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Most Read: Softbank Group, TAL Education, Tencent, Hansoh Pharmaceutical, Li Auto Inc. and more

In today’s briefing:

  • JAPAN PASSIVE: Who Owns What 2021?
  • TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”
  • Tencent Holdings – Only The Beginning
  • As The Dust Settles – Potential Index Changes to the FTSE China 50/A50 & HSCEI
  • Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower

JAPAN PASSIVE: Who Owns What 2021?

By Travis Lundy

A few years ago I started this series, and I updated it last year. Since last year, it has been a top 10 insight in terms of views. 

I personally think it is important for investors of all types to understand WHO OWNS WHAT. 

Many fundamental investors are reticent to spend any time on this but there are many reasons why active investors in Japan should be interested in understanding the ownership and shareholder dynamics of passive investors in Japan.

Some of the places active investors will see their influence are:

  • Stories intermittently published about the BOJ’s presence in Japanese ETFs (especially the fact that it owns 85+% of the outstanding ETF market),
  • Relatively constant interest in Nikkei 225 rebalances like the one we saw in July 2020, which helped push up Japan Exchange Group (8697 JP) by 30+% from May to July, then helped it slide 13% in a week, or the changes in the Nikkei 225 review rules published earlier this year which may change what happens this September to a few large caps, and the announcement of the BOJ that it would no longer buy Nikkei 225 ETFs which started a long slide in Fast Retailing (9983 JP) shares against comps and the Nikkei itself. Long “held up” by ‘market inventory’ and Nikkei 225 ETF buying, when the BOJ stopped, it removed the cushion and existing inventory holders had to sell out. 
  • Then if you look at the shareholder structure of Fast Retailing today, you will see that it is STILL fundamentally a serious problem for large foreign active investors who would actually wish to take an active (but not activist) position. Real World Float on the stock is, by my calculation, less than 15% of shares outstanding. 
  • The relatively recent policy of increased stewardship regarding the passive management portion of the GPIF (the Government Pension Investment Fund) – an investing heavyweight in Japan.
  • The timing and quantum of after-event support or overhang on corporate actions such as buybacks, secondary offerings, primary offerings, mergers, etc. 
  • Index inclusions mean big flows. If you follow the insights on TOPIX Inclusions by Janaghan Jeyakumar, CFA and myself, you will often see big moves. Sometimes these stocks move 50% between when we write about them and when they go into the index. If you own them and are considering an exit, you need to know when to take profits, and the dynamic of the liquidity. If you are thinking about getting in for fundamental reasons, it pays to know early so you can get ahead of the major flow.
  • The return of Toshiba Corp (6502 JP) to the TSE First Section in Q1 this year changed the foreign shareholder percentage ownership, lowering it by 10%. Smartkarma readers knew this last year and in January, which prepared them for the June AGM when the shareholder category ownership was released.
  • The changes to the TSE’s market structure, which will affect TOPIX membership, which will affect many companies’ issuance, buyback, share cancellation, etc decisions over the next several months. They are doing this because of the TSE Prime listing rules which will effectively also determine whether or not they will be included in TOPIX in future, or whether they will fall out of TSE Prime and will see constant selling over late 2022 to early 2025. 

Of course, TOPIX is just over half of the passive tracking AUM in Japan. There’s more. 

Find out WHO OWNS WHAT in Japan Passive below the fold. 


TAL Education (TAL): In New Rule on Tutoring School, “Article 13” Harsher Than “Non-Profit”

By Ming Lu

  • The new rule for tutoring school damaged the prices of Chinese education equities.
  • The market focuses on the “non-profit” requirement, but we believe “Article 13” is more important.
  • We believe the authorities try to block all the ways that a tutoring school can continue.
  • We do not believe this is a “low-price opportunity” after the stock price plunge.
  • Please also see TAL Education (TAL): Last Summer for Physical Tutoring School on June 28 before the price plunge.

Tencent Holdings – Only The Beginning

By Thomas J. Monaco

*What’s Up With WeChat: Mainland China appears to have taken additional action against Tencent Holdings (700.HK) [Tencent], following Monday’s regulatory edict. Tencent is suspending new user registrations for its WeChat services, as it is undergoing a “security technical upgrade” in accordance with relevant laws and regulations. WeChat is Tencent’s most important business, and dominates mainland Chinese social media; and 

*Pain Trade Coming:Tencent is widely expected pay a large fine. In addition, Tencent may have to give up its exclusive music rights and possibly dispose of Kuwo and Kugou. Further, we have no doubt that Tencent will also follow Alibaba Group (BABA.US) [Alibaba] in their formation of a financial holding company. For Tencent, WeChat Pay and the broader lending/deposit taking business are likely to be reined-in. At CNY 38.5 bn for full year 2020, FinTech represents a growing 28.8% of revenue – and is a key and growing component of Tencent’s current and future results. No matter what spin that Tencent wants to place on its other businesses, an FHC represents significant downside risks. Earnings will compress, as capital requirements increase.


As The Dust Settles – Potential Index Changes to the FTSE China 50/A50 & HSCEI

By Brian Freitas

As regulations have changed in China, and as the market positions for regulations that could be changed in China, the fallout has resulted in markets selling off with a few sectors firmly in the crosshairs.

What started off with the ‘three red lines’ for real estate companies, the pulled IPO of Ant Financial Services Group (6688 HK) in November 2020 and regulating monopolies in big-tech has spread to the online education industry, food delivery industry, property service companies and the market is bracing for regulation of the medical and pharmaceutical industry.

The rampant selling of stocks that are affected by the regulations or could be affected will have an impact on the upcoming September index rebalances for the FTSE China 50 Index and FTSE China A50 Index (XIN9I INDEX) and the December rebalance for the Hang Seng China Enterprises Index (HSCEI INDEX).

In addition, there will be a lot more mainland China companies that will list in Hong Kong since they will not need to (or will find it easier to) get approval from the Cyberspace Administration of China. That will also have implications for these indices.

In this Insight, we look at the potential changes to the FTSE China 50, FTSE China A50 Index (XIN9I INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX) in the upcoming reviews based on the close of trading on 27 July.


Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower

By Brian Freitas

Li Auto Inc. (LI US) has got approval from the HKEX (388 HK) for a dual primary listing. Media reports indicate that the company could raise between US$1bn-2bn in the offering. Based on the XPeng (9868 HK) timeline, Li Auto could list around 6-9 August.

Xpeng (XPEV US) / XPeng (9868 HK) raised US$1.8bn via a dual primary listing earlier this month and Li Auto Inc. (LI US) is following closely behind. Maybe NIO Inc (NIO US) comes next.

We expect Li Auto Inc. (LI US) to get Fast Entry to the Hang Seng Composite Index (HSCI) though, as a WVR security, the stock will only be eligible for Stock Connect once it has completed 6 months of listing plus 20 trading days.

Li Auto could also be included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December review. This will lead to a further drop in the HSCEI 2022 dividend futures since we do not expect Li Auto Inc. (LI US) to pay dividends in the near future, while the potential deletion is a higher dividend yielding stock.


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