Senior Technology Analyst, Japanese Equities, LightStream Research

Scott Foster

Senior Technology Analyst, Japanese Equities

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

<ul>
<li>Share price up almost 30% since mid-July. Q1 results and FY Mar-23 guidance discounted. Look to the long term when this advance has been consolidated.</li>
<li>Focus on MLCCs for electric vehicles, new factories in Japan and the weak yen counter smartphone and PC/server slowdown. Capacity expansion in India also positive. </li>
<li>Alliance with CATL underscores the company's "China Plus Alpha" strategy. China for batteries, Japan for MLCCS, India for long-term growth potential. </li>
</ul>


Share price up almost 30% since mid-July. Q1 results and FY Mar-23 guidance discounted. Look to the long term when this advance has been consolidated.
Focus on MLCCs for electric vehicles, new factories in Japan and the weak yen counter smartphone and PC/server slowdown. Capacity expansion in India also positive. 
Alliance with CATL underscores the company's "China Plus Alpha" strategy. China for batteries, Japan for MLCCS, India for long-term growth potential. 


Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>Berkshire appears set to exit <a href="https://www.smartkarma.com/entities/byd-co-ltd-h" target="_blank" data-smartkarma-citation="entities:20962:1" rel="noopener">BYD (1211 HK)</a> partially or in full. But why signal to market well in advance?</li>
<li>
<a href="https://www.smartkarma.com/entities/united-tractors-tbk-pt" target="_blank" data-smartkarma-citation="entities:698:1" rel="noopener">United Tractors (UNTR IJ)</a>'s buyback should be impactful. They could do another one afterwards as they have lots of cash. This is a raging buy. Buy now. With both hands.</li>
<li>The BOJ was expected to change its ETF allocations. It stopped buying Nikkei 225 and JPX Nikkei 400 ETFs. As the world moves more to passive, expect float to decrease.</li>
</ul>


Berkshire appears set to exit BYD (1211 HK) partially or in full. But why signal to market well in advance?

United Tractors (UNTR IJ)'s buyback should be impactful. They could do another one afterwards as they have lots of cash. This is a raging buy. Buy now. With both hands.
The BOJ was expected to change its ETF allocations. It stopped buying Nikkei 225 and JPX Nikkei 400 ETFs. As the world moves more to passive, expect float to decrease.


Last Week in Event SPACE: BYD, Astra/United Tractor, Japan Passive, AGL, Genting Singapore

Travis Lundy

NTT (Nippon Telegraph & Telephone) / Event-Driven

NTT (Nippon Telegraph & Telephone) (9432 JP)

<ul>
<li>2022 Version of JAPAN PASSIVE: Who Owns What? where we break down the major (and minor) passive tracking indices and which category of investor owns how much of each. </li>
<li>Even if you do not "play" index changes, understanding impact is important. <a href="https://www.smartkarma.com/entities/japan-exchange-group-inc" target="_blank" data-smartkarma-citation="entities:11266:1" rel="noopener">Japan Exchange Group (8697 JP)</a> entered Nikkei 225 in July 2020 after rising 30%. That was the top.</li>
<li>Understanding the nature of the ownership and flows is crucial to understanding how to trade certain stocks. </li>
</ul>


2022 Version of JAPAN PASSIVE: Who Owns What? where we break down the major (and minor) passive tracking indices and which category of investor owns how much of each. 
Even if you do not "play" index changes, understanding impact is important. Japan Exchange Group (8697 JP) entered Nikkei 225 in July 2020 after rising 30%. That was the top.
Understanding the nature of the ownership and flows is crucial to understanding how to trade certain stocks. 


<ul>
<li>Good 1H results led to an upward revision to FY Mar-22 sales and profit guidance. Geared to both digital and energy transformations.</li>
<li>Higher R&amp;D spending limits short-term profits but should contribute to long-term growth, particularly in rechargeable batteries.</li>
<li>Selling at a discount to main comparable Murata Mfg (6981 JP). 30% potential upside.</li>
</ul>


Good 1H results led to an upward revision to FY Mar-22 sales and profit guidance. Geared to both digital and energy transformations.
Higher R&amp;D spending limits short-term profits but should contribute to long-term growth, particularly in rechargeable batteries.
Selling at a discount to main comparable Murata Mfg (6981 JP). 30% potential upside.


TDK (6762 JP): Sales & Profits Rebounding, Relatively Cheap

Every year (usually in the beginning of September), the Nikkei Inc Index team conducts an annual review of the major price-weighted Nikkei indices - the most important being the Nikkei 225 Average - and adds and subtracts constituents according to the Rules.
Today, they announced the 2021 version of the changes (<a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_1.pdf" target="_blank" rel="noopener">announcement</a>, <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_3.pdf" target="_blank" rel="noopener">PAF changes</a>).
Below is Some Background. If you want to skip ahead to the juicy analysis, you can jump ahead to the Changes Announced section just below, and then more below the fold.
<h3>Some Background</h3>
The Nikkei 225, well-known globally as "the Nikkei" is a price-weighted index, originally started nearly 70 years ago as an average of a selected number of stocks listed on the TSE First Section. Later, it became 225 members. 
Because it is price-weighted, and because for a long time it made no divisor adjustments for stock splits (so when a stock split 2:1 its weight fell by half because price fell by half and trackers had to sell half their shares in that stock), and the price multiplier was determined by the par value of a company, then they later they started adjusting for splits, stocks which are old, never split, AND have a high price end up having a high weight in the index. 
There was a huge reshuffle in April 2000 when the Nikkei decided that the system needed rebalancing to include more tech, so they changed the Rules. They pushed 30 names out and 30 names in, and the 30 names added were 50% of the new index. 
Twenty one years after the prior change in methodology, this past May 10 the Nikkei Inc Index Team announced new changes to the Rules. There was a <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_1.pdf" target="_blank" rel="noopener">proposal</a>, with an <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_3.pdf" target="_blank" rel="noopener">FAQ</a>, and <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210510E_2.pdf" target="_blank" rel="noopener">supplemental data</a>. On 5 July, the Nikkei confirmed the proposal with a new <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210705E_1.pdf" target="_blank" rel="noopener">Guidebook</a>.
When I wrote about this on 10 May in <a href="https://www.smartkarma.com/insights/after-20yrs-nikkei-225-proposes-minor-impact-rule-changes-nintendo-disappointment" target="_blank" data-smartkarma-citation="insights:51277" rel="noopener">After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?)</a> I said I thought the changes disappointing. There are real problems with the index and this did not do much; the changes are evolutionary rather than revolutionary, with the only interesting change being that constituents are added with a weight no greater than 1%. If the normal price adjustment factor would allow a constituent to enter at a weight greater than 1%, the Price Adjustment Factor (base 1) is lowered in increments of 0.1 so that the deemed inclusion weight on Base Date (end of July) is no more than 1%. There is no change to the idea that the Nikkei Index Team can override their rankings at any time as they see fit.
Because the Nikkei Index Team had let the sector balances and rankings slide quite a bit over the years (not adding "obvious" names and not deleting names which should probably have been deleted, and not rebalancing the sectors as the rules say they should), the possibility was that some names like <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a> and similar high-price-low-share-count names which "deserved" to be included were not simply because their very high price would create undue impact (it was undue impact and the lack of incremental float for high-weight low-share-count names which caused the BOJ to lower, then eventually cease their buying of Nikkei 225 ETFs). This rule on capping inclusions at 1% would go a ways to mitigating that problem so that would allow the Nikkei to add previously un-addable names. Expectations were high on a group of names, with <a href="https://www.smartkarma.com/entities/nintendo-co-ltd" target="_blank" data-smartkarma-citation="entities:5415:1" rel="noopener">Nintendo Co Ltd (7974 JP)</a>, <a href="https://www.smartkarma.com/entities/keyence-corp" target="_blank" data-smartkarma-citation="entities:3077:1" rel="noopener">Keyence Corp (6861 JP)</a>, <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a>, and probably <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a>, with the latter two likely to create some real froth if actually selected. 
<h2>The Changes Announced</h2>
Today after the close, the Nikkei Index Team announced the following changes to the Nikkei 225 Average as a result of the Annual Review:
<section class="figure">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/056/original/Screenshot+2021-09-06+at+5.11.07+PM.png?1630919479" class="editor-image img-responsive" data-smartkarma-image-id="228056"></figure>
</section>
<section class="figure">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/228/055/original/Screenshot+2021-09-06+at+5.06.02+PM.png?1630919179" class="editor-image img-responsive" data-smartkarma-image-id="228055"></figure>

</section>
The changes will be made on the last trading day of September, at the close. I expect to see $10bn trade on that day.
The new rules allow the Nikkei Index team to not do a lot to the sector mix if the additions are made because of "High Liquidity" because while the sector mix would normally mean more than three deleted, the new rules cap changes at 3 per annual rebalance (which is not enough).
As noted above, <a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a> and <a href="https://www.smartkarma.com/entities/oriental-land-co-ltd" target="_blank" data-smartkarma-citation="entities:13517:1" rel="noopener">Oriental Land (4661 JP)</a> were among names which were expected as possible inclusions and therefore a certain amount of pre-positioning may be in place. They may get somewhat hurt tomorrow.
<div class="content-highlight">
There are a LOT of moving parts here. There are 3 ADDs, 3 DELETIONS, 1 Price Adjustment Factor moved sharply higher and one moved somewhat lower (a list of all the PAFs announced by the Nikkei is <a href="https://indexes.nikkei.co.jp/nkave/archives/news/20210906E_3.pdf" target="_blank" rel="noopener">here</a>), then there are another 220 stocks which will see selling on 30 September at the rebalance. 
</div>
For more detailed analysis of the stocks, their positioning, how much to buy, etc, please read on.
<hr>
For more about passive tracking in Japan, please refer to <a href="https://www.smartkarma.com/insights/japan-passive-who-owns-what-2021" target="_blank" data-smartkarma-citation="insights:55008" rel="noopener">JAPAN PASSIVE: Who Owns What 2021?</a>

Every year (usually in the beginning of September), the Nikkei Inc Index team conducts an annual review of the major price-weighted Nikkei indices - the most important being the Nikkei 225 Average - and adds and subtracts constituents according to the Rules.
Today, they announced the 2021 version of the changes (announcement, PAF changes).
Below is Some Background. If you want to skip ahead to the juicy analysis, you can jump ahead to the Changes Announced section just below, and then more below the fold.
Some Background
The Nikkei 225, well-known globally as "the Nikkei" is a price-weighted index, originally started nearly 70 years ago as an average of a selected number of stocks listed on the TSE First Section. Later, it became 225 members. 
Because it is price-weighted, and because for a long time it made no divisor adjustments for stock splits (so when a stock split 2:1 its weight fell by half because price fell by half and trackers had to sell half their shares in that stock), and the price multiplier was determined by the par value of a company, then they later they started adjusting for splits, stocks which are old, never split, AND have a high price end up having a high weight in the index. 
There was a huge reshuffle in April 2000 when the Nikkei decided that the system needed rebalancing to include more tech, so they changed the Rules. They pushed 30 names out and 30 names in, and the 30 names added were 50% of the new index. 
Twenty one years after the prior change in methodology, this past May 10 the Nikkei Inc Index Team announced new changes to the Rules. There was a proposal, with an FAQ, and supplemental data. On 5 July, the Nikkei confirmed the proposal with a new Guidebook.
When I wrote about this on 10 May in After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?) I said I thought the changes disappointing. There are real problems with the index and this did not do much; the changes are evolutionary rather than revolutionary, with the only interesting change being that constituents are added with a weight no greater than 1%. If the normal price adjustment factor would allow a constituent to enter at a weight greater than 1%, the Price Adjustment Factor (base 1) is lowered in increments of 0.1 so that the deemed inclusion weight on Base Date (end of July) is no more than 1%. There is no change to the idea that the Nikkei Index Team can override their rankings at any time as they see fit.
Because the Nikkei Index Team had let the sector balances and rankings slide quite a bit over the years (not adding "obvious" names and not deleting names which should probably have been deleted, and not rebalancing the sectors as the rules say they should), the possibility was that some names like Nintendo Co Ltd (7974 JP) and similar high-price-low-share-count names which "deserved" to be included were not simply because their very high price would create undue impact (it was undue impact and the lack of incremental float for high-weight low-share-count names which caused the BOJ to lower, then eventually cease their buying of Nikkei 225 ETFs). This rule on capping inclusions at 1% would go a ways to mitigating that problem so that would allow the Nikkei to add previously un-addable names. Expectations were high on a group of names, with Nintendo Co Ltd (7974 JP), Keyence Corp (6861 JP), ZOZO Inc (3092 JP), and probably Oriental Land (4661 JP), with the latter two likely to create some real froth if actually selected. 
The Changes Announced
Today after the close, the Nikkei Index Team announced the following changes to the Nikkei 225 Average as a result of the Annual Review:







The changes will be made on the last trading day of September, at the close. I expect to see $10bn trade on that day.
The new rules allow the Nikkei Index team to not do a lot to the sector mix if the additions are made because of "High Liquidity" because while the sector mix would normally mean more than three deleted, the new rules cap changes at 3 per annual rebalance (which is not enough).
As noted above, ZOZO Inc (3092 JP) and Oriental Land (4661 JP) were among names which were expected as possible inclusions and therefore a certain amount of pre-positioning may be in place. They may get somewhat hurt tomorrow.

There are a LOT of moving parts here. There are 3 ADDs, 3 DELETIONS, 1 Price Adjustment Factor moved sharply higher and one moved somewhat lower (a list of all the PAFs announced by the Nikkei is here), then there are another 220 stocks which will see selling on 30 September at the rebalance. 

For more detailed analysis of the stocks, their positioning, how much to buy, etc, please read on.

For more about passive tracking in Japan, please refer to JAPAN PASSIVE: Who Owns What 2021? 

2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, 'Skupper' OUT

Japan

TDK CORPORATION manufactures electronics components such as magnetic tapes and ferrite cores.  The Company also sells power supplies, inductors, transformers, ceramic capacitors, magnets, LAN (Local Area Network) components, sensors, and semiconductors.  TDK markets its products worldwide.

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TDK Corp (6762 JP)

TDK (6762 JP): Getting Ahead of Itself

Strong June quarter points to short term profit taking. Focus on EVs and auto electronics, new factories in Japan, weak yen, alliance with CATL and...

Scott Foster

Last Week in Event SPACE: BYD, Astra/United Tractor, Japan Passive, AGL, Genting Singapore

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

JAPAN PASSIVE: Who Owns What 2022?

JAPAN PASSIVE: Who Owns What 2022 Version. This is a mark to market of the passive tracking data from domestic and international investors in...

Travis Lundy

TDK (6762 JP): Sales & Profits Rebounding, Relatively Cheap

Sales and profits rebounding. Higher R&D spending limiting short-term profits but should boost long-term growth in digital and energy...

Scott Foster

2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, 'Skupper' OUT

The Nikkei 225 Rebalance is here. A small surprise in the ADDs. No surprises on the DELETEs. A couple of housekeeping changes, and 600 baskets to...

Travis Lundy

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