Index Rebal/Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Index Rebal/Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Event-Driven

<ul>
<li>JPX-Nikkei 400 is composed of common stocks listed on the Tokyo Stock Exchange. It is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents.</li>
<li>A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. We look at the potential forward inclusions and removals every month.</li>
<li>Below is a look at potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2023 based on trading data as of end-January 2023.</li>
</ul>


JPX-Nikkei 400 is composed of common stocks listed on the Tokyo Stock Exchange. It is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents.
A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. We look at the potential forward inclusions and removals every month.
Below is a look at potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2023 based on trading data as of end-January 2023.


Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Equity Bottom-Up

<ul>
<li>Kazuo Inamori (稲盛和夫), founder of <a href="https://www.smartkarma.com/entities/kyocera-corp" target="_blank" data-smartkarma-citation="entities:753:1" rel="noopener">Kyocera Corp (6971 JP)</a> and <a href="https://www.smartkarma.com/entities/kddi-corp" target="_blank" data-smartkarma-citation="entities:639:1" rel="noopener">KDDI Corp (9433 JP)</a> precursor company DDI (Dai Ni Den Den), and former chairman of JAL overseeing restructuring, has passed.</li>
<li>In his own name, he owns 10.212mm shares of Kyocera, and likely other assets. Inheritance tax would be due 10 months from now. </li>
<li>Kyocera is not blowing out the lights compared to peers, but it is relatively inexpensive to its history and peers. If the shares are sold, Kyocera can buy them.</li>
</ul>


Kazuo Inamori (稲盛和夫), founder of Kyocera Corp (6971 JP) and KDDI Corp (9433 JP) precursor company DDI (Dai Ni Den Den), and former chairman of JAL overseeing restructuring, has passed.
In his own name, he owns 10.212mm shares of Kyocera, and likely other assets. Inheritance tax would be due 10 months from now. 
Kyocera is not blowing out the lights compared to peers, but it is relatively inexpensive to its history and peers. If the shares are sold, Kyocera can buy them.


Kyocera (6971 JP) Founder Kazuo Inamori Passes - Implications for Holdings

<ul>
<li>JPX-Nikkei 400 is composed of common stocks listed on the Tokyo Stock Exchange. It is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents.</li>
<li>A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. We look at the potential forward inclusions and removals every month.</li>
<li>Below is a look at potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2023 based on trading data as of end-August 2022.</li>
</ul>


JPX-Nikkei 400 is composed of common stocks listed on the Tokyo Stock Exchange. It is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents.
A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. We look at the potential forward inclusions and removals every month.
Below is a look at potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2023 based on trading data as of end-August 2022.


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:
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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

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.

I would like to write about what I felt when I attended Hirose Electric's full-year results analyst meeting yesterday, Friday, May 7. Following the announcement of full-year financial results after the close of trading on the previous day, the company's stock price fell 12% from the previous day, with the slowdown in sales for smartphones in the 4Q and the fact that the company's guidance for the fiscal year ending March 31, 2022 is for an increase in sales but a decrease in profits being a selling point. At the financial results briefing held on the morning of the day of the meeting, which started in the midst of such a decline in the stock price, in addition to the financial results for the previous fiscal year and the outlook for the current fiscal year, there were reports on capital allocation policy, medium-term growth strategy, and the transition to a company with an audit committee. I would like to focus my discussion here mainly on the capital allocation policy.

I would like to write about what I felt when I attended Hirose Electric's full-year results analyst meeting yesterday, Friday, May 7. Following the announcement of full-year financial results after the close of trading on the previous day, the company's stock price fell 12% from the previous day, with the slowdown in sales for smartphones in the 4Q and the fact that the company's guidance for the fiscal year ending March 31, 2022 is for an increase in sales but a decrease in profits being a selling point. At the financial results briefing held on the morning of the day of the meeting, which started in the midst of such a decline in the stock price, in addition to the financial results for the previous fiscal year and the outlook for the current fiscal year, there were reports on capital allocation policy, medium-term growth strategy, and the transition to a company with an audit committee. I would like to focus my discussion here mainly on the capital allocation policy.

Japan's Governance: Hirose Electric (6806) And Capital Allocation Policy

Japan

HIROSE ELECTRIC CO., LTD. develops and sells electronic equipment, specializing in connectors.  The Company's products include circular, rectangular and ribbon cables, printed circuit boards, integrated circuits, PC cards, nylon boards, and board connectors.

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Hirose Electric (6806 JP)

JPX-Nikkei 400 Rebal 2023: End-Jan 2023

There are 45 Potential ADDs and 42 Potential DELs presented in the current Leaderboard and I expect the Potential ADDs to outperform the Potential...

Janaghan Jeyakumar, CFA

Kyocera (6971 JP) Founder Kazuo Inamori Passes - Implications for Holdings

Kyocera founder and KDDI "co-founder" Kazuo Inamori has passed away. He has a ¥80bn stake in Kyocera, and Kyocera owns 15% of KDDI. But overhang is...

Travis Lundy

JPX-Nikkei 400 Rebal 2023: End-Aug 2022

Some Potential ADDs have underperformed their EPS Trends and Potential DELs have outperformed their EPS trends and this makes the LONG Potential...

Janaghan Jeyakumar, CFA

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

Japan's Governance: Hirose Electric (6806) And Capital Allocation Policy

Following the announcement of full-year financial results, the company's stock price fell 12% from the previous day. I would like to focus my...

Metrical Inc

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