Brief Japan: TSE’s Market Structure Review: Public Comments As Expected, But Miss The Mark and more

In this briefing:

1. TSE’s Market Structure Review: Public Comments As Expected, But Miss The Mark
2. Pan Pacific/Don Quijote: Bringing Joy into Shopping
3. China’s New Semiconductor Thrust – Part 1: Why and How?
4. Mercari: Why Mercari Is Likely to Be a Winner in the Cashless Wars
5. Last Week in GER Research: Lyft, Rakuten, Lynas, Yunji IPO, Xinyi IPO and Ruhnn IPO

1. TSE’s Market Structure Review: Public Comments As Expected, But Miss The Mark

Late last December after a Nikkei article on 21 December titled  Tokyo Stock Exchange’s big board about to get a lot smaller suggested the TSE would boot up to 1500 stocks from TOPIX, which now boasts 2130+ members – far more than major indices in other developed markets.

The same day, the TSE released a  Consultation Paper “Review of the TSE Cash Equity Market Structure” (Paper, and Data presentation).

My conclusion (in Big Trouble in Little Stocks? TSE Mulls Changing TOPIX almost three months ago) was that there was no good news to be had in bulk on small cap stocks relative to large cap stocks unless they made it clear they’d use the opportunity to buy back stock, etc.

In the interim, there has been considerable speculation about the eventual disposition of smallcap stocks. There was an extensive Toyo Keizai article in early March which pointed to stocks below a market cap of ¥100 billion being possibly excluded from the “step-up” market. There was a Nikkei article on March 15 which suggested that the “limit” might be considerably lower – perhaps ¥25 billion – and that the limit might have other softer elements such as a requirement to deliver or release company reports in English. There have been other ‘non-financial elements’ suggested as well, such as independent director count, cross-holding policies, etc. 

It is not clear whether the substantially different reports are the rival speculations of different media enterprises, or the rival agendas of different factions within the power structures who may care (the TSE, FSA, Keidanren, JPFA, JSDA, brokers themselves, a whole raft of small companies, the Securities documentation printing houses, etc).

There are theoretically a lot of vested interests in keeping a very large number of companies listed, and a very large number of companies in widely-followed/tracked indices. Brokers get money from being underwriters on deals. The more companies there are the more deals there are. Brokers also make money by providing the stock loan access for investors who want to go short stocks. If 1500 small stocks are removed from a broad index, it will become incrementally more difficult to borrow them – to make markets or go short. The documentation printing houses charge each company for adapting their financial statements and reports into the regulator-mandated formats and uploading them, running the IR sections of their websites, etc. On the other hand, if half the listed companies in Japan were simply to decide that they’d be better off if they merged into other large companies, then those providers would lose big. Some of the more aggressive local stewards and governance hounds are all for much more rigorous standards. 

The New News

Last week the TSE released a document outlining the Comments Received from Market Participants in Response to the Review of the TSE Cash Equity Market Structure along with their version of a Summary.

The two-page Summary is actually not a bad recap of the issues, BUT… there’s more.

There is a fair bit of pent-up expectation that there will be selling of small caps. There is a need to see improvement in governance, independence, board structure, and capital stewardship by a very large number of companies in Japan, and small companies outside MOTHERS are often viewed as lacking in effort to improve governance so the reason why there could be selling.

However, it is not clear there needs to be any selling, which is somewhat counterintuitive.

2. Pan Pacific/Don Quijote: Bringing Joy into Shopping

• Japanese Retail is in a secular decline: There are areas in retail that are worse affected than the rest
• Falling foot traffic: The biggest problem for Japanese retail
• Don Quijote’s recent history and growth potential
• Attracting shoppers from multiple store formats helps Don Quijote to expand its target market
• Don Quijote is least affected from slowdown in Chinese tourist spending
• FamilyMart UNY store conversions to contribute to revenue and EBIT growth over the next five years
• New store openings to cap at 25 per year because of UNY store conversions
• Valuation: Market unjustly penalized Don Quijote for the UNY acquisition
• Change in retail landscape to help make Don Quijote the “DON” in Japanese retail

3. China’s New Semiconductor Thrust – Part 1: Why and How?

China’s current efforts to gain prominence in the semiconductor market targets memory chips – large commodities.  This three-part series of insights examines how China determined its strategy and explains which companies are the most threatened by it.

In the first part of this series we will see what motivated China to enter the market and how it plans to do so.

4. Mercari: Why Mercari Is Likely to Be a Winner in the Cashless Wars

While we have been sceptical about Mercari Inc (4385 JP)‘s efforts in the US, we have always appreciated the domestic business and have only been put off by the rather demanding multiples. After speaking to the company, we continue to like the domestic business and feel that recent initiatives to broaden the user base are likely to be successful. In addition, while we still feel that there are numerous question marks about whether the business model can work in the US, we have come around to a more positive view on the company’s execution there. Lastly, we believe Merpay’s edge in the cashless wars is underappreciated and the fall in the share price is starting to make the stock attractive.

We discuss the details below.

5. Last Week in GER Research: Lyft, Rakuten, Lynas, Yunji IPO, Xinyi IPO and Ruhnn IPO

Below is a recap of the key analysis produced by the Global Equity Research team. This week, we update on Lyft Inc (LYFT US) now that it is below its IPO price and remind of the potentially muted impact for strategic holder Rakuten Inc (4755 JP). On the M&A front, Arun digs into the conditional deal for Lynas Corp Ltd (LYC AU) from Wesfarmers Ltd (WES AU). With regards to IPO research, we initiate on e-commerce player Yunji Inc. (YJ US) and solar company Xinyi Energy Holdings Ltd (1671746D HK) while we update on the IPO valuation of Ruhnn Holding Ltd (RUHN US). 

In addition, we have provided an updated calendar of upcoming catalysts for EVENT driven names below. 

Best of luck for the new week – Arun, Venkat and Rickin