Asia L/S Equity PM/Macro/Thematic Idea Generation

Rikki Malik

Cross Asset Strategy

<ul>
<li>A shift in composition needed in a Japanese portfolio this year</li>
<li>A weaker US and Japanese economy together with a stronger Yen will  make sector allocation key.</li>
<li>Some sectors to avoid or invest in during this next phase.</li>
</ul>


A shift in composition needed in a Japanese portfolio this year
A weaker US and Japanese economy together with a stronger Yen will  make sector allocation key.
Some sectors to avoid or invest in during this next phase.


2024 High Conviction Idea: The Case for a Rotation Out of Japan into Hong Kong - Part 4

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.

<ul>
<li>Parent-Subsidiary listings present several problems: the disadvantages to parent company's shareholders that drain subsidiary's profits, the distortion of market capitalization between subsidiary and parent company, and independence of subsidiary's management.</li>
<li>While it’s an improvement for TSE to ask companies to disclose their purpose and policy of listing subsidiaries and affiliates, it doesn't ensure the complete independence of subsidiaries and affiliates.</li>
<li>More than 30% of listed companies are listed subsidiaries or affiliates. Investors are forced to look for investment targets while worrying about management independence in 70% of the companies.</li>
</ul>


Parent-Subsidiary listings present several problems: the disadvantages to parent company's shareholders that drain subsidiary's profits, the distortion of market capitalization between subsidiary and parent company, and independence of subsidiary's management.
While it’s an improvement for TSE to ask companies to disclose their purpose and policy of listing subsidiaries and affiliates, it doesn't ensure the complete independence of subsidiaries and affiliates.
More than 30% of listed companies are listed subsidiaries or affiliates. Investors are forced to look for investment targets while worrying about management independence in 70% of the companies.


TSE's Request for Disclosure About Parent-Subsidiary Listings Is an Improvement, Not a Solution

<ul>
<li>It is desirable for stakeholders other than shareholders for the company to be profitable. The problem lies in holding excess cash without making sufficient returns from the business.</li>
<li>Cash flow should be used for reinvestment and shareholder returns, but in fact many companies didn't grow their allocations to investment and shareholder returns, but instead accumulated cash on hand.</li>
<li>There is a big difference in corporate value between a company with growing cash flow and increasing shareholder returns and a company with stagnant cash flow but raising shareholder returns.</li>
</ul>


It is desirable for stakeholders other than shareholders for the company to be profitable. The problem lies in holding excess cash without making sufficient returns from the business.
Cash flow should be used for reinvestment and shareholder returns, but in fact many companies didn't grow their allocations to investment and shareholder returns, but instead accumulated cash on hand.
There is a big difference in corporate value between a company with growing cash flow and increasing shareholder returns and a company with stagnant cash flow but raising shareholder returns.


If Multi-Stakeholder Is Equally Important, a Company Should Make Sufficient Profit First

<ul>
<li>It is an expected option for a parent company to make a profitable subsidiary wholly owned by the parent company, an environment that demands improved ROE.</li>
<li>It is natural that the market would receive a stock offering by a large shareholder with more information than others as the stock price is higher than its fair value.</li>
<li>It's not unrelated to the fact that few shareholder proposals are approved and company proposals are rejected at AGMs, and that most domestic investment managers affiliates of major financial institutions.</li>
</ul>


It is an expected option for a parent company to make a profitable subsidiary wholly owned by the parent company, an environment that demands improved ROE.
It is natural that the market would receive a stock offering by a large shareholder with more information than others as the stock price is higher than its fair value.
It's not unrelated to the fact that few shareholder proposals are approved and company proposals are rejected at AGMs, and that most domestic investment managers affiliates of major financial institutions.


Interesting that the Buy Parent Company + Sell Subsidiary Trade Does Not Work

<ul>
<li>In Japan, many companies have large gap between their stock price and their intrinsic value due to issues related to the use of assets and other resources or cash flow.</li>
<li>Companies want to use the example of "improvement measures" to be released by TSE in January as a template, so we can't expect "management is serious about  tackling this issue."</li>
<li>The fact that ROE has improved modestly over the past decade indicates that management hasn’t made fundamental changes to traditional management strategies to address the challenges faced by individual companies.</li>
</ul>


In Japan, many companies have large gap between their stock price and their intrinsic value due to issues related to the use of assets and other resources or cash flow.
Companies want to use the example of "improvement measures" to be released by TSE in January as a template, so we can't expect "management is serious about  tackling this issue."
The fact that ROE has improved modestly over the past decade indicates that management hasn’t made fundamental changes to traditional management strategies to address the challenges faced by individual companies.


"Requests" Through Overseas Investor Engagement Will Continue to Be More Effective than TSE Requests

Japan

The TOPIX, also known as the Tokyo Stock Price Index, is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The index calculation excludes temporary issues and preferred stocks, and has a base value of 100 as of January 4, 1968.

TSE Tokyo Price Index TOPIX (TPX INDEX)

2024 High Conviction Idea: The Case for a Rotation Out of Japan into Hong Kong - Part 4

In light of a weaker US and Japanese economy and a stronger Yen, sector allocation is crucial for Japanese portfolios this year. Certain sectors...

Rikki Malik

TSE's Request for Disclosure About Parent-Subsidiary Listings Is an Improvement, Not a Solution

I would like to discuss the issues on the December 11 Nikkei Shimbun article, "TSE Requests Disclosure of Significance of Parent-Subsidiary...

Metrical Inc

If Multi-Stakeholder Is Equally Important, a Company Should Make Sufficient Profit First

I would like to discuss the issues on the November 26 Nikkei Shimbun article, "Are Japanese Companies Shareholder Neglectful or Biased? A Message...

Metrical Inc

Interesting that the Buy Parent Company + Sell Subsidiary Trade Does Not Work

I would like to discuss the issues on the December 6 Nikkei Newspaper article, "Dialogue with the Market Questioned: Sell or Buy?"

Metrical Inc

"Requests" Through Overseas Investor Engagement Will Continue to Be More Effective than TSE Requests

I would like to discuss the issues on the December 4 Nikkei Shimbun article, "P/Bs Push Fund Managers to Break Out of Slump, One after Another.”

Metrical Inc

2024 High Conviction Idea: The Case for a Rotation Out of Japan into Hong Kong - Part 4

​In light of a weaker US and Japanese economy and a stronger Yen, sector allocation is crucial for Japanese portfolios this year. Certain sectors...

Rikki Malik

TSE's Request for Disclosure About Parent-Subsidiary Listings Is an Improvement, Not a Solution

I would like to discuss the issues on the December 11 Nikkei Shimbun article, "TSE Requests Disclosure of Significance of Parent-Subsidiary...

Metrical Inc

If Multi-Stakeholder Is Equally Important, a Company Should Make Sufficient Profit First

I would like to discuss the issues on the November 26 Nikkei Shimbun article, "Are Japanese Companies Shareholder Neglectful or Biased? A Message...

Metrical Inc

Interesting that the Buy Parent Company + Sell Subsidiary Trade Does Not Work

I would like to discuss the issues on the December 6 Nikkei Newspaper article, "Dialogue with the Market Questioned: Sell or Buy?"

Metrical Inc

"Requests" Through Overseas Investor Engagement Will Continue to Be More Effective than TSE Requests

I would like to discuss the issues on the December 4 Nikkei Shimbun article, "P/Bs Push Fund Managers to Break Out of Slump, One after Another.”

Metrical Inc

In light of a weaker US and Japanese economy and a stronger Yen, sector allocation is crucial for Japanese portfolios this year. Certain sectors...