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.

<ul>
<li>While it's natural for a rational investor to disagree with a company that cannot generate a return commensurate with the risk, the existence of cross-shareholdings in Japanese companies complicates matters.</li>
<li>The benefit of listing is raising capital on favorable terms by trading shares at a value greater than shareholders' equity, but there are not many Japanese companies trading at premium.</li>
<li>Going private is one option for companies that are unable to find growth investment opportunities and accumulate cash on their balance sheets. In this regard, Japanese equities are of interest.</li>
</ul>


While it's natural for a rational investor to disagree with a company that cannot generate a return commensurate with the risk, the existence of cross-shareholdings in Japanese companies complicates matters.
The benefit of listing is raising capital on favorable terms by trading shares at a value greater than shareholders' equity, but there are not many Japanese companies trading at premium.
Going private is one option for companies that are unable to find growth investment opportunities and accumulate cash on their balance sheets. In this regard, Japanese equities are of interest.


Going Private Is an Option for Both the Companies and Investors

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

<ul>
<li>Quiddity's "Who is Ready" series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.</li>
<li>This insight is a follow-up to <a href="https://www.smartkarma.com/insights/topix-inclusions-who-is-ready-oct-2022" target="_blank" data-smartkarma-citation="insights:81556" rel="noopener">TOPIX Inclusions: Who Is Ready (Oct 2022)</a> </li>
<li>At present, there are 60 names that satisfy all of these conditions and there are more names that are close to being in that group.</li>
</ul>


Quiddity's "Who is Ready" series of insights aims to objectively identify names listed on the Tokyo Stock Exchange that are potential additions to the TOPIX Index in future.
This insight is a follow-up to TOPIX Inclusions: Who Is Ready (Oct 2022) 
At present, there are 60 names that satisfy all of these conditions and there are more names that are close to being in that group.


TOPIX Inclusions: Who Is Ready (Dec 2022)

<ul>
<li>There is a gap between investors, who seek KPIs that reflect future cash flows and cost of capital to determine the prospects for corporate value, and the company.</li>
<li>Many companies aren't able to manage investment and return by business, and under such conditions it is difficult to show future investments and growth prospects in a mid-term business plan.</li>
<li>Metrical's analysis shows that simply increasing shareholder returns isn’t sufficient to raise market capitalization; growth policy and capital allocation policy must be systematically established as part of management policy.</li>
</ul>


There is a gap between investors, who seek KPIs that reflect future cash flows and cost of capital to determine the prospects for corporate value, and the company.
Many companies aren't able to manage investment and return by business, and under such conditions it is difficult to show future investments and growth prospects in a mid-term business plan.
Metrical's analysis shows that simply increasing shareholder returns isn’t sufficient to raise market capitalization; growth policy and capital allocation policy must be systematically established as part of management policy.


Not Which KPI Is Better, but What Is Shared Between Investors and Managers to Achieve the Same Goal

<ul>
<li>Although the stock split doesn't raise the intrinsic value of the stock, the stock price is likely to rise on the speculation that future purchases into the NISA are expected.</li>
<li>As cross-shareholdings decline, the companies are actively engaging in IR activities with individual investors to secure shareholders who share the company's position against foreign shareholders who are increasing their presence.</li>
<li>Some believe that NISA will be used as receptacle for the disposal of BOJ's ETF holdings, but companies may hope that the silent shareholder hold ETFs as long as possible.</li>
</ul>


Although the stock split doesn't raise the intrinsic value of the stock, the stock price is likely to rise on the speculation that future purchases into the NISA are expected.
As cross-shareholdings decline, the companies are actively engaging in IR activities with individual investors to secure shareholders who share the company's position against foreign shareholders who are increasing their presence.
Some believe that NISA will be used as receptacle for the disposal of BOJ's ETF holdings, but companies may hope that the silent shareholder hold ETFs as long as possible.


Again, It Is the BOJ's ETF Issue that Makes Us Think

<ul>
<li>There are 236 companies with a trading unit of more than 500,000 yen, while there are 967 companies with a trading unit of less than 50,000 yen on the TSE.</li>
<li>It's fair to amend the law to abolish the share unit system, but changing the law takes time. It's also unclear why "between 50,000 yen and 500,000 yen" is appropriate.</li>
<li>While TSE still allows 300 companies that don't meet the listing criteria to be listed on prime market, TSE requires companies with higher stock prices to increase their administrative burden.</li>
</ul>


There are 236 companies with a trading unit of more than 500,000 yen, while there are 967 companies with a trading unit of less than 50,000 yen on the TSE.
It's fair to amend the law to abolish the share unit system, but changing the law takes time. It's also unclear why "between 50,000 yen and 500,000 yen" is appropriate.
While TSE still allows 300 companies that don't meet the listing criteria to be listed on prime market, TSE requires companies with higher stock prices to increase their administrative burden.


Is TSE Being Too Strict with the Honor Students and Too Lenient with the Underdogs?

Japan

The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.

TSE Tokyo Price Index TOPIX (TPX INDEX)

Going Private Is an Option for Both the Companies and Investors

I would like to discuss the issues on the Nikkei article of November 7, "Are Companies Fulfilling Their Listing Obligations?"

Metrical Inc

TOPIX Inclusions: Who Is Ready (Dec 2022)

There are currently four names identified with high likelihood of TOPIX Inclusion within the next few months: Medley, Appier, Chubu Steel, and...

Janaghan Jeyakumar, CFA

Not Which KPI Is Better, but What Is Shared Between Investors and Managers to Achieve the Same Goal

I would like to discuss the issues on the Nikkei article of September 20, 2022, "3 ways to deal with activist investors."

Metrical Inc

Again, It Is the BOJ's ETF Issue that Makes Us Think

I would like to discuss the issues on Nikkei article of November 7, 2022, "TSE has requested a reduction in the investment unit, which has led to...

Metrical Inc

Is TSE Being Too Strict with the Honor Students and Too Lenient with the Underdogs?

I would like to discuss the issues on the "Request for Consideration Concerning Reduction of Minimum Investment Unit" sent to the companies with...

Metrical Inc