Index Rebal Trades & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Index Rebal Trades & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Quantitative Analysis

About 18 months ago, <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy</a> set up an interesting framework to look at TOPIX Inclusions over time, showing how different size categories performed in the run-up to inclusion then after inclusion. That was in <a href="https://www.smartkarma.com/insights/historical-topix-inclusions-how-do-they-do-around-inclusion-date" target="_blank" data-smartkarma-citation="insights:26751" rel="noopener">Historical TOPIX Inclusions:  How Do They Do Around Inclusion Date?</a> I published <a href="https://www.smartkarma.com/insights/historical-topix-inclusions-what-flavor-performs-best" target="_blank" data-smartkarma-citation="insights:39523" rel="noopener">Historical TOPIX Inclusions:  What Flavor Performs Best?</a> last month to enhance and update the analysis to include combination inclusion event size and impact size as parameters by which to understand reward: risk characteristics. This month I published <a href="https://www.smartkarma.com/insights/topix-inclusion-pre-events-recent-tachiaigai-bunbai-round-up" target="_blank" data-smartkarma-citation="insights:40509" rel="noopener">TOPIX Inclusion Pre-Events: Recent "Tachiaigai Bunbai" Round-Up</a> which discussesThere are currently 10 live pre-events, 5 live inclusion events, and a half dozen just-post-inclusion names from May 2020.This insight provides a recap of what has happened this month in each category, and the charts can show you where each category of live event situates itself on its historical pattern.The three TOPIX inclusions for May in the non-AVOID category outperformed TOPIX by an average of just over 50% from announcement to inclusion. We wrote on all three, being <a href="https://www.smartkarma.com/insights/topix-inclusion-retail-partners-8167-jp" target="_blank" rel="noopener">especially bullish on the one which went up 80%</a>. This category of event trade can offer significantly interesting trading opportunities. We encourage investors to track them.

About 18 months ago, Travis Lundy set up an interesting framework to look at TOPIX Inclusions over time, showing how different size categories performed in the run-up to inclusion then after inclusion. That was in Historical TOPIX Inclusions:  How Do They Do Around Inclusion Date? I published Historical TOPIX Inclusions:  What Flavor Performs Best? last month to enhance and update the analysis to include combination inclusion event size and impact size as parameters by which to understand reward: risk characteristics. This month I published TOPIX Inclusion Pre-Events: Recent "Tachiaigai Bunbai" Round-Up which discussesThere are currently 10 live pre-events, 5 live inclusion events, and a half dozen just-post-inclusion names from May 2020.This insight provides a recap of what has happened this month in each category, and the charts can show you where each category of live event situates itself on its historical pattern.The three TOPIX inclusions for May in the non-AVOID category outperformed TOPIX by an average of just over 50% from announcement to inclusion. We wrote on all three, being especially bullish on the one which went up 80%. This category of event trade can offer significantly interesting trading opportunities. We encourage investors to track them.

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Event-Driven

<div>Yesterday after the close, <a href="https://www.smartkarma.com/entities/mixi-inc" target="_blank" data-smartkarma-citation="entities:602:1" rel="noopener">mixi Inc (2121 JP)</a> made an <a href="https://pdf.irpocket.com/C2121/QW2b/oEga/x8Ah.pdf" target="_blank" rel="noopener">announcement</a> that the company had received approval from the Tokyo Stock Exchange to move from the MOTHERS section, where it IPOed in 2006, to the First Section of the Tokyo Stock Exchange as of 23 June 2020. </div><div>TSE1 reassignment triggers inclusion into the TOPIX Index and the inclusion event should occur at the close of trading 30th July 2020.</div><div>mixi, Inc was founded in 1999 as a kind of social networking service, and since has developed or some net portals for jobs and other things, and any number of mobile telephone apps, has developed games such as Fight League, Monster Strike, and Monster Strike Stadium and runs sports, a sports team, e-sports, and government-regulated sports-betting services. The recent past has not been great for the company as in the past three years revenue has dropped nearly 50% and EBIT and Net Profit have dropped 80%. The share price has dropped 75% in that time.</div><div>
mixi has always been quintessentially MOTHERS-ish. It has long been able to move to the TSE1, and indeed the guidelines of MOTHERS venue listing are that it "graduate" within ten years of listing on MOTHERS. mixi took 14 yrs.
And this announcement appears to be a surprise. 
In this insight, we take a look at the Index Inclusion Parameters and the Fundamentals of the company to evaluate the trade.
</div>

Yesterday after the close, mixi Inc (2121 JP) made an announcement that the company had received approval from the Tokyo Stock Exchange to move from the MOTHERS section, where it IPOed in 2006, to the First Section of the Tokyo Stock Exchange as of 23 June 2020. TSE1 reassignment triggers inclusion into the TOPIX Index and the inclusion event should occur at the close of trading 30th July 2020.mixi, Inc was founded in 1999 as a kind of social networking service, and since has developed or some net portals for jobs and other things, and any number of mobile telephone apps, has developed games such as Fight League, Monster Strike, and Monster Strike Stadium and runs sports, a sports team, e-sports, and government-regulated sports-betting services. The recent past has not been great for the company as in the past three years revenue has dropped nearly 50% and EBIT and Net Profit have dropped 80%. The share price has dropped 75% in that time.
mixi has always been quintessentially MOTHERS-ish. It has long been able to move to the TSE1, and indeed the guidelines of MOTHERS venue listing are that it "graduate" within ten years of listing on MOTHERS. mixi took 14 yrs.
And this announcement appears to be a surprise. 
In this insight, we take a look at the Index Inclusion Parameters and the Fundamentals of the company to evaluate the trade.


'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

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.

Thematic (Sector/Industry)

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/139/255/original/2020-06-11_08-36-54.png?1591832240" class="editor-image img-responsive" data-smartkarma-image-id="139255"></figure><div class="content-caption">Source: Japan Analytics</div>STRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through the current euphoria and assess where business risk is concentrated among larger Japanese companies. According to Tokyo Shoko Research, 171 listed Japanese firms have raised nearly ¥10 trillion in new funds to weather COVID-19.ALTMAN Z-SCORES - The first Insight will update our earlier Who's<a href="https://www.smartkarma.com/insights/japan-who-s-swimming-naked-part-2-altman-z-score" target="_blank" data-smartkarma-citation="insights:37316" rel="noopener"> Swimming Naked?</a> Insight and focus on the Altman Z-Score as updated for the most recent quarterly results for both manufacturing and non-manufacturing companies.  In each category, ee will look at both the companies that are below Altman's 'distress' levels and those companies that have the most significant negative deviation from their seven-year average score. Only six of the bottom-thirty manufacturing and five of the bottom-thirty manufacturing companies have outperformed over one year. Many are already Oversold and offer potential value opportunities -as with <a href="https://www.smartkarma.com/entities/nissan-motor-co-ltd" target="_blank" data-smartkarma-citation="entities:72:1" rel="noopener">Nissan Motor (7201 JP)</a> which is now as distressed as when Carlos Ghosn first arrived.  QUASI-FINANCIAL FIRMS - The Z-Score methodology does not work for financial firms. Accordingly, five non-financial companies which have significant financial subsidiaries -  <a href="https://www.smartkarma.com/entities/rakuten-inc" target="_blank" data-smartkarma-citation="entities:31:1" rel="noopener">Rakuten (4755 JP)</a>, <a href="https://www.smartkarma.com/entities/z-holdings-corp" target="_blank" data-smartkarma-citation="entities:19603:1" rel="noopener">Z Holdings (4689 JP)</a>, <a href="https://www.smartkarma.com/entities/japan-post-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:359:1" rel="noopener">Japan Post (6178 JP)</a>, <a href="https://www.smartkarma.com/entities/softbank-group-corp" target="_blank" data-smartkarma-citation="entities:315:1" rel="noopener">Softbank Group (9984 JP)</a> and <a href="https://www.smartkarma.com/entities/sony-corp" target="_blank" data-smartkarma-citation="entities:563:1" rel="noopener">Sony (6758 JP)</a>- have been excluded from this analysis.

Source: Japan AnalyticsSTRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through the current euphoria and assess where business risk is concentrated among larger Japanese companies. According to Tokyo Shoko Research, 171 listed Japanese firms have raised nearly ¥10 trillion in new funds to weather COVID-19.ALTMAN Z-SCORES - The first Insight will update our earlier Who's Swimming Naked? Insight and focus on the Altman Z-Score as updated for the most recent quarterly results for both manufacturing and non-manufacturing companies.  In each category, ee will look at both the companies that are below Altman's 'distress' levels and those companies that have the most significant negative deviation from their seven-year average score. Only six of the bottom-thirty manufacturing and five of the bottom-thirty manufacturing companies have outperformed over one year. Many are already Oversold and offer potential value opportunities -as with Nissan Motor (7201 JP) which is now as distressed as when Carlos Ghosn first arrived.  QUASI-FINANCIAL FIRMS - The Z-Score methodology does not work for financial firms. Accordingly, five non-financial companies which have significant financial subsidiaries -  Rakuten (4755 JP), Z Holdings (4689 JP), Japan Post (6178 JP), Softbank Group (9984 JP) and Sony (6758 JP)- have been excluded from this analysis. 

🇯🇵 JAPAN - Stress Tests Part 1 - Altman Z-Scores

David Blennerhassett

When investors are chucking in the towel, including the event space (RV, risk arb etc.), it's time for some old school perspective.
In this insight, I look at <a href="https://en.wikipedia.org/wiki/Benjamin_Graham" target="_blank" rel="noopener">Benjamin Graham</a>'s Net Nets, or working capital (current assets less current liabilities), then subtract any debt not included in current liabilities. To make it simple, I use current assets less total liabilities.
This set of data is what Graham would deem stocks priced for liquidation.
I calculate 1,087 stocks trading below their net current asset value (NCAV) across Japan, Hong Kong, Korea, Australia, Taiwan and Singapore.
That number declines to 114 for stocks which trade &gt;US1$mn/day (3-month basis), and just 20 trading &gt;US$5mn/day.
A rundown of those stocks is shown below.

When investors are chucking in the towel, including the event space (RV, risk arb etc.), it's time for some old school perspective.
In this insight, I look at Benjamin Graham's Net Nets, or working capital (current assets less current liabilities), then subtract any debt not included in current liabilities. To make it simple, I use current assets less total liabilities.
This set of data is what Graham would deem stocks priced for liquidation.
I calculate 1,087 stocks trading below their net current asset value (NCAV) across Japan, Hong Kong, Korea, Australia, Taiwan and Singapore.
That number declines to 114 for stocks which trade &gt;US1$mn/day (3-month basis), and just 20 trading &gt;US$5mn/day.
A rundown of those stocks is shown below.

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/963/original/2020-02-15_09-46-55.png?1581796265" class="editor-image img-responsive" data-smartkarma-image-id="117963"></figure><div class="content-caption">Source • Japan Analytics</div>A YEAR TO FORGET - The aggregate earnings of Japanese listed companies peaked on December 26th 2018 and, over the last five quarters, have declined by ¥10.5 trillion or by 22%. Net margins have declined by 135 basis points over this period to 4.5%, 224 bps below the current operating margin. Whatever the uncertainties over the impact of Covid-19, the current quarter will see a further decline. A base-case outlook for aggregate Net Income is ¥30 trillion by May 2020, which, if the total market cap were to remain at current levels, would take the  PE to a ten-year high of 22.4 times. The decline in Operating Income has been more moderate at 11%, illustrating the still all-too-frequent write-offs that Japanse corporate routinely require as penance for their mostly-overseas capital misallocations.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/966/original/2020-02-16_05-32-51.png?1581798783" class="editor-image img-responsive" data-smartkarma-image-id="117966"></figure><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/117/967/original/2020-02-16_05-28-20.png?1581798803" class="editor-image img-responsive" data-smartkarma-image-id="117967"></figure><div class="content-caption">Source • Japan Analytics</div>ACCELERATING DOWNTREND -  Trailing-twelve-month (TTM) Revenues are now declining quarter-on-quarter, and the pace of decline in Operating Income has accelerated for the fourth quarter in a row. The aggregate one year forward forecasts have seen falling QoQ revenues and OP since TTM-2. With only one month to go before the end of FY2020 for the majority of companies and with many December year-end companies looking forward ten months, a degree of optimism has slowed the pace of decline in the current quarter. We expect Covid-19 to result in many of these forecasts to be revised down at the interim results to be released in August. RECESSION - With GDP shrinking by an annualised 6.3% in the fourth quarter and Covid-19 having at least a similar impact in the current quarter, Japan will be in an, albeit 'technical', recession by the spring.<div class="content-highlight">In the DETAIL below, we shall review the actual results and initial and revised forecasts by Sector and highlight the best and worst-performing companies by one-quarter revenue and margin changes. Part 2 will update our Results and Revision Scoring for the market, Sectors, Peer Groups and Companies.</div>

Source • Japan AnalyticsA YEAR TO FORGET - The aggregate earnings of Japanese listed companies peaked on December 26th 2018 and, over the last five quarters, have declined by ¥10.5 trillion or by 22%. Net margins have declined by 135 basis points over this period to 4.5%, 224 bps below the current operating margin. Whatever the uncertainties over the impact of Covid-19, the current quarter will see a further decline. A base-case outlook for aggregate Net Income is ¥30 trillion by May 2020, which, if the total market cap were to remain at current levels, would take the  PE to a ten-year high of 22.4 times. The decline in Operating Income has been more moderate at 11%, illustrating the still all-too-frequent write-offs that Japanse corporate routinely require as penance for their mostly-overseas capital misallocations.Source • Japan AnalyticsACCELERATING DOWNTREND -  Trailing-twelve-month (TTM) Revenues are now declining quarter-on-quarter, and the pace of decline in Operating Income has accelerated for the fourth quarter in a row. The aggregate one year forward forecasts have seen falling QoQ revenues and OP since TTM-2. With only one month to go before the end of FY2020 for the majority of companies and with many December year-end companies looking forward ten months, a degree of optimism has slowed the pace of decline in the current quarter. We expect Covid-19 to result in many of these forecasts to be revised down at the interim results to be released in August. RECESSION - With GDP shrinking by an annualised 6.3% in the fourth quarter and Covid-19 having at least a similar impact in the current quarter, Japan will be in an, albeit 'technical', recession by the spring.In the DETAIL below, we shall review the actual results and initial and revised forecasts by Sector and highlight the best and worst-performing companies by one-quarter revenue and margin changes. Part 2 will update our Results and Revision Scoring for the market, Sectors, Peer Groups and Companies.

🇯🇵 JAPAN • IT'S A WRAP! Part 1 - 2020-Q1 Earnings Results & Forecasts

Japan

mixi, Inc. operates community style website, mixi.  The Company sells advertising spaces on its website.  mixi also runs online recruiting services for IT related positions.

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Mixi Inc (2121 JP)

TOPIX Inclusion Trade Summary: June 2020

About 18 months ago, Travis Lundy set up an interesting framework to look at TOPIX Inclusions over time, showing how different size categories...

Janaghan Jeyakumar, CFA

Mixi TOPIX Inclusion - Out of Left Field

Yesterday after the close, mixi Inc (2121 JP) made an announcement that the company had received approval from the Tokyo Stock Exchange to move...

Travis Lundy

🇯🇵 JAPAN - Stress Tests Part 1 - Altman Z-Scores

STRESS TESTS - This Insight is the first in a series that will use a variety of standard and less-frequently used 'stress-tests' to look through...

Campbell Gunn

Asia-Pac Stocks Priced For Liquidation

When investors are chucking in the towel, including the event space (RV, risk arb etc.), it's time for some old school perspective. In this...

David Blennerhassett

🇯🇵 JAPAN • IT'S A WRAP! Part 1 - 2020-Q1 Earnings Results & Forecasts

A YEAR TO FORGET - The aggregate earnings of Japanese listed companies peaked on December 26th 2018 and, over the last five quarters, have declined...

Campbell Gunn

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