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>Many of the companies that didn't meet the listing criteria for the prime market still failed to gain market recognition over an 18-month period and moved to the standard market.</li>
<li>It is believed that TSE expects more companies to gradually drop out of Prime Market by raising the hurdle for effort targets that aren’t explicitly stated in the listing criteria.</li>
<li>As quality differences gradually emerge between the Prime and Standard markets, the rift between management awareness and shareholders of Standard market-listed companies is likely to deepen in the future.</li>
</ul>


Many of the companies that didn't meet the listing criteria for the prime market still failed to gain market recognition over an 18-month period and moved to the standard market.
It is believed that TSE expects more companies to gradually drop out of Prime Market by raising the hurdle for effort targets that aren’t explicitly stated in the listing criteria.
As quality differences gradually emerge between the Prime and Standard markets, the rift between management awareness and shareholders of Standard market-listed companies is likely to deepen in the future.


The Rift Between Managers and Shareholders of Standard Market-Listed Companies Is Likely to Deepen

<ul>
<li>In TOB case from a parent company, managers of acquired company finally realized that there’s litigation risk from shareholders if there’s flaw in their fiduciary duty to maximize shareholder interests.</li>
<li>In the past, acquisitions with negative goodwill were conducted, but a TOB at a price below book value would require plausible rationales. TSE's request to raise P/B may have affected.</li>
<li>In addition to the increasing dissolution of parent-subsidiary listings, TOBs (or sales) of equity-method affiliates are expected to increase, as in the case of Daiken Kogyo.</li>
</ul>


In TOB case from a parent company, managers of acquired company finally realized that there’s litigation risk from shareholders if there’s flaw in their fiduciary duty to maximize shareholder interests.
In the past, acquisitions with negative goodwill were conducted, but a TOB at a price below book value would require plausible rationales. TSE's request to raise P/B may have affected.
In addition to the increasing dissolution of parent-subsidiary listings, TOBs (or sales) of equity-method affiliates are expected to increase, as in the case of Daiken Kogyo.


Parent-Subsidiary Listing Strategy Expected to Be Even More Attractive

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Periscope Analytics

Periscope Analytics focuses on event-driven trades across Asia Pacific and provides comprehensive, timely and systematic coverage of index changes to major Asia Pacific indices in a structured manner.

The analysis includes forecasted inclusions and exclusions to all major Asian indices that have significant amount of tracking assets, including estimates of passive buy/sell flow on the stocks. The service also provides commentary and impact of market consultations, ground rule changes, and other events (IPOs, spin-offs, M&A) that could lead to index changes and passive flow.

Periscope Analytics works with multi-strategy hedge funds, proprietary trading firms, stat arb trading groups and long-only investors that invest and trade in the Asia Pacific region with the data being used to trade index rebalances, avoid pre-positioning and passive flow, and to time entry into and exit from stocks.

Event-Driven Trades Across Asia Pacific

Event-Driven

<ul>
<li>The review period for the <a href="https://www.smartkarma.com/entities/nikkei-225" target="_blank" data-smartkarma-citation="entities:22909:1" rel="noopener">Nikkei 225 (NKY INDEX)</a> March rebalance ends end January. There could be three changes at the rebalance with sector balance in focus.</li>
<li>Depending on the changes, passive trackers will need to buy between 6-28x ADV (11-50% of real float) on the inclusions and sell between 2.8-44x ADV on the deletions.</li>
<li>
<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> could be capped at 11% of the index weight and there will be buying in <a href="https://www.smartkarma.com/entities/nitori-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:20386:1" rel="noopener">Nitori Holdings (9843 JP)</a> due to the stepwise addition.</li>
</ul>


The review period for the Nikkei 225 (NKY INDEX) March rebalance ends end January. There could be three changes at the rebalance with sector balance in focus.
Depending on the changes, passive trackers will need to buy between 6-28x ADV (11-50% of real float) on the inclusions and sell between 2.8-44x ADV on the deletions.

Fast Retailing (9983 JP) could be capped at 11% of the index weight and there will be buying in Nitori Holdings (9843 JP) due to the stepwise addition.


Nikkei 225 Index Rebalance Preview (Mar 2024): Ranking, Capping, Funding & Other Changes

<ul>
<li>Cash usage and return targets should be presented to investors along with cost of capital, but few companies can successfully envision future design due to poor planning for growth investments.</li>
<li>Since there’s a significant positive correlation between ROE+DOE and TOPIX, the company should optimize its cash allocation by demonstrating enhanced shareholder returns until it can design a growth investment plan.</li>
<li>Ajinomoto, which provided cost of capital projections and ROIC targets by business segment, should be commended for its constant communication with investors seeking better disclosure in good times and bad.</li>
</ul>


Cash usage and return targets should be presented to investors along with cost of capital, but few companies can successfully envision future design due to poor planning for growth investments.
Since there’s a significant positive correlation between ROE+DOE and TOPIX, the company should optimize its cash allocation by demonstrating enhanced shareholder returns until it can design a growth investment plan.
Ajinomoto, which provided cost of capital projections and ROIC targets by business segment, should be commended for its constant communication with investors seeking better disclosure in good times and bad.


Return Targets and Use of Cash Should Be Disclosed Together with Cost of Capital

<ul>
<li>An ad hoc <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a> rebalance will be implemented at the close on 17 October with <a href="https://www.smartkarma.com/entities/light-wonder-inc-7e7d040f-e811-4fb9-9710-796a39af299e" target="_blank" data-smartkarma-citation="entities:40171:1" rel="noopener">Light &amp; Wonder (LNW AU)</a> replacing <a href="https://www.smartkarma.com/entities/united-malt-group-ltd" target="_blank" data-smartkarma-citation="entities:29116:1" rel="noopener">United Malt Group Ltd (UMG AU)</a>. </li>
<li>The rebalances of <a href="https://www.smartkarma.com/entities/wisdomtree-emerging-markets-146edc02-f8a5-4ac5-968b-5f0f7c89e476" target="_blank" data-smartkarma-citation="entities:32683:1" rel="noopener">Wisdomtree Emerging Markets (DEM US)</a>, <a href="https://www.smartkarma.com/entities/wisdomtree-em-small-cap" target="_blank" data-smartkarma-citation="entities:32679:1" rel="noopener">Wisdomtree Em Small Cap (DGS US)</a> and <a href="https://www.smartkarma.com/entities/wisdmtree-emerg-mkt-ex-st-ow" target="_blank" data-smartkarma-citation="entities:32798:1" rel="noopener">Wisdmtree Emerg Mkt Ex-St Ow (XSOE US)</a> will be implemented on 18 October.</li>
<li>There were net outflows from onshore China ETFs with inflows to larger cap ETFs and outflows mainly from the <a href="https://www.smartkarma.com/entities/csi-smallcap-500-index-shang" target="_blank" data-smartkarma-citation="entities:35347:1" rel="noopener">CSI Smallcap 500 Index</a> and CSI 1000 Index trackers.</li>
</ul>


An ad hoc S&amp;P/ASX 200 (AS51 INDEX) rebalance will be implemented at the close on 17 October with Light &amp; Wonder (LNW AU) replacing United Malt Group Ltd (UMG AU). 
The rebalances of Wisdomtree Emerging Markets (DEM US), Wisdomtree Em Small Cap (DGS US) and Wisdmtree Emerg Mkt Ex-St Ow (XSOE US) will be implemented on 18 October.
There were net outflows from onshore China ETFs with inflows to larger cap ETFs and outflows mainly from the CSI Smallcap 500 Index and CSI 1000 Index trackers.


Index Rebalance & ETF Flow Recap: HSCEI, HSTECH, TOPIX FFW, SSE50, AS51, ChiNext, Kenedix, Liontown

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 Rift Between Managers and Shareholders of Standard Market-Listed Companies Is Likely to Deepen

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Parent-Subsidiary Listing Strategy Expected to Be Even More Attractive

I would like to discuss the issues on the September 29th Nikkei Shimbun article, "Subsidiaries negotiate with parent companies one after the other...

Metrical Inc

Nikkei 225 Index Rebalance Preview (Mar 2024): Ranking, Capping, Funding & Other Changes

There could be 3 changes in March + Fast Retailing capping. Stepwise inclusion of Nitori too. Socionext could be an add if it splits its stock. As...

Brian Freitas

Return Targets and Use of Cash Should Be Disclosed Together with Cost of Capital

I would like to discuss the issues of the September 18 Nikkei article, "Companies Sharpen Awareness of Cost of Capital."

Metrical Inc

Index Rebalance & ETF Flow Recap: HSCEI, HSTECH, TOPIX FFW, SSE50, AS51, ChiNext, Kenedix, Liontown

This recap highlights Insights covering Asian index rebalances (announcements/ forecasts/ IPO Fast Entry/ M&A driven changes). We also highlight...

Brian Freitas