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Most Read: Nintendo Co Ltd, Toyo Seikan Group Holdings L, Murata Manufacturing, China Gas Holdings, Pan Pacific International Holdings and more

In today’s briefing:

  • Nikkei225 Index Rebalance Preview: Perennial Favourites Could Be In
  • Nikkei 225 Index Rebalance: Nintendo, Keyence, Murata IN; Nisshinbo, Toyo Seikan, SKY Perfect OUT
  • 2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, ‘Skupper’ OUT
  • HSI Index Rebalance Preview: Potential Inclusions in December
  • PPIH (7532 JP) ToSTNeT-3 Buyback – The Alliance Is Strong, so FamilyMart Is Selling Shares

Nikkei225 Index Rebalance Preview: Perennial Favourites Could Be In

By Brian Freitas

In May, the Nikkei released a market consultation on proposed changes to the Nikkei 225 (NKY INDEX) covering capping the weight of new constituents in the index at 1% by using a Price Adjustment Factor, limiting the number of index changes at a periodic review to 3, and changing the index universe from stocks listed on TSE’s 1st section to stocks that are listed on the Prime Market (post the reorganisation). Most of the proposed changes were subsequently approved.

This is the first Nikkei 225 (NKY INDEX) rebalance after the market consultation that tweaked things around. The tweaks could ensure the inclusion of stocks that were historically not included in the index due to their high stock price, though the impact will be much smaller since their weight in the index will not exceed 1%.

At the upcoming rebalance, we see a high probability of Nintendo Co Ltd (7974 JP) and ZOZO Inc (3092 JP) being included in the index while there is a lower probability of Oriental Land (4661 JP) and Orix Corp (8591 JP) being included.

Potential deletion candidates are Toho Zinc (5707 JP), Sky Perfect Jsat (9412 JP), Maruha Nichiro (1333 JP) and Pacific Metals (5541 JP).

There will be quite a large impact from passive trading on a few names.

The changes will be announced early September and will be implemented at the close of trading on 30 September.


Nikkei 225 Index Rebalance: Nintendo, Keyence, Murata IN; Nisshinbo, Toyo Seikan, SKY Perfect OUT

By Brian Freitas

Nikkei has just announced the changes to the Nikkei 225 (NKY INDEX) as part of its periodic review. The changes will be made prior to the open of the market on 1 October, so passive funds will trade at the closing auction on 30 September.

There are 3 changes to the index with Keyence Corp (6861 JP), Murata Manufacturing (6981 JP) and Nintendo Co Ltd (7974 JP) replacing Nisshinbo Holdings (3105 JP), Toyo Seikan Group Holdings L (5901 JP) and Sky Perfect Jsat (9412 JP).

While the inclusion of Nintendo Co Ltd (7974 JP) and the deletion of Sky Perfect Jsat (9412 JP) was expected, the other names are relative surprises.

The impact on the inclusions is not very high in terms of days of ADV to buy and in terms of the real float to buy, but the impact on the deletions is a lot higher. The selling on Nisshinbo Holdings (3105 JP) and Toyo Seikan Group Holdings L (5901 JP) will result in around 18% of the free float of the stock being sold and the stocks could drop a lot before investors start to get involved.

This is the first review post the market consultation that was announced in May and the conclusions of which were published in July.

As usual, Nikkei have ignored the sector balance that is spoken about so much in the index methodology. Apparently its easier to write the index methodology than to follow it!


2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, ‘Skupper’ OUT

By Travis Lundy

Every year (usually in the beginning of September), the Nikkei Inc Index team conducts an annual review of the major price-weighted Nikkei indices – the most important being the Nikkei 225 Average – and adds and subtracts constituents according to the Rules.

Today, they announced the 2021 version of the changes (announcement, PAF changes).

Below is Some Background. If you want to skip ahead to the juicy analysis, you can jump ahead to the Changes Announced section just below, and then more below the fold.

Some Background

The Nikkei 225, well-known globally as “the Nikkei” is a price-weighted index, originally started nearly 70 years ago as an average of a selected number of stocks listed on the TSE First Section. Later, it became 225 members. 

Because it is price-weighted, and because for a long time it made no divisor adjustments for stock splits (so when a stock split 2:1 its weight fell by half because price fell by half and trackers had to sell half their shares in that stock), and the price multiplier was determined by the par value of a company, then they later they started adjusting for splits, stocks which are old, never split, AND have a high price end up having a high weight in the index. 

There was a huge reshuffle in April 2000 when the Nikkei decided that the system needed rebalancing to include more tech, so they changed the Rules. They pushed 30 names out and 30 names in, and the 30 names added were 50% of the new index

Twenty one years after the prior change in methodology, this past May 10 the Nikkei Inc Index Team announced new changes to the Rules. There was a proposal, with an FAQ, and supplemental data. On 5 July, the Nikkei confirmed the proposal with a new Guidebook.

When I wrote about this on 10 May in After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?) I said I thought the changes disappointing. There are real problems with the index and this did not do much; the changes are evolutionary rather than revolutionary, with the only interesting change being that constituents are added with a weight no greater than 1%. If the normal price adjustment factor would allow a constituent to enter at a weight greater than 1%, the Price Adjustment Factor (base 1) is lowered in increments of 0.1 so that the deemed inclusion weight on Base Date (end of July) is no more than 1%. There is no change to the idea that the Nikkei Index Team can override their rankings at any time as they see fit.

Because the Nikkei Index Team had let the sector balances and rankings slide quite a bit over the years (not adding “obvious” names and not deleting names which should probably have been deleted, and not rebalancing the sectors as the rules say they should), the possibility was that some names like Nintendo Co Ltd (7974 JP) and similar high-price-low-share-count names which “deserved” to be included were not simply because their very high price would create undue impact (it was undue impact and the lack of incremental float for high-weight low-share-count names which caused the BOJ to lower, then eventually cease their buying of Nikkei 225 ETFs). This rule on capping inclusions at 1% would go a ways to mitigating that problem so that would allow the Nikkei to add previously un-addable names. Expectations were high on a group of names, with Nintendo Co Ltd (7974 JP), Keyence Corp (6861 JP), ZOZO Inc (3092 JP), and probably Oriental Land (4661 JP), with the latter two likely to create some real froth if actually selected. 

The Changes Announced

Today after the close, the Nikkei Index Team announced the following changes to the Nikkei 225 Average as a result of the Annual Review:

The changes will be made on the last trading day of September, at the close. I expect to see $10bn trade on that day.

The new rules allow the Nikkei Index team to not do a lot to the sector mix if the additions are made because of “High Liquidity” because while the sector mix would normally mean more than three deleted, the new rules cap changes at 3 per annual rebalance (which is not enough).

As noted above, ZOZO Inc (3092 JP) and Oriental Land (4661 JP) were among names which were expected as possible inclusions and therefore a certain amount of pre-positioning may be in place. They may get somewhat hurt tomorrow.

There are a LOT of moving parts here. There are 3 ADDs, 3 DELETIONS, 1 Price Adjustment Factor moved sharply higher and one moved somewhat lower (a list of all the PAFs announced by the Nikkei is here), then there are another 220 stocks which will see selling on 30 September at the rebalance. 

For more detailed analysis of the stocks, their positioning, how much to buy, etc, please read on.

For more about passive tracking in Japan, please refer to JAPAN PASSIVE: Who Owns What 2021? 


HSI Index Rebalance Preview: Potential Inclusions in December

By Brian Freitas

The September rebalance of the Hong Kong Hang Seng Index (HSI INDEX) was implemented at the close of trading on 3 September. Hang Seng Indexes should announce the results of the December 2021 review of the Hang Seng Family of Indexes on 12 November. The constituent changes will be effective after the close of trading on 3 December.

The review period for the December rebalance ends on 30 September and stocks that have at least 3 month of trading history by the review meeting date are eligible for inclusion in the Hong Kong Hang Seng Index (HSI INDEX).

There were 3 inclusions at the June rebalance and 3 inclusions and 1 exclusion at the September rebalance to take the number of index constituents to 60.

With Hang Seng Indexes looking to get up to 80 Hong Kong Hang Seng Index (HSI INDEX) members by mid-2022, there could be 20 inclusions over the next 3 index rebalances.

Stocks that are ranked towards the top of their Industry group and are potential inclusions are Smoore International (6969 HK), Nongfu Spring (9633 HK), China Resources Beer Holdings (291 HK), China Resources Mixc Lifestyle Services (1209 HK), Sunac China Holdings (1918 HK), China Gas Holdings (384 HK), JD Health (6618 HK), Hansoh Pharmaceutical (3692 HK)China Hongqiao (1378 HK) and Fosun International (656 HK).

Given that the index committee consciously avoided including stocks from sectors that were targeted by tightening regulations in China, this list will be revised closer to the index committee meeting in November. Another factor that will determine the number of inclusions is the turnover at the rebalance – while it is less than 4% now with the 10 inclusions, that number will move higher as stocks move around and there are capping changes on the largest constituents.


PPIH (7532 JP) ToSTNeT-3 Buyback – The Alliance Is Strong, so FamilyMart Is Selling Shares

By Travis Lundy

Today after the close, Pan Pacific International Holdings (7532 JP) announced two things (in Japanese only).

  1. PPIH was registering for a bond issuance for up to ¥300bn, and
  2. PPIH would buy back up to 38,054,300 shares tomorrow morning on ToSTNeT-3 before the open, for up to ¥80.94bn. 

The second states that FamilyMart, which bought just over 10% of the company in the market starting in 2019 after

  1. selling the rest of its UNY business to PPIH, and
  2. attempting to buy 20% of PPIH in a Partial Tender Offer, which was much discussed on Smartkarma (see this insight for the result of the Tender Offer to see the earlier ones in the stream)….       ….and missing because almost nobody would sell their shares to FamilyMart

… will sell 38,054,300 shares into the buyback. 

The second statement is odd so merits a quick discussion. And there are opportunities for those who care.  As of Monday’s close and consensus forecast Net Income to June 2022, PPIH’s forward PER has hit a 20.x handle. That is good, but despite that, the market was not terribly supportive of last month’s earnings/guidance release.

As always, more below the fold. 


Before it’s here, it’s on Smartkarma