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>The policy backdrop points to greater corporate buying, greater foreign flow, greater selling by individuals and trust banks. The current timing probably matches. </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. 
The policy backdrop points to greater corporate buying, greater foreign flow, greater selling by individuals and trust banks. The current timing probably matches. 


JAPAN FLOW: Foreign Investor Inflows May Increase

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 many companies have disclosed enhanced shareholder returns, dividend payout ratio in 30% range and no increase, and 4% increase in total dividends from the previous year, is not enough.</li>
<li>Since DOE remains at just under 3% same as the previous year, few companies allocate enough cash to dividend to reduce Shareholder's Equity, and consequently ROE is expected to lower.</li>
<li>Cash on hand in September is at all-time high. Behind the ROE, which shows no sign of rising, is the psychology of managers who want to keep cash on hand.</li>
</ul>


While many companies have disclosed enhanced shareholder returns, dividend payout ratio in 30% range and no increase, and 4% increase in total dividends from the previous year, is not enough.
Since DOE remains at just under 3% same as the previous year, few companies allocate enough cash to dividend to reduce Shareholder's Equity, and consequently ROE is expected to lower.
Cash on hand in September is at all-time high. Behind the ROE, which shows no sign of rising, is the psychology of managers who want to keep cash on hand.


Is Japan's Culture the Psychology of Managers Who Prefer to Keep Cash on Hand over Higher ROE?

<ul>
<li>In addition to the large number of micro-caps among companies listed on the Growth Market, another problem is the lack of growth in market capitalization after IPOs. </li>
<li>Many managers consider IPO to be the goal, and this is evidenced by the fact that not many companies raise capital at IPO and after listing.</li>
<li>The government proposed raising the market capitalization criteria for IPOs and revitalizing the secondary market for pre-listed companies. TSE is likely to review its listing criteria as early as 2025.</li>
</ul>


In addition to the large number of micro-caps among companies listed on the Growth Market, another problem is the lack of growth in market capitalization after IPOs. 
Many managers consider IPO to be the goal, and this is evidenced by the fact that not many companies raise capital at IPO and after listing.
The government proposed raising the market capitalization criteria for IPOs and revitalizing the secondary market for pre-listed companies. TSE is likely to review its listing criteria as early as 2025.


What Is A "Growth Market" Where Many Companies Do Not Grow in Market Cap or Raise Capital?

<ul>
<li>Since the introduction of the Corporate Governance Code, the hurdle for listed companies to fulfill their responsibilities has become higher, which is why more managers are choosing to go private.</li>
<li>While some of companies with large market capitalizations that overseas investor engagement extends to are showing promise for change, many others are failing to step up management to create value.</li>
<li>TOPIX's rise has been mainly driven by an increase in the number of companies rather than an increase in stock prices. The market should become higher in quality through de-listing.</li>
</ul>


Since the introduction of the Corporate Governance Code, the hurdle for listed companies to fulfill their responsibilities has become higher, which is why more managers are choosing to go private.
While some of companies with large market capitalizations that overseas investor engagement extends to are showing promise for change, many others are failing to step up management to create value.
TOPIX's rise has been mainly driven by an increase in the number of companies rather than an increase in stock prices. The market should become higher in quality through de-listing.


Isn't It Hypocritical to Request a P/B Raising Measure While Continuing the Listed Subsidiary IPO?

<ul>
<li>The fact that only 7% of companies disclosed their cost of capital disappoints investors who had hoped that the "TSE request" would change management's mindset to become more share-price conscious.</li>
<li>The average ROE of listed companies declined slightly. This indicates that they haven't been able to find effective investments to raise business profitability and that shareholder returns have been inadequate.</li>
<li>The ROE trend does not indicate a significant change in management's mindset, so this will be a major issue if the stock price moves lower to the June AGM season.</li>
</ul>


The fact that only 7% of companies disclosed their cost of capital disappoints investors who had hoped that the "TSE request" would change management's mindset to become more share-price conscious.
The average ROE of listed companies declined slightly. This indicates that they haven't been able to find effective investments to raise business profitability and that shareholder returns have been inadequate.
The ROE trend does not indicate a significant change in management's mindset, so this will be a major issue if the stock price moves lower to the June AGM season.


ROE Trends Do Not Seem to Indicate a Significant Change in Management's Mindset?

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)

JAPAN FLOW: Foreign Investor Inflows May Increase

JAPAN FLOW: Foreign flows matter in Japanese equities. Foreigners chase performance, individuals and trust banks fade it. This works over multi...

Travis Lundy

Is Japan's Culture the Psychology of Managers Who Prefer to Keep Cash on Hand over Higher ROE?

I would like to discuss the issues on the December 24 Nikkei Shimbun article, "Listed Companies' Dividends to Reach 16 Trillion Yen in FY2024, 3...

Metrical Inc

What Is A "Growth Market" Where Many Companies Do Not Grow in Market Cap or Raise Capital?

I would like to discuss the issues on the December 17 Nikkei article, "TSE Considers Raising Criteria for Growth Market Listings, Criticisms Strong...

Metrical Inc

Isn't It Hypocritical to Request a P/B Raising Measure While Continuing the Listed Subsidiary IPO?

I would like to discuss the issues on the November 26 Nikkei Shimbun article, "MBOs to Top 1 Trillion Yen in 2023, Taisho Pharmaceutical and...

Metrical Inc

ROE Trends Do Not Seem to Indicate a Significant Change in Management's Mindset?

I would like to discuss the issues on the Nikkei article published on December 22, "Cost of Capital Disclosure Stays at 7%."

Metrical Inc