Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

On Thursday, the Nikkei came out with an <a href="https://asia.nikkei.com/Economy/BOJ-to-widen-interest-rate-target-range-to-support-bank-profits" target="_blank" rel="noopener">article</a> during the lunch break of equities trading. The headline said "BOJ to widen interest rate target range to support bank profits" and indeed in the article it noted that the BOJ would allow the long end of the curve to fluctuate more widely, creating a slightly steeper curve. This could lead to slightly better bank profits less because of the extra 5bp on the curve but more because of the expectation of forcing borrowers to pay more on an absolute basis. What was MORE important for equity markets was the idea that the BOJ "would also abolish its target for purchasing exchange-traded funds, now 6 trillion yen ($55 billion) per year, and instead vow to make such purchases only in times of market turmoil."The article also suggested that the "Target" would be removed for the ¥90bn of J-REITs they buy as a base case (doubled now to ¥180bn as the ¥6trln was doubled to ¥12trln in the depths of the covid crash of March 2020). This move caused Nikkei to underperform TOPIX on the day. TOPIX actually ended up on the day, and ended above where the market closed the AM session before the article came out. Nikkei fell, and started underperforming TOPIX from that point on. <section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/872/original/Screenshot+2021-03-21+at+3.26.17+PM.png?1616311594" class="editor-image img-responsive" data-smartkarma-image-id="195872"></figure></section>Nikkei underperformed TOPIX in the AM session on Friday, and when the BOJ announcements came mid-day on Friday, there were additional subtleties involved. The details are <a href="https://www.boj.or.jp/en/announcements/release_2021/rel210319c.pdf" target="_blank" rel="noopener">here</a>. The presentation with the basic details is <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319b.pdf" target="_blank" rel="noopener">here</a>.<ul>
<li>The target rates for ETF and REIT buying will be abolished, but the current "Target Rate" of annual buying will become annual maxima (¥12 trillion for ETFs, ¥180bn for J-REITs, with ongoing maximum ownership limits on ETFs in place).</li>
<li>Buying of ETFs and J-REITs will be conducted "as necessary" "in times of market turbulence" and such buying will be done only on TOPIX ETFs.</li>
<li>The "Special Rules for Purchases of ETFs to Support Firms Proactively Investing in Physical and Human Capital" will continue as before with only specific ETFs permitted in this group. The amount of ~¥300bn/year and ¥1.2bn per business day will continue.</li>
</ul>It based the new policy on the Reference <a href="https://www.boj.or.jp/en/announcements/release_2021/k210319c.pdf" target="_blank" rel="noopener">document</a> which backs up the changes in policy is much more interesting reading.  Appendix 5 and Chart 12 are the parts you want to read.The hypotheses and results are described here.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/195/869/original/Screenshot+2021-03-21+at+3.02.28+PM.png?1616310186" class="editor-image img-responsive" data-smartkarma-image-id="195869"></figure></section>There are a couple of other side conclusions but the base understanding is...<div class="content-highlight">When the BOJ steps into the market in size, in times of market turbulence, and when stocks are trading below their medium-term average, it has a greater effect per dollar spent on market-wide risk premia as measured in option premia than buying in normal times, and size matters when looking at the risk premia change on single stocks.  </div><h3>What This Means</h3><ul>
<li>When the BOJ steps into the market in size, in times of market turbulence, and when stocks are trading below their medium-term average, it has a greater effect per dollar spent on market-wide risk premia as measured in option premia than buying in normal times, and size matters when looking at the risk premia change on single stocks.  </li>
<li>Expect the BOJ to follow the concept of its study (Appendix 5 again).</li>
<li>Expect the BOJ to pay greater attention to futures activity. </li>
</ul><h3>What This Does NOT Mean</h3><ul><li>It does NOT mean the BOJ will be selling any ETFs.</li></ul><hr>It is worthwhile taking a look at WHY the market reacted the way it did on Thursday and Friday afternoon, and it is worthwhile looking at what the BOJ ETF buying might look like going forward. So we do so below the fold.Note: This is part 1 of the analysis of potential future BOJ ETF Buying. Part II looks at the difference in single stock makeup.

On Thursday, the Nikkei came out with an article during the lunch break of equities trading. The headline said "BOJ to widen interest rate target range to support bank profits" and indeed in the article it noted that the BOJ would allow the long end of the curve to fluctuate more widely, creating a slightly steeper curve. This could lead to slightly better bank profits less because of the extra 5bp on the curve but more because of the expectation of forcing borrowers to pay more on an absolute basis. What was MORE important for equity markets was the idea that the BOJ "would also abolish its target for purchasing exchange-traded funds, now 6 trillion yen ($55 billion) per year, and instead vow to make such purchases only in times of market turmoil."The article also suggested that the "Target" would be removed for the ¥90bn of J-REITs they buy as a base case (doubled now to ¥180bn as the ¥6trln was doubled to ¥12trln in the depths of the covid crash of March 2020). This move caused Nikkei to underperform TOPIX on the day. TOPIX actually ended up on the day, and ended above where the market closed the AM session before the article came out. Nikkei fell, and started underperforming TOPIX from that point on. Nikkei underperformed TOPIX in the AM session on Friday, and when the BOJ announcements came mid-day on Friday, there were additional subtleties involved. The details are here. The presentation with the basic details is here.
The target rates for ETF and REIT buying will be abolished, but the current "Target Rate" of annual buying will become annual maxima (¥12 trillion for ETFs, ¥180bn for J-REITs, with ongoing maximum ownership limits on ETFs in place).
Buying of ETFs and J-REITs will be conducted "as necessary" "in times of market turbulence" and such buying will be done only on TOPIX ETFs.
The "Special Rules for Purchases of ETFs to Support Firms Proactively Investing in Physical and Human Capital" will continue as before with only specific ETFs permitted in this group. The amount of ~¥300bn/year and ¥1.2bn per business day will continue.
It based the new policy on the Reference document which backs up the changes in policy is much more interesting reading.  Appendix 5 and Chart 12 are the parts you want to read.The hypotheses and results are described here.There are a couple of other side conclusions but the base understanding is...When the BOJ steps into the market in size, in times of market turbulence, and when stocks are trading below their medium-term average, it has a greater effect per dollar spent on market-wide risk premia as measured in option premia than buying in normal times, and size matters when looking at the risk premia change on single stocks.  What This Means
When the BOJ steps into the market in size, in times of market turbulence, and when stocks are trading below their medium-term average, it has a greater effect per dollar spent on market-wide risk premia as measured in option premia than buying in normal times, and size matters when looking at the risk premia change on single stocks.  
Expect the BOJ to follow the concept of its study (Appendix 5 again).
Expect the BOJ to pay greater attention to futures activity. 
What This Does NOT MeanIt does NOT mean the BOJ will be selling any ETFs.It is worthwhile taking a look at WHY the market reacted the way it did on Thursday and Friday afternoon, and it is worthwhile looking at what the BOJ ETF buying might look like going forward. So we do so below the fold.Note: This is part 1 of the analysis of potential future BOJ ETF Buying. Part II looks at the difference in single stock makeup. 

Quantifying the BOJ Change in ETF Policy: Assessing Future ETF Buying Methodology

Japan Specialist

Mark Chadwick

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/freee-kk" target="_blank" data-smartkarma-citation="entities:28424:1" rel="noopener">freee (4478 JP)</a>  provides cloud-based accounting software for small businesses and individuals.  Freee serves over 220,000 clients with an annualized recurring revenue of around $80m.  In the year ended June, revenue grew 53% YoY. There is a huge opportunity to grow in the nascent cloud accounting market in Japan. With a strong and well-incentivised management team, Freee is well placed to build a strong moat around its business. At 68x TTM revenue, the valuation is way up in the clouds.  <section class="figure"><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/165/623/original/Annual-Recurring-Revenue-ARR_chartbuilder.png?1602902386" class="editor-image img-responsive" data-smartkarma-image-id="165623"></figure></section></section>

freee (4478 JP)  provides cloud-based accounting software for small businesses and individuals.  Freee serves over 220,000 clients with an annualized recurring revenue of around $80m.  In the year ended June, revenue grew 53% YoY. There is a huge opportunity to grow in the nascent cloud accounting market in Japan. With a strong and well-incentivised management team, Freee is well placed to build a strong moat around its business. At 68x TTM revenue, the valuation is way up in the clouds.  

Small Cap Growth: Freee (4478) - Counting Clouds

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

* Poor Results To Continue: Orix (8591.JP/IX.US) reported consolidated FY (March) 1Q21 results of JPY 50.0 bn, declining JPY 19.2 bn (28%) YOY and below consensus forecasts. The bulk of the decline can be attributed to a JPY 12.2 bn reduction in capital gains; and* Opacity Doesn’t Help: ORIX is a riddle. Its business structure makes it relatively opaque and quite difficult to gauge profitability. ORIX shares have fallen to their March lows, and earnings/dividends expectations now lack confidence.

* Poor Results To Continue: Orix (8591.JP/IX.US) reported consolidated FY (March) 1Q21 results of JPY 50.0 bn, declining JPY 19.2 bn (28%) YOY and below consensus forecasts. The bulk of the decline can be attributed to a JPY 12.2 bn reduction in capital gains; and* Opacity Doesn’t Help: ORIX is a riddle. Its business structure makes it relatively opaque and quite difficult to gauge profitability. ORIX shares have fallen to their March lows, and earnings/dividends expectations now lack confidence.

When it was reported in the press and subsequently announced by Sony on the 19th of May part way through the day that Sony was going to launch a Tender Offer to take out minorities in <a href="https://www.smartkarma.com/entities/sony-financial-holdings-inc" target="_blank" data-smartkarma-citation="entities:564:1" rel="noopener">Sony Financial Holdings (8729 JP)</a> the immediate reaction of first order thinkers was to buy Sony Financial. The immediate reaction of second-order thinkers was to buy <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> because taking out minorities in Sony Financial would cause it to be delisted, putting its place in the Nikkei 225 Average up for grabs. The moment the news came out the stock was ¥2,080 a share, and quickly jumped. The two-hourly chart below shows the evolution of Japan Exchange Group shares against TOPIX, setting the two at the "same" price at the time of the Sony Financial announcement. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/148/245/original/Screenshot%202020-07-27%20at%2010.25.57%20PM.png?1595859982" class="editor-image img-responsive" data-smartkarma-image-id="148245"></figure><div style="text-align: left;" class="content-caption">source: tradingview.com, Quiddity</div><div style="text-align: left;" class="content-caption"></div>JPX shares closed 3.7% higher that day at ¥2,166, then opened the following day at ¥2,223, traded up, then briefly lower than ¥2,223 a day later before marching higher. The shares are up 37.4% since the moment before the announcement while TOPIX is up 5.9% during the same period. The period since the Sony Financial announcement can be split into two parts. <ol>
<li>The period where Japan Exchange was the favorite to replace Sony Financial in the Nikkei 225 Average, starting at the blue vertical line, and </li>
<li>The period since when the Nikkei confirmed after the close on 15 July that indeed Japan Exchange had been selected. </li>
</ol>During the period prior to the Sony Financial news, Japan Exchange Group announced earnings (April 30 - the E in the red circle at the bottom) and the shares dipped, rebounded, and net did nothing. The subsequent rise in the share price was NOT linked to earnings. Or volume traded in the market, or really anything other than speculation on its inclusion in the Nikkei 225 Average.This insight carries a bit of analysis, and a trade recommendation. You can guess which way it tilts.The trade is later today.More below the fold...<hr>For the precursor to this insight, please see <a href="https://www.smartkarma.com/insights/nikkei-225-jpx-in-sony-financial-out" target="_blank" data-smartkarma-citation="insights:41274" rel="noopener">Nikkei 225 - JPX IN, Sony Financial OUT</a>.

When it was reported in the press and subsequently announced by Sony on the 19th of May part way through the day that Sony was going to launch a Tender Offer to take out minorities in Sony Financial Holdings (8729 JP) the immediate reaction of first order thinkers was to buy Sony Financial. The immediate reaction of second-order thinkers was to buy Japan Exchange Group (8697 JP) because taking out minorities in Sony Financial would cause it to be delisted, putting its place in the Nikkei 225 Average up for grabs. The moment the news came out the stock was ¥2,080 a share, and quickly jumped. The two-hourly chart below shows the evolution of Japan Exchange Group shares against TOPIX, setting the two at the "same" price at the time of the Sony Financial announcement. source: tradingview.com, QuiddityJPX shares closed 3.7% higher that day at ¥2,166, then opened the following day at ¥2,223, traded up, then briefly lower than ¥2,223 a day later before marching higher. The shares are up 37.4% since the moment before the announcement while TOPIX is up 5.9% during the same period. The period since the Sony Financial announcement can be split into two parts. 
The period where Japan Exchange was the favorite to replace Sony Financial in the Nikkei 225 Average, starting at the blue vertical line, and 
The period since when the Nikkei confirmed after the close on 15 July that indeed Japan Exchange had been selected. 
During the period prior to the Sony Financial news, Japan Exchange Group announced earnings (April 30 - the E in the red circle at the bottom) and the shares dipped, rebounded, and net did nothing. The subsequent rise in the share price was NOT linked to earnings. Or volume traded in the market, or really anything other than speculation on its inclusion in the Nikkei 225 Average.This insight carries a bit of analysis, and a trade recommendation. You can guess which way it tilts.The trade is later today.More below the fold...For the precursor to this insight, please see Nikkei 225 - JPX IN, Sony Financial OUT. 

Today after the close the Nikkei Inc <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20200715E_1.pdf" target="_blank" rel="noopener">announced</a> that it would delete <a href="https://www.smartkarma.com/entities/sony-financial-holdings-inc" target="_blank" data-smartkarma-citation="entities:564:1" rel="noopener">Sony Financial Holdings (8729 JP)</a> from a few of its indices and in the case of the Nikkei 225, would replace it with <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>. Changes will be made so that the calculation changes as of the opening price of 29 July, meaning the inclusion event takes place at the close of trading on 28 July. This is a new way of dealing with Securities which will likely be delisted, following the <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20200615E_1.pdf" target="_blank" rel="noopener">announcement</a> of a slight change in policy made on 15 June, titled Changes to the Constituents Selection Rules of the Nikkei Stock Average which followed a <a href="https://indexes.nikkei.co.jp/en/nkave/archives/news/20200511E_2.pdf" target="_blank" rel="noopener">consultation</a> starting in early May.This was not that much of a surprise. There were several "top picks" out there, including <a href="https://www.smartkarma.com/entities/seven-bank-ltd" target="_blank" data-smartkarma-citation="entities:16063:1" rel="noopener">Seven Bank Ltd (8410 JP)</a>, the Japan Post names not in already, <a href="https://www.smartkarma.com/entities/orix-corp" target="_blank" data-smartkarma-citation="entities:9936:1" rel="noopener">Orix Corp (8591 JP)</a>, <a href="https://www.smartkarma.com/entities/sbi-holdings-inc" target="_blank" data-smartkarma-citation="entities:10928:1" rel="noopener">Sbi Holdings (8473 JP)</a> and <a href="https://www.smartkarma.com/entities/monex-group-inc" target="_blank" data-smartkarma-citation="entities:14211:1" rel="noopener">Monex Group Inc (8698 JP)</a>. The fact that there were so many top picks indicates three things at the outset.<ol>
<li>Not everyone is in the successful inclusion,</li>
<li>People are in names which were not successful inclusions and will want to exit,</li>
<li>The Nikkei has rules or habits which are vague enough to be considered unreliable. That creates for more surprise when inclusions come, but it also creates for unreliable index construction, which remains a problem. </li>
</ol>However, Japan Exchange Group saw a decent run on excess volume, perhaps partially helped by rising forward Street consensus EBIT. The trade is partially "done" already.The details of the inclusion and exclusion trades, flows, etc are, of course, below.

Today after the close the Nikkei Inc announced that it would delete Sony Financial Holdings (8729 JP) from a few of its indices and in the case of the Nikkei 225, would replace it with Japan Exchange Group (8697 JP). Changes will be made so that the calculation changes as of the opening price of 29 July, meaning the inclusion event takes place at the close of trading on 28 July. This is a new way of dealing with Securities which will likely be delisted, following the announcement of a slight change in policy made on 15 June, titled Changes to the Constituents Selection Rules of the Nikkei Stock Average which followed a consultation starting in early May.This was not that much of a surprise. There were several "top picks" out there, including Seven Bank Ltd (8410 JP), the Japan Post names not in already, Orix Corp (8591 JP), Sbi Holdings (8473 JP) and Monex Group Inc (8698 JP). The fact that there were so many top picks indicates three things at the outset.
Not everyone is in the successful inclusion,
People are in names which were not successful inclusions and will want to exit,
The Nikkei has rules or habits which are vague enough to be considered unreliable. That creates for more surprise when inclusions come, but it also creates for unreliable index construction, which remains a problem. 
However, Japan Exchange Group saw a decent run on excess volume, perhaps partially helped by rising forward Street consensus EBIT. The trade is partially "done" already.The details of the inclusion and exclusion trades, flows, etc are, of course, below.

Japan

ORIX Corporation provides comprehensive financial services throughout the world. The Company's business lines include leasing, real estate loans, life insurance, banking, and consumer finance.  The Company also operates Environment related business and Private equity investment business. ORIX has a professional baseball team, the ORIX Buffalos.

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Orix Corp (8591 JP)

Quantifying the BOJ Change in ETF Policy: Assessing Future ETF Buying Methodology

The BOJ has announced a change in ETF Buying Program Parameters. The study/review they did is required reading to understand how they might buy...

Travis Lundy

Small Cap Growth: Freee (4478) - Counting Clouds

Small Cap Growth: Freee is Japan's number one provider of cloud accounting software. Early stage growth with large TAM. Visionary management team;...

Mark Chadwick

ORIX Corp.– Enigma Wrapped In A Riddle

* Poor Results To Continue: Orix (8591.JP/IX.US) reported consolidated FY (March) 1Q21 results of JPY 50.0 bn, declining JPY 19.2 bn (28%) YOY and...

Thomas J. Monaco

JPX Goes In to Nikkei 225 - Time To Sell

When it was reported in the press and subsequently announced by Sony on the 19th of May part way through the day that Sony was going to launch a...

Travis Lundy

Nikkei 225 - JPX IN, Sony Financial OUT

Today after the close the Nikkei Inc announced that it would delete Sony Financial Holdings (8729 JP) from a few of its indices and in the case of...

Travis Lundy

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