Pan-Asia Index Flows & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Pan-Asia Index Flows & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Event-Driven

In January and February 2021 we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented (application deadline November 1, 2020). In contrast, not a single TSE1 Section Transfer was announced in the months of March and April 2021. However, during the month of April, we witnessed TSE's Annual Liquidity Factor Review which caused dozens of stocks to enjoy Index Upweights during the April-end Inclusion Event collectively amount to an estimated upweight size of approximately US$1bn. Below is a look at the performance of the TOPIX-related event trades covered by Quiddity in the Pre-event, Live-event, and Post-event categories during the month of April 2021.

In January and February 2021 we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented (application deadline November 1, 2020). In contrast, not a single TSE1 Section Transfer was announced in the months of March and April 2021. However, during the month of April, we witnessed TSE's Annual Liquidity Factor Review which caused dozens of stocks to enjoy Index Upweights during the April-end Inclusion Event collectively amount to an estimated upweight size of approximately US$1bn. Below is a look at the performance of the TOPIX-related event trades covered by Quiddity in the Pre-event, Live-event, and Post-event categories during the month of April 2021.  

TOPIX Inclusion Trade Summary: April 2021

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

This insight is meant to be read in conjunction with <a href="https://www.smartkarma.com/profiles/janaghan-jeyakumar-cfa" target="_blank" data-smartkarma-citation="accounts:3173" rel="noopener">Janaghan Jeyakumar, CFA</a>'s <a href="https://www.smartkarma.com/insights/topix-upweights-big-april-basket-2021-pre-event-is-a-win-now-the-event-leg" target="_blank" data-smartkarma-citation="insights:50084" rel="noopener">TOPIX Upweights: Big April Basket 2021 Pre-Event Is a WIN! Now the Event-Leg!</a> (which is the announced result of the proposed 50-name buy basket introduced in the explanation of an annual but obscure aspect of TOPIX Index calculation rebalancing explained in <a href="https://www.smartkarma.com/insights/topix-index-upweights-the-big-april-basket-2021" target="_blank" data-smartkarma-citation="insights:49660" rel="noopener">TOPIX Index Upweights: The Big April Basket 2021</a>).Suffice it to say, he got 48 out of the 50 names chosen right, and there are a few more trades related to this on the side. That is US$1.1bn to buy. This insight is about all the OTHER names in the TOPIX rebalance for April 2020, including a total of 43 up-weights and 16 down-weights with ~ US$500mm to buy and US$260mm to sell.That means there will be a US$1bn sell on the close of the 28th too. Not huge, but there. The trades to do here are for investors to see if any of these situations warrant use as a liquidity event.

This insight is meant to be read in conjunction with Janaghan Jeyakumar, CFA's TOPIX Upweights: Big April Basket 2021 Pre-Event Is a WIN! Now the Event-Leg! (which is the announced result of the proposed 50-name buy basket introduced in the explanation of an annual but obscure aspect of TOPIX Index calculation rebalancing explained in TOPIX Index Upweights: The Big April Basket 2021).Suffice it to say, he got 48 out of the 50 names chosen right, and there are a few more trades related to this on the side. That is US$1.1bn to buy. This insight is about all the OTHER names in the TOPIX rebalance for April 2020, including a total of 43 up-weights and 16 down-weights with ~ US$500mm to buy and US$260mm to sell.That means there will be a US$1bn sell on the close of the 28th too. Not huge, but there. The trades to do here are for investors to see if any of these situations warrant use as a liquidity event. 

TOPIX April-End Rebalance - The OTHER Trades

In January and February we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented. In contrast, not a single TSE1 Section Transfer was announced in the month of March 2021. 
However, this is only the calm before the storm.
In April 2021, we are expecting dozens of companies to enjoy TOPIX Index upweights as a result of the annual liquidity factor review (and this will mean dozens of downweights too). On the other hand, although fewer companies will qualify under the new rules, small-cap companies could use M&amp;A as an alternative route to Section Transfers to meet criteria as discussed below in this insight.
Furthermore, I have discussed the changes to Quiddity's pre-events watchlist and provided performance updates for one "Live" event stock which is expected to have its Inclusion event at the end of April 2021 and 9 "Post" event stocks that completed their Inclusion Events at the end of January 2021 and February 2021.

In January and February we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented. In contrast, not a single TSE1 Section Transfer was announced in the month of March 2021. 
However, this is only the calm before the storm.
In April 2021, we are expecting dozens of companies to enjoy TOPIX Index upweights as a result of the annual liquidity factor review (and this will mean dozens of downweights too). On the other hand, although fewer companies will qualify under the new rules, small-cap companies could use M&amp;A as an alternative route to Section Transfers to meet criteria as discussed below in this insight.
Furthermore, I have discussed the changes to Quiddity's pre-events watchlist and provided performance updates for one "Live" event stock which is expected to have its Inclusion event at the end of April 2021 and 9 "Post" event stocks that completed their Inclusion Events at the end of January 2021 and February 2021. 

During the month of February 2021, one of the most anticipated TOPIX Inclusion candidates, <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a> completed its TOPIX Inclusion Event. We also saw four new names announce their TSE1 moves during this month, among which was <a href="https://www.smartkarma.com/entities/faithnetwork-co-ltd" target="_blank" data-smartkarma-citation="entities:29132:1" rel="noopener">FaithNetwork Co Ltd (3489 JP)</a> the third stock out of the four pre-event bets highlighted in <a href="https://www.smartkarma.com/insights/topix-inclusion-trade-summary-sep-2020" target="_blank" data-smartkarma-citation="insights:43700" rel="noopener">TOPIX Inclusion Trade Summary: Sep 2020</a>. During this month, we also introduced new pre-event picks to be added to our list in <a href="https://www.smartkarma.com/insights/topix-inclusions-who-is-ready-3-0" target="_blank" data-smartkarma-citation="insights:48306" rel="noopener">TOPIX Inclusions: Who Is READY? 3.0</a>. In this insight, I have provided performance updates for 4 "Live" event stocks which are expected to have Inclusion Events at the end of March/April 2021 and 17 "Post" event stocks that completed their Inclusion Events at the end of January 2021 and February 2021.

During the month of February 2021, one of the most anticipated TOPIX Inclusion candidates, Toshiba Corp (6502 JP) completed its TOPIX Inclusion Event. We also saw four new names announce their TSE1 moves during this month, among which was FaithNetwork Co Ltd (3489 JP) the third stock out of the four pre-event bets highlighted in TOPIX Inclusion Trade Summary: Sep 2020. During this month, we also introduced new pre-event picks to be added to our list in TOPIX Inclusions: Who Is READY? 3.0. In this insight, I have provided performance updates for 4 "Live" event stocks which are expected to have Inclusion Events at the end of March/April 2021 and 17 "Post" event stocks that completed their Inclusion Events at the end of January 2021 and February 2021. 

Equity Capital Markets

Rakus is a digital outsourcing and cloud technology provider which concentrates on the under-served SME sector in Japan. Their main product is expense settlement software. Founded in 2000, and listed on the TSE MOTHERS exchange in December 2015 at ¥1050/share, the stock has split 2:1 every September since then, and is now ¥1650/share. It is a 25-bagger in five years. 
On Friday after the close, the company announced that the TSE had approved its application to move to the First Section of the TSE on 11 March 2021. This triggers an inclusion into the TOPIX Index at the end of April. 
The company ALSO announced an Equity Offering. 
<blockquote>
Since listing in December 2015, through discussions with a large number of investors we have been told that low liquidity and low free float ratio is a major issue for proper formation of stock prices and the improvement of corporate value, so we have asked for the cooperation of major investors and are conducting the above-mentioned stock sale for the purposes of improving liquidity.
</blockquote>
We'll see about that. 
The stock trades at 21x revenue.

Rakus is a digital outsourcing and cloud technology provider which concentrates on the under-served SME sector in Japan. Their main product is expense settlement software. Founded in 2000, and listed on the TSE MOTHERS exchange in December 2015 at ¥1050/share, the stock has split 2:1 every September since then, and is now ¥1650/share. It is a 25-bagger in five years. 
On Friday after the close, the company announced that the TSE had approved its application to move to the First Section of the TSE on 11 March 2021. This triggers an inclusion into the TOPIX Index at the end of April. 
The company ALSO announced an Equity Offering. 

Since listing in December 2015, through discussions with a large number of investors we have been told that low liquidity and low free float ratio is a major issue for proper formation of stock prices and the improvement of corporate value, so we have asked for the cooperation of major investors and are conducting the above-mentioned stock sale for the purposes of improving liquidity.

We'll see about that. 
The stock trades at 21x revenue.

Big Rakus (3923) Offering and TOPIX Inclusion

Japan

Rakus Co.,Ltd. provides cloud service and IT engineer temp service. The Company also provides rental server services.

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Rakus Co Ltd (3923 JP)

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Big Rakus (3923) Offering and TOPIX Inclusion

Rakus is a fast-growing (30% CAGR in revenues) IT and cloud services provider to SMEs. It has a good niche. Moving to TSE1 and shareholders...

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