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>In the last two months, <a href="https://www.smartkarma.com/entities/amvis-holdings-inc" target="_blank" data-smartkarma-citation="entities:31511:1" rel="noopener">Amvis Holdings Inc (7071 JP)</a>, <a href="https://www.smartkarma.com/entities/axxzia-inc" target="_blank" data-smartkarma-citation="entities:31482:1" rel="noopener">AXXZIA Inc (4936 JP)</a>, and <a href="https://www.smartkarma.com/entities/sosei-group-corp" target="_blank" data-smartkarma-citation="entities:770:1" rel="noopener">Sosei Group (4565 JP)</a> have confirmed their moves to the Prime Market.</li>
<li>These names appeared in our lists (A or B) of candidates with high "readiness" for TOPIX Inclusions in our recent insights.</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.
In the last two months, Amvis Holdings Inc (7071 JP), AXXZIA Inc (4936 JP), and Sosei Group (4565 JP) have confirmed their moves to the Prime Market.
These names appeared in our lists (A or B) of candidates with high "readiness" for TOPIX Inclusions in our recent insights.


TOPIX Inclusions: Who Is Ready (Apr 2023)

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>ROE has not risen at the pace expected, but dividends have begun to increase, and in FY2021 DOE rose to the 3% range for the first time.</li>
<li>While ROE alone will not surpass the record high of FY2017, ROE plus DOE (ROE+DOE) is expected to slightly surpass the record high of FY2017 in FY2022.</li>
<li>Even in FY2021, when DOE increased, Equity Ratio increased (and total assets also increased), so there is still room to increase shareholder returns, given that cash on hand increased.</li>
</ul>


ROE has not risen at the pace expected, but dividends have begun to increase, and in FY2021 DOE rose to the 3% range for the first time.
While ROE alone will not surpass the record high of FY2017, ROE plus DOE (ROE+DOE) is expected to slightly surpass the record high of FY2017 in FY2022.
Even in FY2021, when DOE increased, Equity Ratio increased (and total assets also increased), so there is still room to increase shareholder returns, given that cash on hand increased.


ROE up Modestly, but ROE Plus DOE Is Expected to Reach a Record High This Fiscal Year

<ul>
<li>For Japanese companies that take time to take action while watching their surroundings, it's skeptical of the expectation that individual managers will initiate measures in response to a "TSE request.</li>
<li>The shift from deflation to inflation won't only affect company's profit structure and balance-sheet, but will also force Japanese companies to change as it resets the mindset of all managers.</li>
<li>Since there's little economic rationale for holding cash under inflation, all companies, rather than individual management decisions, will be forced to use cash for investment in growth and shareholder returns.</li>
</ul>


For Japanese companies that take time to take action while watching their surroundings, it's skeptical of the expectation that individual managers will initiate measures in response to a "TSE request.
The shift from deflation to inflation won't only affect company's profit structure and balance-sheet, but will also force Japanese companies to change as it resets the mindset of all managers.
Since there's little economic rationale for holding cash under inflation, all companies, rather than individual management decisions, will be forced to use cash for investment in growth and shareholder returns.


Changing Japanese Companies Is Not TSE Request but Inflation that Changes Mindset of All Managers

<ul>
<li>Not because TSE requires it, but because management should provide shareholders with a concrete plan and outlook for cash allocation based on the company's growth stage and the external environment.</li>
<li>For companies that disclosed improvement measures before TSE requested them and saw their stock price rise significantly, the sustainability of the stock price depends on the feasibility of the plan.</li>
<li>The stock market jumped the gun and rallied in anticipation of the company's announcement of feasible plan as expected, even though the company has yet to disclose any improvement plan.</li>
</ul>


Not because TSE requires it, but because management should provide shareholders with a concrete plan and outlook for cash allocation based on the company's growth stage and the external environment.
For companies that disclosed improvement measures before TSE requested them and saw their stock price rise significantly, the sustainability of the stock price depends on the feasibility of the plan.
The stock market jumped the gun and rallied in anticipation of the company's announcement of feasible plan as expected, even though the company has yet to disclose any improvement plan.


Can Many Companies that over Years Could Not Suddenly Transform Themselves Thanks to TSE Requests?

<ul>
<li>Even though OP Margin has been stagnant, NP Margin has improved due to the corporate tax rate cut, and the increased free cash flow has been less directed to investments.</li>
<li>The fact that OP Margin didn’t rise much while personnel and R&amp;D costs were curbed and there wasn't much investment simply implies a lower gross margin in the core business.</li>
<li>With ROE growth sluggish and cash accumulating, it's reasonable that investors demand further shareholder returns. If asset turnover declines while OP Margin slows, there's little reason to hold cross-held shares.</li>
</ul>


Even though OP Margin has been stagnant, NP Margin has improved due to the corporate tax rate cut, and the increased free cash flow has been less directed to investments.
The fact that OP Margin didn’t rise much while personnel and R&amp;D costs were curbed and there wasn't much investment simply implies a lower gross margin in the core business.
With ROE growth sluggish and cash accumulating, it's reasonable that investors demand further shareholder returns. If asset turnover declines while OP Margin slows, there's little reason to hold cross-held shares.


Shouldn't Shareholders Raise Voice for a Company that Is Building up Cash While Its ROE Is Sluggish?

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)

TOPIX Inclusions: Who Is Ready (Apr 2023)

Amvis and Sosei will have TOPIX Inclusion events at the end of April 2023. Celsys has gained slightly and is close to being fully ready. There is...

Janaghan Jeyakumar, CFA

ROE up Modestly, but ROE Plus DOE Is Expected to Reach a Record High This Fiscal Year

I would like to discuss the issues on the March 8 Nikkei article, "40% of Companies to Raise Dividends in FY2023 Forecast; Total Dividends to Reach...

Metrical Inc

Changing Japanese Companies Is Not TSE Request but Inflation that Changes Mindset of All Managers

I would like to discuss the issues on the March 8 Nikkei article, "The Truth Behind Japan's Stock Market Solo Surge: Overseas Investors' Interest...

Metrical Inc

Can Many Companies that over Years Could Not Suddenly Transform Themselves Thanks to TSE Requests?

I would like to discuss the issues on the March 8 Nikkei article, "Top share price gainers among low P/B stocks are those with expanded shareholder...

Metrical Inc

Shouldn't Shareholders Raise Voice for a Company that Is Building up Cash While Its ROE Is Sluggish?

I would like to discuss the issues on the March 6 Nikkei article, "ROE as a Resume of Japanese Companies: Struggle with 'Global' Continues."

Metrical Inc