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>Characteristic of companies TSE introduced as good disclosure examples is that they include more companies with a high foreign ownership and those that pay relatively close attention to cash allocation.</li>
<li>Not all companies that are good examples have increased their valuations noticeably compared to before TSE market restructuring, but TSE has chosen them based on the content of their initiatives.</li>
<li>These companies didn't create their cash allocation policies abruptly, but had more opportunities to think through cost of capital, return on capital and stock price through engagements with overseas investors.</li>
</ul>


Characteristic of companies TSE introduced as good disclosure examples is that they include more companies with a high foreign ownership and those that pay relatively close attention to cash allocation.
Not all companies that are good examples have increased their valuations noticeably compared to before TSE market restructuring, but TSE has chosen them based on the content of their initiatives.
These companies didn't create their cash allocation policies abruptly, but had more opportunities to think through cost of capital, return on capital and stock price through engagements with overseas investors.


The Good Case Companies Had More Opportunities to Reflect on Cost of Capital and Return on Capital

<ul>
<li>The pace of share repurchases in 2023 (+1.4%, YoY) is not sufficient compared to the increase in corporate profits, and there is much room for reconsideration of cash allocations.</li>
<li>In Japan, where many manufacturers keep CapEx within the depreciation, it's more important to verify whether shareholder return is appropriate on a cash basis rather than a net income basis.</li>
<li>Companies that fail to formulate measures to generate ROE that exceeds the cost of capital in accordance with TSE requests are not able to achieve an appropriate cash allocation.</li>
</ul>


The pace of share repurchases in 2023 (+1.4%, YoY) is not sufficient compared to the increase in corporate profits, and there is much room for reconsideration of cash allocations.
In Japan, where many manufacturers keep CapEx within the depreciation, it's more important to verify whether shareholder return is appropriate on a cash basis rather than a net income basis.
Companies that fail to formulate measures to generate ROE that exceeds the cost of capital in accordance with TSE requests are not able to achieve an appropriate cash allocation.


Shareholder Returns Should Be Examined on a Cash Basis, Not on a Net Profit Basis

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

TSE Tokyo Price Index TOPIX / Event-Driven

<ul>
<li>For years I have tracked investor category flows in Japanese stocks because I find them quite informative. I write about them every so often in an insight series JAPAN FLOW.</li>
<li>The series, which I have written about for years, suggests foreign investors invest in Japan pro-cyclically and that correlates well to One (relatively) Simple Indicator.</li>
<li>Foreigners have a lot of ammunition left. But cross-holding unwinds are picking up, and buybacks are too, and dividend reinvestments are smaller than public pension selling. Which way next?</li>
</ul>


For years I have tracked investor category flows in Japanese stocks because I find them quite informative. I write about them every so often in an insight series JAPAN FLOW.
The series, which I have written about for years, suggests foreign investors invest in Japan pro-cyclically and that correlates well to One (relatively) Simple Indicator.
Foreigners have a lot of ammunition left. But cross-holding unwinds are picking up, and buybacks are too, and dividend reinvestments are smaller than public pension selling. Which way next?


JAPAN FLOW: Foreigners Vs Cross-Holding Unwinds Vs Buybacks Vs Pensions

<ul>
<li>Companies with the highest Disclosure in English scores have the highest ROE, Tobin's Q, Market Capitalization, and Foreign Shareholder Ratio, while companies with the lowest scores have the lowest values.</li>
<li>Companies with the highest Disclosure in English scores also show generally higher Board Practices and Key Actions. Both Disclosure in English and these practices are the result of engagement efforts.</li>
<li>If Disclosure in English and corporate governance efforts are advanced through engagement, it can be hypothesized that profitability will also increase through engagement with overseas investors.</li>
</ul>


Companies with the highest Disclosure in English scores have the highest ROE, Tobin's Q, Market Capitalization, and Foreign Shareholder Ratio, while companies with the lowest scores have the lowest values.
Companies with the highest Disclosure in English scores also show generally higher Board Practices and Key Actions. Both Disclosure in English and these practices are the result of engagement efforts.
If Disclosure in English and corporate governance efforts are advanced through engagement, it can be hypothesized that profitability will also increase through engagement with overseas investors.


First Step in Engagement in Term of Listening to Overseas Investors Is Seeking Disclosure in English

<ul>
<li>In the past, value traps were macro environment that couldn't generate profits in deflationary economy, and micro problem of managers who didn't listen to constructive management improvement proposals from investors.</li>
<li>The introduction of Stewardship Code and Corporate Governance Code, and TSE's request for change in awareness of companies, has reduced the risk of activist investors' investment strategies flailing around in vain.</li>
<li>Management awareness has just begun to change, and few companies generate intrinsic value, as evidenced by the fact that ROE hasn’t begun to improve. Activist investors will continue taking interest.</li>
</ul>


In the past, value traps were macro environment that couldn't generate profits in deflationary economy, and micro problem of managers who didn't listen to constructive management improvement proposals from investors.
The introduction of Stewardship Code and Corporate Governance Code, and TSE's request for change in awareness of companies, has reduced the risk of activist investors' investment strategies flailing around in vain.
Management awareness has just begun to change, and few companies generate intrinsic value, as evidenced by the fact that ROE hasn’t begun to improve. Activist investors will continue taking interest.


A Change in Manager's Mindset that Has Begun Will Lower the Investment Risk for Activist Investors

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)

The Good Case Companies Had More Opportunities to Reflect on Cost of Capital and Return on Capital

I would like to discuss the document "Publication of Key Points and Examples of "Management Conscious of Cost of Capital and Stock Price" Based on...

Metrical Inc

Shareholder Returns Should Be Examined on a Cash Basis, Not on a Net Profit Basis

I would like to discuss the issues on the January 30 Nikkei article, "Share Buybacks to Top 9.6 Trillion Yen in 2023, Aggressive Shareholder...

Metrical Inc

JAPAN FLOW: Foreigners Vs Cross-Holding Unwinds Vs Buybacks Vs Pensions

Moving forward in time, we have more foreign buying, and coming up this week, we have both a large net buying event for dividend reinvestment on...

Travis Lundy

First Step in Engagement in Term of Listening to Overseas Investors Is Seeking Disclosure in English

I would like to discuss the issues on the analysis the characteristics of companies in profitability, valuation and corporate governance practices...

Metrical Inc

A Change in Manager's Mindset that Has Begun Will Lower the Investment Risk for Activist Investors

I would like to discuss the issues on the January 24 Nikkei article, "Activist Investors Triple in 5 Years, Following Japanese Companies' P/B...

Metrical Inc