PREVIEW-Pacific Metals, Haseko seen joining Nikkei 225

What: Annual reshuffle of Nikkei 225 stock average

When: Announcement early September, carried out Oct. 1

Outcome: Included shares may surge, deleted ones may fall

By Elaine Lies

TOKYO, Aug 27 (Reuters) - As the annual Nikkei 225 .N225 reshuffle draws near, market players reckon that Pacific Metals Co Ltd (5541.T) and Haseko Corp (1808.T) are top picks to join the blue-chip average, while Kumagai Gumi (1861.T) is likely out.

Stocks newly added to the benchmark will benefit because 4.4-4.9 trillion yen ($40-45 billion) worth of funds are estimated to track the Nikkei. They must include the new additions in their portfolios, and sell shares of companies that are deleted.

Index compiler the Nihon Keizai Shimbun, publisher of the Nikkei business daily, will announce its additions and deletions for the benchmark early next month. They will take effect from the first business day of October.

The Nikkei does not reveal all the methodology behind its choices, but analysts say the decision is a combination of trade volume and maintaining a balance between six broad sectors.

Factors such as the impact of a stock's inclusion and how long it has been listed can also come into play.

In addition, the number of stocks involved differs each year. This time, because of rejigs carried out earlier this year due to companies delisting, two or three at most will change.

Pacific Metals, Japan's largest producer of the stainless steel ingredient ferronickel, and condominium builder Haseko are leading contenders to join, according to reports from Daiwa Institute of Research, Nomura Securities and Shinko Securities.

Other candidates are venture capital firm SBI Holdings Inc (8473.T), chipmaker Elpida Memory Inc 6665.T and Hitachi Construction Machinery Co Ltd. (6305.T).

Though shares seen as candidates for addition often rise once analysts have issued their reports, this year is different, with only Pacific Metals gaining in August -- by 4 percent.

"People aren't really buying on this kind of thing right now -- it's a bear market," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

Everyone agrees Kumagai Gumi, a general contractor that for years has been a candidate for deletion, is nearly sure to go. Kumagai Gumi's shares fell 39 percent in August compared with the Nikkei's 4.7 percent decline.

"Basically, when you look at the ranking of shares according to liquidity, this year only Kumagai is really at the level for deletion," said Junichi Hashimoto, a quantitative analyst at Daiwa. "It's finally at the bottom."

Haseko is in the same sector, and its estimated trading impact -- how many times a usual day's worth of trading volume will be traded after the reshuffle takes place -- is only 0.67 days, according to Nomura.

But its earnings have been hit by weak conditions in the property and construction sector, so that may diminish its appeal.

Hitachi Construction is in the same sector as Kumagai as well, making it another likely pick, Hashimoto said. But its estimated trading impact is 6.5 days, which might be seen as too much by the risk-averse Nikkei.

Pacific Metals has the highest liquidity rating of the prospective additions, and is a member of a sector that is not heavily over-represented. Its trading impact is estimated at 3.04 days, but as a metals firm it appears to have better prospects than Haseko or SBI Holdings.

Elpida, highly ranked in liquidity, is a strong candidate but faces challenges, one being that the technology sector is already heavily represented.

"Elpida also hasn't been listed for even five years yet, so it's still probably not a company that the Nikkei really wants put on at this point," said Osamu Shintani, a quantitative analyst at Nomura Securities.

With Kumagai the only firm below the make-or-break line for deletion, analysts said other deletions would depend on which firms the Nihon Keizai might want to include, and sector balance.

This might mean dropping electrical equipment maker Meidensha Corp (6508.T) so Elpida could join, or Toagosei Co (4045.T), a chemicals firm, for Pacific Metals.

The rejig is now fairly tame, but this wasn't always true.

Still painfully fresh in memory is the spring of 2000, when the Nikkei reshuffled 30 shares at once and set the rules that have been in force since.

"This basically meant that roughly half the (tracking funds') assets had to be relocated, and this created problems," said Nomura's Shintani. ($1=109.21 Yen) (Editing by Edwina Gibbs and Michael Watson)