Index Rebal Trades & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Index Rebal Trades & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Quantitative Analysis

There are currently ~1,500 stocks listed in the Mothers, JASDAQ, and Second Sections of the Tokyo Stock Exchange. As time passes, some of these stocks will "graduate" to the First Section of the Tokyo Stock Exchange (TSE1), triggering inclusion into the TOPIX Index causing passive funds tracking TOPIX to buy them on an inclusion event. This presents various trading opportunities in several phases of this event timeline.  Being able to identify such candidates at a "Pre-event" phase (before the TSE reassignment is confirmed) can unlock great value for speculative bets as we recently witnessed in the case of <a href="https://www.smartkarma.com/insights/topix-inclusion-4931-jp-shinnihonseiyaku" target="_blank" data-smartkarma-citation="insights:45660" rel="noopener">TOPIX Inclusion (4931 JP): Shinnihonseiyaku</a> where the stock gained 90%+ in the ~5 months leading to the TSE1-reassignment announcement. However, in July 2020, TSE introduced more stringent new Section Transfer Requirements and TSE1 Listing Criteria adding a new layer of complexity to this prediction process, especially during the period of transition from the old rules to the new rules. In this insight, we take a look at how some of the potential TSE1 candidates will fare against these New Section Transfer Requirements and evaluate their attractiveness at the Pre-event phase. <hr><div class="content-remarks">This insight is an update to <a href="https://www.smartkarma.com/insights/topix-inclusion-pre-events-who-is-ready" target="_blank" data-smartkarma-citation="insights:41091" rel="noopener">TOPIX Inclusion Pre-Events: Who Is Ready?</a>. Please refer to that insight for more information on the approach used in the below analysis. Note that some assumptions used in the analysis have changed since then. </div>

There are currently ~1,500 stocks listed in the Mothers, JASDAQ, and Second Sections of the Tokyo Stock Exchange. As time passes, some of these stocks will "graduate" to the First Section of the Tokyo Stock Exchange (TSE1), triggering inclusion into the TOPIX Index causing passive funds tracking TOPIX to buy them on an inclusion event. This presents various trading opportunities in several phases of this event timeline.  Being able to identify such candidates at a "Pre-event" phase (before the TSE reassignment is confirmed) can unlock great value for speculative bets as we recently witnessed in the case of TOPIX Inclusion (4931 JP): Shinnihonseiyaku where the stock gained 90%+ in the ~5 months leading to the TSE1-reassignment announcement. However, in July 2020, TSE introduced more stringent new Section Transfer Requirements and TSE1 Listing Criteria adding a new layer of complexity to this prediction process, especially during the period of transition from the old rules to the new rules. In this insight, we take a look at how some of the potential TSE1 candidates will fare against these New Section Transfer Requirements and evaluate their attractiveness at the Pre-event phase. This insight is an update to TOPIX Inclusion Pre-Events: Who Is Ready?. Please refer to that insight for more information on the approach used in the below analysis. Note that some assumptions used in the analysis have changed since then. 

TOPIX Inclusions:  New Regulations! Who Is READY? 2.0

Expert on Japan Retail and Consumer Markets, JapanConsuming

Michael Causton

Expert on Japan Retail and Consumer Markets

Real Insight on Japanese Consumer Markets

JapanConsuming

JapanConsuming is a specialist research firm producing intelligence on Japanese retail and consumer markets. Founded in 2000, JapanConsuming has become the leading provider of insights on Japanese retailers and consumer trends to retailers, brands, government agencies and investors. As well as a highly regarded monthly report on the market, JapanConsuming produces in-depth reports on retail sectors, seminars on key trends and telephone consulting to investors on trends and retailers.

JapanConsuming was founded by Michael Causton and Roy Larke. 

Equity Bottom-Up

Zozo’s new business model as a brand producer was off to a strong start last month with most of the new 18 private brands selling out.
The online platform also re-launched the Zozosuit, suggesting a revival of the Zozo brand may be on the cards.
<a href="https://www.smartkarma.com/entities/zozo-inc" target="_blank" data-smartkarma-citation="entities:18379:1" rel="noopener">ZOZO Inc (3092 JP)</a> needs these new initiatives if it is to successfully transition to becoming a still distinctive but much more volume-based mall, a medium-term project that should lead to improving growth rates and profitability.

Zozo’s new business model as a brand producer was off to a strong start last month with most of the new 18 private brands selling out.
The online platform also re-launched the Zozosuit, suggesting a revival of the Zozo brand may be on the cards.
ZOZO Inc (3092 JP) needs these new initiatives if it is to successfully transition to becoming a still distinctive but much more volume-based mall, a medium-term project that should lead to improving growth rates and profitability.

Seven &amp; I had a dismal first half at almost all of its chains. On the plus side, e-commerce sales improved but, even here, results could have been better when compared to what some rivals have achieved online. At least Nissen, the acquired catalogue company, finally returned to profit.

Seven &amp; I had a dismal first half at almost all of its chains. On the plus side, e-commerce sales improved but, even here, results could have been better when compared to what some rivals have achieved online. At least Nissen, the acquired catalogue company, finally returned to profit.

Equity Analyst, LightStream Research

Supun Walpola

Equity Analyst

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.

Rakuten’s 3Q FY20 financial results did not carry any major surprises. We continue to prefer Rakuten among other Japanese e-commerce names, as we believe its strategy of improving monetisation of its existing users and increasing penetration into untapped markets through logistics expansion, better suits the maturing Japanese e-commerce market.We believe Rakuten, excluding its mobile and logistics businesses, is undervalued, however, we do not see any short term catalysts that would drive Rakuten’s share price up, especially as we expect Rakuten to continue making operating losses in the next two years as the company continues to invest heavily on its mobile and logistics operations. However, we like Rakuten for its long-term potential and expect further upside once investments in mobile and logistics operations start making meaningful contributions.

Rakuten’s 3Q FY20 financial results did not carry any major surprises. We continue to prefer Rakuten among other Japanese e-commerce names, as we believe its strategy of improving monetisation of its existing users and increasing penetration into untapped markets through logistics expansion, better suits the maturing Japanese e-commerce market.We believe Rakuten, excluding its mobile and logistics businesses, is undervalued, however, we do not see any short term catalysts that would drive Rakuten’s share price up, especially as we expect Rakuten to continue making operating losses in the next two years as the company continues to invest heavily on its mobile and logistics operations. However, we like Rakuten for its long-term potential and expect further upside once investments in mobile and logistics operations start making meaningful contributions.  

Rakuten: E-Commerce Monetisation Is Improving, Logistics and Mobile Losses Aside

Telco/Internet specialist

Kirk Boodry

Redex Research

Rakuten posted Q3 results that missed on profitability as the company ramped up spending on mobile to expand network coverage. With surveys of existing mobile users that show high marks for cost performance and simplicity but much less enthusiasm for network quality, this is what Rakuten needs to do to be competitive. Management said they are confident on progress towards profitability but this month’s monetization of its stake in Lyft and the sale of subordinated bonds indicate losses are going to continue for now. Results from the core eCommerce and Fintech segments were steady but not surprising as growth in the former moderated as Japan returned to normal whilst robust online trading boosted the latter as it did last quarter.

Rakuten posted Q3 results that missed on profitability as the company ramped up spending on mobile to expand network coverage. With surveys of existing mobile users that show high marks for cost performance and simplicity but much less enthusiasm for network quality, this is what Rakuten needs to do to be competitive. Management said they are confident on progress towards profitability but this month’s monetization of its stake in Lyft and the sale of subordinated bonds indicate losses are going to continue for now. Results from the core eCommerce and Fintech segments were steady but not surprising as growth in the former moderated as Japan returned to normal whilst robust online trading boosted the latter as it did last quarter.  

Rakuten - Q3 20 Results: Record Mobile Losses Are Unlikely to Ease Soon

Japan

LY Corporation operates as an internet search engine "Yahoo! JAPAN". The Company provides electronic commerce and settlement finance services for small medium enterprises and individuals. LY also operates media business including search linked advertising and display advertising services.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

LY (4689 JP)

TOPIX Inclusions: New Regulations! Who Is READY? 2.0

The TSE has new Listing Rules and Criteria for TSE1 listing and promotion. That means new analysis on what pre-event trades. One TOP PICK to trade...

Janaghan Jeyakumar, CFA

Zozo Transitions, Zozosuit Returns

Zozo continues its transition from fashion premium mall to lifestyle mall for all. This will take time but the spate of new projects are promising...

Michael Causton

Seven & I: Still Floundering

Seven & I has tried and failed to gain a foothold in digital markets but looks to be retreating from online food just at a time when competitors...

Michael Causton

Rakuten: E-Commerce Monetisation Is Improving, Logistics and Mobile Losses Aside

We like Rakuten for its long-term potential and expect further upside once investments in mobile and logistics operations start making meaningful...

Supun Walpola

Rakuten - Q3 20 Results: Record Mobile Losses Are Unlikely to Ease Soon

Rakuten ramped up mobile investment in Q3 leading to higher than expected operating losses. Recent moves to raise cash indicate higher investment...

Kirk Boodry

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)