to take profits, and the dynamic of the liquidity. If you are thinking about getting in for fundamental reasons, it pays to know early so you can get ahead of the major flow.</li>
<li>The return of <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a> to the TSE First Section in Q1 this year changed the foreign shareholder percentage ownership, lowering it by 10%. Smartkarma readers knew this last year and in January, which prepared them for the June AGM when the shareholder category ownership was released.</li>
<li>The changes to the TSE's market structure, which will affect TOPIX membership, which will affect many companies' issuance, buyback, share cancellation, etc decisions over the next several months. They are doing this because of the TSE Prime listing rules which will effectively also determine whether or not they will be included in TOPIX in future, or whether they will fall out of TSE Prime and will see constant selling over late 2022 to early 2025. </li>
</ul>
<p>Of course, TOPIX is just over half of the passive tracking AUM in Japan. There's more. </p>
<p>Find out WHO OWNS WHAT in Japan Passive below the fold. </p>
</div>

A few years ago I started this series, and I updated it last year. Since last year, it has been a top 10 insight in terms of views. I personally think it is important for investors of all types to understand WHO OWNS WHAT. Many fundamental investors are reticent to spend any time on this but there are many reasons why active investors in Japan should be interested in understanding the ownership and shareholder dynamics of passive investors in Japan.Some of the places active investors will see their influence are:

Stories intermittently published about the BOJ's presence in Japanese ETFs (especially the fact that it owns 85+% of the outstanding ETF market),
Relatively constant interest in Nikkei 225 rebalances like the one we saw in July 2020, which helped push up Japan Exchange Group (8697 JP) by 30+% from May to July, then helped it slide 13% in a week, or the changes in the Nikkei 225 review rules published earlier this year which may change what happens this September to a few large caps, and the announcement of the BOJ that it would no longer buy Nikkei 225 ETFs which started a long slide in Fast Retailing (9983 JP) shares against comps and the Nikkei itself. Long "held up" by 'market inventory' and Nikkei 225 ETF buying, when the BOJ stopped, it removed the cushion and existing inventory holders had to sell out. 
Then if you look at the shareholder structure of Fast Retailing today, you will see that it is STILL fundamentally a serious problem for large foreign active investors who would actually wish to take an active (but not activist) position. Real World Float on the stock is, by my calculation, less than 15% of shares outstanding. 
The relatively recent policy of increased stewardship regarding the passive management portion of the GPIF (the Government Pension Investment Fund) - an investing heavyweight in Japan.
The timing and quantum of after-event support or overhang on corporate actions such as buybacks, secondary offerings, primary offerings, mergers, etc. 
Index inclusions mean big flows. If you follow the insights on TOPIX Inclusions by Janaghan Jeyakumar, CFA and myself, you will often see big moves. Sometimes these stocks move 50% between when we write about them and when they go into the index. If you own them and are considering an exit, you need to know when to take profits, and the dynamic of the liquidity. If you are thinking about getting in for fundamental reasons, it pays to know early so you can get ahead of the major flow.
The return of Toshiba Corp (6502 JP) to the TSE First Section in Q1 this year changed the foreign shareholder percentage ownership, lowering it by 10%. Smartkarma readers knew this last year and in January, which prepared them for the June AGM when the shareholder category ownership was released.
The changes to the TSE's market structure, which will affect TOPIX membership, which will affect many companies' issuance, buyback, share cancellation, etc decisions over the next several months. They are doing this because of the TSE Prime listing rules which will effectively also determine whether or not they will be included in TOPIX in future, or whether they will fall out of TSE Prime and will see constant selling over late 2022 to early 2025. 

Of course, TOPIX is just over half of the passive tracking AUM in Japan. There's more. 
Find out WHO OWNS WHAT in Japan Passive below the fold. 


Japan

Hitachi Construction Machinery Co., Ltd. develops, manufactures, sells, and repairs construction machinery. The Company's products include hydraulic excavators, crawler cranes, wheel loaders, shield machines, and bulldozers. Hitachi Construction Machinery, a subsidiary of Hitachi, Ltd., markets its products worldwide through sales offices overseas.

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Hitachi Construction Machinery (6305 JP)

Japan's Governance: Parent-Subsidiary Listing and Hitachi Construction Machinery (6305): Update

I participated in the analyst and small business meetings of Hitachi Construction Machinery and Hitachi last week, and would like to update you on...

Metrical Inc

Fanuc – Whoomp! There It Is

On Friday we warned that Fanuc might come through with a surprise downgrade as a result of weakness in its Robomachine division. They did.

Mio Kato

HCM – Could Retest All-Time Highs Given Time But…

HCM 2Q results reassured with margins rebounding and the stock is up 6.8% with guidance for 2H still looking far too conservative, but there is the...

Mio Kato

HCM – Miss on Margins

HCM announced slightly concerning 1Q results yesterday as gross margin continues to undershoot and it is unclear when this issue might be resolved.

Mio Kato

JAPAN PASSIVE: Who Owns What 2021?

This is the 2021 Version of Who Owns What in Japan Passive. It tries to present a relatively comprehensive idea of how much money/float tracks the...

Travis Lundy

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