Index Rebal Trades & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Index Rebal Trades & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Event-Driven

In January and February 2021 we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented (application deadline November 1, 2020). In contrast, not a single TSE1 Section Transfer was announced in the months of March and April 2021. However, during the month of April, we witnessed TSE's Annual Liquidity Factor Review which caused dozens of stocks to enjoy Index Upweights during the April-end Inclusion Event collectively amount to an estimated upweight size of approximately US$1bn. Below is a look at the performance of the TOPIX-related event trades covered by Quiddity in the Pre-event, Live-event, and Post-event categories during the month of April 2021.

In January and February 2021 we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented (application deadline November 1, 2020). In contrast, not a single TSE1 Section Transfer was announced in the months of March and April 2021. However, during the month of April, we witnessed TSE's Annual Liquidity Factor Review which caused dozens of stocks to enjoy Index Upweights during the April-end Inclusion Event collectively amount to an estimated upweight size of approximately US$1bn. Below is a look at the performance of the TOPIX-related event trades covered by Quiddity in the Pre-event, Live-event, and Post-event categories during the month of April 2021.  

TOPIX Inclusion Trade Summary: April 2021

In January and February we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented. In contrast, not a single TSE1 Section Transfer was announced in the month of March 2021. 
However, this is only the calm before the storm.
In April 2021, we are expecting dozens of companies to enjoy TOPIX Index upweights as a result of the annual liquidity factor review (and this will mean dozens of downweights too). On the other hand, although fewer companies will qualify under the new rules, small-cap companies could use M&amp;A as an alternative route to Section Transfers to meet criteria as discussed below in this insight.
Furthermore, I have discussed the changes to Quiddity's pre-events watchlist and provided performance updates for one "Live" event stock which is expected to have its Inclusion event at the end of April 2021 and 9 "Post" event stocks that completed their Inclusion Events at the end of January 2021 and February 2021.

In January and February we saw a large wave of TSE1 Section Transfers as many small cap names rushed to get promoted before the new (and more stringent) Section Transfer Requirements were implemented. In contrast, not a single TSE1 Section Transfer was announced in the month of March 2021. 
However, this is only the calm before the storm.
In April 2021, we are expecting dozens of companies to enjoy TOPIX Index upweights as a result of the annual liquidity factor review (and this will mean dozens of downweights too). On the other hand, although fewer companies will qualify under the new rules, small-cap companies could use M&amp;A as an alternative route to Section Transfers to meet criteria as discussed below in this insight.
Furthermore, I have discussed the changes to Quiddity's pre-events watchlist and provided performance updates for one "Live" event stock which is expected to have its Inclusion event at the end of April 2021 and 9 "Post" event stocks that completed their Inclusion Events at the end of January 2021 and February 2021. 

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Last Week in Event SPACE: China Youzan, Mcdonald's, Beijing Jingneng, Ricoh, Melco Resorts, LG Corp

Travis Lundy

In the 2020FQ2 earnings call for <a href="https://www.smartkarma.com/entities/mcdonald-s-corp" target="_blank" data-smartkarma-citation="entities:1425:1" rel="noopener">Mcdonald's Corp (MCD US)</a> held in late July, CFO Kevin Ozan brought up the subject of <a href="https://www.smartkarma.com/entities/mcdonald-s-holdings-co-japan" target="_blank" data-smartkarma-citation="entities:985:1" rel="noopener">Mcdonald's Holdings Co Japan (2702 JP)</a> a bit over 22 minutes into the call. <div><blockquote>Consistent with enhancing financial flexibility and our franchising strategy, we're planning to divest a portion of our stake in McDonald's Japan. As a result of the strong performance of the McDonald's Japan business over the past few years and our confidence in the local management team, we believe it's the right time to gradually reduce our ownership stake in the market. This will take some time because of the low trading volume of McDonald's Japan shares. As a reminder, we currently own about 49% of the business, and we will retain at least 35% ownership. This decision provides us with additional financial flexibility to execute our capital allocation strategy while also demonstrating our commitment to our Japanese business.</blockquote></div><div>
The conclusion was that MCD would sell 14% of McD Japan in the market. But 14% was 18.6mm shares, which on an ex-ante basis was 56 days worth of average daily volume over the previous three years and over a year's worth of volume if trading at 20% of volume every single day.
It was a near 30% increase in the float and not quite US$1bn in value.
On 20 August, MCD <a href="https://disclosure.edinet-fsa.go.jp/E01EW/download?uji.verb=W0EZA104CXP001003Action&amp;uji.bean=ee.bean.parent.EECommonSearchBean&amp;PID=W1E63011&amp;SESSIONKEY=1597918899762&amp;lgKbn=2&amp;pkbn=0&amp;skbn=1&amp;dskb=&amp;askb=&amp;dflg=0&amp;iflg=&amp;preId=1&amp;mul=2702&amp;lpr=on&amp;cal=1&amp;era=R&amp;yer=&amp;mon=&amp;pfs=4&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=&amp;s=S100JKOI" target="_blank" rel="noopener">announced</a> that it had sold a bit over 3% of McD J, selling 4.2mm shares at ¥5340/share on 19 August 2020. On 20 November 2020, they <a href="https://disclosure.edinet-fsa.go.jp/E01EW/download?uji.verb=W0EZA104CXP001003Action&amp;uji.bean=ee.bean.parent.EECommonSearchBean&amp;PID=W1E63011&amp;SESSIONKEY=1614669632749&amp;lgKbn=2&amp;pkbn=0&amp;skbn=1&amp;dskb=&amp;askb=&amp;dflg=0&amp;iflg=&amp;preId=1&amp;mul=2702&amp;lpr=on&amp;cal=1&amp;era=R&amp;yer=&amp;mon=&amp;pfs=4&amp;row=100&amp;idx=0&amp;str=&amp;kbn=1&amp;flg=&amp;syoruiKanriNo=&amp;s=S100K899" target="_blank" rel="noopener">announced</a> they had sold another 4,000,000 shares at ¥5370/share on 19 November.
Yesterday, another tranche of 4,000,000 shares was transacted at ¥5280/share. It is likely McDs US selling down more. That would leave McDs with 40.82%, which is more done than not.
And it leaves the setup to be quite favorable to an application to move from JASDAQ to TSE1. 
This was originally discussed in <a href="https://www.smartkarma.com/insights/a-modest-mcdonald-s-japan-proposal" target="_blank" data-smartkarma-citation="insights:42401" rel="noopener">A Modest (McDonald's Japan) Proposal</a> last August and by <a href="https://www.smartkarma.com/profiles/janaghan-jeyakumar-cfa" target="_blank" data-smartkarma-citation="accounts:3173" rel="noopener">Janaghan Jeyakumar, CFA</a> in <a href="https://www.smartkarma.com/insights/2021-high-conviction-mcdonald-s-japan-a-topix-inclusion-big-bet" target="_blank" data-smartkarma-citation="insights:46153" rel="noopener">2021 High Conviction: McDonald's Japan -  A TOPIX Inclusion BIG Bet</a> in December 2020.
Now we discuss the timing pattern of how this might work.
</div>

In the 2020FQ2 earnings call for Mcdonald's Corp (MCD US) held in late July, CFO Kevin Ozan brought up the subject of Mcdonald's Holdings Co Japan (2702 JP) a bit over 22 minutes into the call. Consistent with enhancing financial flexibility and our franchising strategy, we're planning to divest a portion of our stake in McDonald's Japan. As a result of the strong performance of the McDonald's Japan business over the past few years and our confidence in the local management team, we believe it's the right time to gradually reduce our ownership stake in the market. This will take some time because of the low trading volume of McDonald's Japan shares. As a reminder, we currently own about 49% of the business, and we will retain at least 35% ownership. This decision provides us with additional financial flexibility to execute our capital allocation strategy while also demonstrating our commitment to our Japanese business.
The conclusion was that MCD would sell 14% of McD Japan in the market. But 14% was 18.6mm shares, which on an ex-ante basis was 56 days worth of average daily volume over the previous three years and over a year's worth of volume if trading at 20% of volume every single day.
It was a near 30% increase in the float and not quite US$1bn in value.
On 20 August, MCD announced that it had sold a bit over 3% of McD J, selling 4.2mm shares at ¥5340/share on 19 August 2020. On 20 November 2020, they announced they had sold another 4,000,000 shares at ¥5370/share on 19 November.
Yesterday, another tranche of 4,000,000 shares was transacted at ¥5280/share. It is likely McDs US selling down more. That would leave McDs with 40.82%, which is more done than not.
And it leaves the setup to be quite favorable to an application to move from JASDAQ to TSE1. 
This was originally discussed in A Modest (McDonald's Japan) Proposal last August and by Janaghan Jeyakumar, CFA in 2021 High Conviction: McDonald's Japan -  A TOPIX Inclusion BIG Bet in December 2020.
Now we discuss the timing pattern of how this might work.


McD's Japan:  Earnings? Check. Parent Selldown OK? Check. Japanese CEO? Check TSE Prime? Unknown

During the month of February 2021, one of the most anticipated TOPIX Inclusion candidates, <a href="https://www.smartkarma.com/entities/toshiba-corp" target="_blank" data-smartkarma-citation="entities:637:1" rel="noopener">Toshiba Corp (6502 JP)</a> completed its TOPIX Inclusion Event. We also saw four new names announce their TSE1 moves during this month, among which was <a href="https://www.smartkarma.com/entities/faithnetwork-co-ltd" target="_blank" data-smartkarma-citation="entities:29132:1" rel="noopener">FaithNetwork Co Ltd (3489 JP)</a> the third stock out of the four pre-event bets highlighted in <a href="https://www.smartkarma.com/insights/topix-inclusion-trade-summary-sep-2020" target="_blank" data-smartkarma-citation="insights:43700" rel="noopener">TOPIX Inclusion Trade Summary: Sep 2020</a>. During this month, we also introduced new pre-event picks to be added to our list in <a href="https://www.smartkarma.com/insights/topix-inclusions-who-is-ready-3-0" target="_blank" data-smartkarma-citation="insights:48306" rel="noopener">TOPIX Inclusions: Who Is READY? 3.0</a>. In this insight, I have provided performance updates for 4 "Live" event stocks which are expected to have Inclusion Events at the end of March/April 2021 and 17 "Post" event stocks that completed their Inclusion Events at the end of January 2021 and February 2021.

During the month of February 2021, one of the most anticipated TOPIX Inclusion candidates, Toshiba Corp (6502 JP) completed its TOPIX Inclusion Event. We also saw four new names announce their TSE1 moves during this month, among which was FaithNetwork Co Ltd (3489 JP) the third stock out of the four pre-event bets highlighted in TOPIX Inclusion Trade Summary: Sep 2020. During this month, we also introduced new pre-event picks to be added to our list in TOPIX Inclusions: Who Is READY? 3.0. In this insight, I have provided performance updates for 4 "Live" event stocks which are expected to have Inclusion Events at the end of March/April 2021 and 17 "Post" event stocks that completed their Inclusion Events at the end of January 2021 and February 2021. 

Japan

McDonald's Holdings Company (Japan), Ltd. operates a hamburger fast food restaurant chain throughout Japan.  The Company operates its own stores and franchise stores.

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Mcdonald's Japan (2702 JP)

TOPIX Inclusion Trade Summary: April 2021

April TOPIX Index Events had a great month. Whether it be the single inclusion Rakus (3923), the LF reweight baskets, or the normal TOPIX month-end...

Janaghan Jeyakumar, CFA

TOPIX Inclusion Trade Summary: Mar 2021

The March 2021 TOPIX Index Inclusion Event and Pre-Event Summary, with links to all the greatest hits. The model performed as expected. The best...

Janaghan Jeyakumar, CFA

Last Week in Event SPACE: China Youzan, Mcdonald's, Beijing Jingneng, Ricoh, Melco Resorts, LG Corp

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

McD's Japan: Earnings? Check. Parent Selldown OK? Check. Japanese CEO? Check TSE Prime? Unknown

The MCD US selldown continues apace. The CEO-ship is switching to a new Japanese CEO. This company is less parent-controlled. The question on a...

Travis Lundy

TOPIX Inclusion Trade Summary: Feb 2021

TOPIX Inclusion summary for Feb 2021 including performance of Feb inclusions, and March-April inclusions from announcement. Change to recommended...

Janaghan Jeyakumar, CFA

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