In this briefing:
- Big Trouble in Little Stocks? Maybe TSE Mulls Changing TOPIX
- Pasona Non-Grata
- Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon?
- Jardine C&C (JCNC SP): Close the Stub Trade
- Japan: 2018 Sector Review – Down, Down, Deeper & Down
1. Big Trouble in Little Stocks? Maybe TSE Mulls Changing TOPIX
A Nikkei Asian Review article on 21 December titled Tokyo Stock Exchange’s big board about to get a lot smaller suggesting the TSE would boot up to 1500 stocks from TOPIX, which now boasts 2130+ members – far more than major indices in other developed markets.
Since November, a dedicated internal panel (“Advisory Group to Review TSE Cash Equity Market Structure”) has been addressing the issues, trying to make Tokyo’s stock market more attractive for international investors. Some of the proposals raised include a market cap cutoff of ¥50 billion or ¥100 billion of which there were on that date 1,000 companies and 620 companies respectively.
The same day, the TSE released a Consultation Paper “Review of the TSE Cash Equity Market Structure”. There is the Paper and the Data presentation which accompanies it. And the Consultation Paper invites public comments through 31 January (contact the Listing Department at [email protected]).
The introduction makes clear the goal. The part below is underlined in the original document.
Taking into account the role the market structure plays, it is important that TSE reviews the market structure in order to further incentivize listed companies to proactively improve their overall value as corporation, in addition to further attracting diverse global and domestic investors by providing attractive investment opportunities. Conducting a review of the market structure, with the aim of supporting the se roles, will further contribute to the development of a sustainable capital market, and by extension, the wider Japanese economy.
That paragraph tells you all you need to know.
It Has Been Decided That Something Must Be Done So Something Will Be Done.
The Consultation Paper and the Data presentation accompanying it discuss the current market structure (with four “listing” markets including the TSE1, TSE2, MOTHERS, and JASDAQ (including sub markets), making it clear that…
- biotech companies which need R&D capital should be allowed to list in order to raise capital, but pointing out that small companies which are already in existence for many years which list just because they want to are not
- the requirements for reassignment from JASDAQ, MOTHERS or TSE2 to the First Section (the “step-up market” to which all major companies should aspire) are too low, and many companies which should not be admitted to the top ranks because of weak internal management structure or corporate governance end up there anyway,
- delisting requirements and procedures may not function properly and should be reviewed,
- the ability for shareholders to trade the “pink sheets”, “green sheets”, or delisted stocks is insufficient.
- the requirements for listing and liquidity on JASDAQ are insufficient.
I would note that the Consultation Paper does not address the ¥50 billion or ¥100 billion question. The fact that the Nikkei does so tells you where they want to go with this.
- The TSE is not suggesting that small companies shouldn’t be allowed to list.
- The TSE clearly defines three types of companies – 1) risky companies without profits but great need for capital to grow, 2) established companies where capital need is lower and market investment may be made by more risk-averse investors, and 3) the “step-up market” – the big leagues.
- The Paper asks investors what should be the listing criteria for each group and the treatment of those companies which no longer meet the listing criteria. Then it asks about delisting criteria.
- Effectively, the goal of making such changes to minimum market cap would be to…
- make TOPIX (which is an index consisting of all members of the TSE First Section) a “better” index which would look more like the S&P500. That would make TOPIX more like the indices commonly used by foreign investors – such as MSCI Japan and FTSE Japan.
- provide two markets for smaller companies – one for growth companies without profits or track record and one for established companies with a track record.
The “Call for Comment” questions in each section point you to the overall conclusions and destination and ask you, the investor, what limits should be placed to light the way there. Investors with an interest in market structure should think about how best to respond.
- Should parent-controlled subsidiaries be allowed to list when the parent owns more than 50%?
- Should all TSE1 companies be required to release extensive company data and documentation online? in English?
- Should companies which breach the public trust through scandal – such as Seibu Rail, Kanebo, and Olympus years ago or Toshiba more recently – be permitted to stay listed? (Seibu and Kanebo were delisted, Olympus and Toshiba stayed listed)
- What constitutes a situation where delisting should be mandatory?
The language of the Paper and the way the Call for Comment questions are framed tells me the “results” are already known and the results of the Public Comment period will simply be flavoring.
There will be a three-tier market – something akin to MOTHERS, something akin to TSE2 for “established companies”, and something like the TSE First Section which will be beefed up (stricter criteria) and slimmed down (fewer companies).
Whether governance is improved through limits on subsidiary holdings by parent companies, or criteria for independent directors, or more extensive documentation (and in English) is up to investors. If they make enough noise, this could happen.
Most important for traders and investors are the market impacts from potential changes to TSE First Section. If the TSE mandates that listing requires companies to have a market cap of ¥100 billion, the change…
- will have a profound effect on the supply/demand metrics for a large number of companies. THAT will create dislocations.
- possibly prompt consolidation over time. The limited ability of small companies to access TSE1 listing because of insufficient size or dollar value of daily liquidity may cause mergers.
- could have profound effects on the Nikkei 225 if done right.
2. Pasona Non-Grata
PASONA NON-GRATA
![](https://static-prod.smartkarma.com/images/media/000/074/451/original/2019-01-03_11-03-09.png?1546481000)
Source: Japan Analytics
ROUND TRIP – Temporary staffing company Pasona (2168 JP)‘s shares have completed a year-long ’round trip’ after reaching Overbought territory one year ago following the launch of an ‘engagement campaign’ by the activist investor, Oasis. In May 2018, the company took advantage of its elevated share price to sell 2.3m shares (of which 2m were Treasury Shares), prompting a sharp correction in the share price. In recent months, the shares have languished as the company’s business performance has begun to deteriorate, reaching an 18-month low of 1,008 on 25th December, before rebounding 12% to close the year at ¥1,126.
HOLDCO DISCOUNT – According to the Smartkarma HoldCo Monitor, Pasona has the largest ‘ListCo as a % of Market Cap’ percentage at 365%, and the second-largest ‘Discount to Net Asset Value’ (78%) of the 77 companies that are tracked. With Pasona’s interim results due to be released on Friday 11th, January, the Insight will look at the company’s recent business performance, offer some guidelines for valuing the company and make two stock-specific recommendations. The format follows that of our recent Insight on GMO Internet.
3. Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon?
It was reported today that Nexon Co Ltd (3659 JP)’s founder Kim Jung-Joo plans to sell a controlling stake in Nexon’s holding company NXC Corp for at least 10 trillion won ($8.9 billion). Kim Jung-Joo and other related parties plan to sell their entire 98.64% stake in NXC Corp, which owns a 47.98% stake in Nexon. The 10 trillion won or more anticipated acquisition price for NXC Corp would include a significant management premium. Nexon Group’s shareholding structure is basically as follows: Kim Jung-Joo → Nexon (Japan) → Nexon Korea → About 10 affiliates.
One of the reasons why the Nexon’s founder Kim Jung-Joo, who is only 50 years old, is trying to sell his entire stake in Nexon may have been due to the recent allegations about him giving about $380,000 worth of Nexon stock (prior to its listing) to his old high school classmate (who is now a senior public prosecutor) for free. Kim Jung-Joo has repeatedly faced allegations and attended numerous court hearings on this matter in the past two years. He may have gotten a bit tired from all these allegations.
Given the enormous size of this acquisition, the two leading Korean game companies including NCsoft Corp (036570 KS) and Netmarble Games (251270 KS) are not likely to purchase Nexon. Rather, the leading contender to buy Nexon right now is likely to be Tencent Holdings (700 HK). The sheer huge size of this deal will represent one of the largest M&A deals in Asia in 2019.
4. Jardine C&C (JCNC SP): Close the Stub Trade
In my original insight on October 17, 2018 TRADE IDEA – Jardine Cycle & Carriage (JCNC SP) Stub , I proposed setting up a stub trade to profit from volatility in the markets that caused the Jardine Cycle & Carriage (JCNC SP) stub to trade at a historically low discount to NAV. During the 78 calendar days that followed, Jardine Cycle & Carriage (JCNC SP) has gained 23% and the trade has made 5.03% on the gross notional. I now recommend closing the trade.
In this insight I will discuss:
- Performance of ALL my recommended stub trades
- a post-mortem trade analysis on the JCNC stub
5. Japan: 2018 Sector Review – Down, Down, Deeper & Down
![](https://static-prod.smartkarma.com/images/media/000/074/237/original/2019-01-01_09-45-52.png?1546303583)
Source: Japan Analytics
DOWN, DOWN, DEEPER & DOWN – Japanese equities were as unfashionable as the venerable ‘Quo’ in 2018, although all of the year’s decline occurred in the fourth quarter. Our All-Market-Composite fell by 16.1%, only three sectors – REITs, Utilities and Telecoms – rose and four sectors – Metals, Building Materials, Technology Hardware and Machinery – fell by more than 30%. All of the sixteen outperforming sectors are domestically-orientated, and only two – Other Commercial Products and Other Consumer Products are manufacturing sectors. With no end in sight to the Bank of Japan’s accommodation, interest rates remained at historically-depressed levels and provided no respite to financial sectors. Construction and Building Materials declined as the pre-Olympic construction order cycle peaked out, although Real Estate outperformed as office vacancy rates and rents reached three-decade new lows and new highs, respectively. The largest fourth-quarter declines were in the Energy, Internet, Information Technology and Commercial Services sectors and now offer some attractive stock-specific opportunities.
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