Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<p>On the 29 September Back on the 27 July, Chinese search-engine <a href="https://www.smartkarma.com/entities/sogou-inc" target="_blank" data-smartkarma-citation="entities:25996:1" rel="noopener">Sogou Inc (SOGO US)</a>, majority-owned by <a href="https://www.smartkarma.com/entities/sohu-com-ltd" target="_blank" data-smartkarma-citation="entities:22853:1" rel="noopener">Sohu.com Inc (SOHU US)</a>  and <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, <a href="http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&amp;ref=115257193&amp;type=PDF&amp;symbol=SOGO&amp;companyName=Sogou+Inc.+American+Depositary+Shares+each+representing+one+Class+A&amp;formType=6-K&amp;dateFiled=2020-09-29&amp;CK=1713947" target="_blank" rel="noopener">entered</a> into a definitive agreement for a Going-Private Transaction at US$9/share.</p>
<p>In addition, Sohu entered into a share purchase agreement with Tencent concerning its stake in Sogou, the completion of which will result in Tencent holding not less than 90% of the voting power in Sogou. Therefore the Merger will be in the form of a short-form merger as per section 233(7) of the <a href="https://www.cima.ky/upimages/commonfiles/CompaniesLaw2020Revision_1579811065.pdf" target="_blank" rel="noopener">Companies Law of the Cayman Islands</a> - there is no vote. There are no dissenting rights.</p>
<p>That's about as clean a deal as you can get. But wait ...</p>
<p>On the 1 December, Sogou made an <a href="http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&amp;ref=115473750&amp;type=PDF&amp;symbol=SOGO&amp;companyName=Sogou+Inc.+American+Depositary+Shares+each+representing+one+Class+A&amp;formType=SC+13E3%2FA&amp;dateFiled=2020-12-01&amp;CK=1713947" target="_blank" rel="noopener">SEC filing</a>, with the following stated on page 34:</p>
<blockquote>
<p>In late November 2020, THL and Parent made an antitrust filing with relevant PRC regulatory authorities in connection with the Sohu Share Purchase and the Merger. Considering the time needed for the clearance of such filing, the parties decided to extend the termination date under the Sohu Share Purchase Agreement and the Merger Agreement. On December 1, 2020, (i) Sohu.com, Sohu Search, and Parent executed an Amendment No. 1 to Share Purchase Agreement, to <strong>extend the termination date under the Sohu Share Purchase Agreement from March 29, 2021 to July 31, 2021,</strong> and (ii) the Company, THL, Parent and TML executed an Amendment No. 1 to Agreement and Plan of Merger, to extend the termination date under the Merger Agreement from March 29, 2021 to July 31, 2021. (my emphasis)</p>
</blockquote>
<p>Shares are off ~2.3% following the announcement, and are now at a 4.4% gross spread to terms. </p>
<p>But isn't the anti-trust filing with the State Administration for Market Regulation a non-issue?</p>
<p>More below the fold.</p>
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<p></p>
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On the 29 September Back on the 27 July, Chinese search-engine Sogou Inc (SOGO US), majority-owned by Sohu.com Inc (SOHU US)  and Tencent Holdings (700 HK), entered into a definitive agreement for a Going-Private Transaction at US$9/share.
In addition, Sohu entered into a share purchase agreement with Tencent concerning its stake in Sogou, the completion of which will result in Tencent holding not less than 90% of the voting power in Sogou. Therefore the Merger will be in the form of a short-form merger as per section 233(7) of the Companies Law of the Cayman Islands - there is no vote. There are no dissenting rights.
That's about as clean a deal as you can get. But wait ...
On the 1 December, Sogou made an SEC filing, with the following stated on page 34:

In late November 2020, THL and Parent made an antitrust filing with relevant PRC regulatory authorities in connection with the Sohu Share Purchase and the Merger. Considering the time needed for the clearance of such filing, the parties decided to extend the termination date under the Sohu Share Purchase Agreement and the Merger Agreement. On December 1, 2020, (i) Sohu.com, Sohu Search, and Parent executed an Amendment No. 1 to Share Purchase Agreement, to extend the termination date under the Sohu Share Purchase Agreement from March 29, 2021 to July 31, 2021, and (ii) the Company, THL, Parent and TML executed an Amendment No. 1 to Agreement and Plan of Merger, to extend the termination date under the Merger Agreement from March 29, 2021 to July 31, 2021. (my emphasis)

Shares are off ~2.3% following the announcement, and are now at a 4.4% gross spread to terms. 
But isn't the anti-trust filing with the State Administration for Market Regulation a non-issue?
More below the fold.





Sogou/Tencent: Anti-Trust Wobble As Deal Nears Finish Line

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<p>Back on the 27 August, <a href="https://www.smartkarma.com/entities/leyou-technologies-holdings" target="_blank" data-smartkarma-citation="entities:5831:1" rel="noopener">Leyou Technologies (1089 HK)</a>  <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0827/2020082701826.pdf" target="_blank" rel="noopener">announced</a> a take-private transaction by way of a Scheme from <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a> at $3.3219/share, a 30.27% premium over the closing price of HK$2.55/share on 19 September 2019, the last trading day prior to Leyou's <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0525/2020052501310.pdf" target="_blank" rel="noopener">announcing</a> it was in preliminary discussions with various independent potential investors.</p>
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<p>70.02% of shares out - primarily comprising chairman Charles Yuk's stake - have given irrevocables to vote in favour of the Scheme. Disinterested Shareholders comprise all shares out, therefore the blocking stake at the Scheme Meeting is 308.5mn shares or 10% of shares out. No single shareholder has such a stake. The headcount test applies. </p>
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<p>This is a very clean deal. </p>
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<p>Leyou's shares wobbled a little in September after gaming companies were asked by Committee on Foreign Investment in the United States on their security protocols in handling Americans' personal data. Those concerns were unfounded, and Canadian and US regulatory bodies <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1008/2020100801134.pdf" target="_blank" rel="noopener">signed off</a> on the Offer on the 8 October.</p>
<p>The Scheme Document has now been <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/1111/2020111100047.pdf" target="_blank" rel="noopener">despatched</a>. The Court Meeting/EGM will be held on the 11 December. Assuming all falls into place, consideration under the Offer will be paid on or before the 31 December.</p>
<p>The IFA (Optima Capital) considers the Offer to be fair and reasonable.</p>
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<p>More below the fold.</p>
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Back on the 27 August, Leyou Technologies (1089 HK)  announced a take-private transaction by way of a Scheme from Tencent Holdings (700 HK) at $3.3219/share, a 30.27% premium over the closing price of HK$2.55/share on 19 September 2019, the last trading day prior to Leyou's announcing it was in preliminary discussions with various independent potential investors.


70.02% of shares out - primarily comprising chairman Charles Yuk's stake - have given irrevocables to vote in favour of the Scheme. Disinterested Shareholders comprise all shares out, therefore the blocking stake at the Scheme Meeting is 308.5mn shares or 10% of shares out. No single shareholder has such a stake. The headcount test applies. 


This is a very clean deal. 


Leyou's shares wobbled a little in September after gaming companies were asked by Committee on Foreign Investment in the United States on their security protocols in handling Americans' personal data. Those concerns were unfounded, and Canadian and US regulatory bodies signed off on the Offer on the 8 October.
The Scheme Document has now been despatched. The Court Meeting/EGM will be held on the 11 December. Assuming all falls into place, consideration under the Offer will be paid on or before the 31 December.
The IFA (Optima Capital) considers the Offer to be fair and reasonable.


More below the fold.


Leyou Tech (1089 HK): Offer Doc Despatched

Chief Economist

Diana Choyleva

Enodo Economics

Enodo Economics is an independent macroeconomic forecasting company that untangles complexity, challenges the consensus, and makes sense of the future. Our focus is on China – one of the most misunderstood economies in the world, but one of the most important to figure out.  Enodo’s chief economist, Diana Choyleva, has been analysing China for almost 20 years, while Enodo’s team boasts a combined 140 years’ experience covering China’s economy, politics and markets. 

Macroeconomics

<h2>China News That Matters</h2>
<ul>
<li>Evergrande, the world’s most indebted property firm </li>
<li>Stay home, stay safe, spend more</li>
<li>Sell those exports like imports </li>
<li>Chinese firms choose own capital markets</li>
<li>Roaring (quietly) once more, electric vehicles excite China </li>
</ul>
<div class="content-remarks">
<p>In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.</p>
</div>

China News That Matters

Evergrande, the world’s most indebted property firm 
Stay home, stay safe, spend more
Sell those exports like imports 
Chinese firms choose own capital markets
Roaring (quietly) once more, electric vehicles excite China 


In my weekly digest China News That Matters, I will give you selected summaries, sourced from a variety of local Chinese-language and international news outlets, and highlight why I think the news is significant. These posts are meant to neither be bullish nor bearish, but help you separate the signal from the noise.


Evergrande/ Golden Week/ Economy/ US-China/ Autos

<div>
<p>Back on the 27 July, Chinese search-engine <a href="https://www.smartkarma.com/entities/sogou-inc" target="_blank" data-smartkarma-citation="entities:25996:1" rel="noopener">Sogou Inc (SOGO US)</a>, majority-owned by <a href="https://www.smartkarma.com/entities/sohu-com-ltd" target="_blank" data-smartkarma-citation="entities:22853:1" rel="noopener">Sohu.com Inc (SOHU US)</a>  and <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, <a href="http://ir.sogou.com/2020-07-27-Sogou-Announces-Receipt-of-a-Preliminary-Non-Binding-Proposal-to-Acquire-the-Company" target="_blank" rel="noopener">announced</a> it has received a preliminary non-binding proposal from Tencent to acquire all of its outstanding ordinary shares that are not already owned by Tencent, for US$9.00 in cash per ordinary share or ADS. The Offer price is a 57% premium to the undisturbed price and a two-year high.</p>
<p>Today Sogou <a href="http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&amp;ref=115257193&amp;type=PDF&amp;symbol=SOGO&amp;companyName=Sogou+Inc.+American+Depositary+Shares+each+representing+one+Class+A&amp;formType=6-K&amp;dateFiled=2020-09-29&amp;CK=1713947" target="_blank" rel="noopener">entered</a> into a definitive agreement for a Going-Private Transaction at the same Offer price of US$9/share.</p>
<p>Separately, <a href="https://www.smartkarma.com/entities/sohu-com-ltd" target="_blank" data-smartkarma-citation="entities:22853:1" rel="noopener">Sohu.com Inc (SOHU US)</a> has entered into a share purchase agreement with Tencent concerning its stake in Sogou, the completion of which will result in Tencent holding not less than 90% of the voting power in Sogou.</p>
</div>
<div>
<p>Therefore the Merger will be in the form of a short-form merger as per section 233(7) of the <em><a href="https://www.cima.ky/upimages/commonfiles/CompaniesLaw2020Revision_1579811065.pdf" target="_blank" rel="noopener">Companies Law of the Cayman Islands</a></em> - there is no vote. There are no dissenting rights.</p>
<p>Done deal - the Merger is expected to close in the fourth quarter of 2020.</p>
</div>
<div>
<p>More below the fold.</p>
</div>


Back on the 27 July, Chinese search-engine Sogou Inc (SOGO US), majority-owned by Sohu.com Inc (SOHU US)  and Tencent Holdings (700 HK), announced it has received a preliminary non-binding proposal from Tencent to acquire all of its outstanding ordinary shares that are not already owned by Tencent, for US$9.00 in cash per ordinary share or ADS. The Offer price is a 57% premium to the undisturbed price and a two-year high.
Today Sogou entered into a definitive agreement for a Going-Private Transaction at the same Offer price of US$9/share.
Separately, Sohu.com Inc (SOHU US) has entered into a share purchase agreement with Tencent concerning its stake in Sogou, the completion of which will result in Tencent holding not less than 90% of the voting power in Sogou.


Therefore the Merger will be in the form of a short-form merger as per section 233(7) of the Companies Law of the Cayman Islands - there is no vote. There are no dissenting rights.
Done deal - the Merger is expected to close in the fourth quarter of 2020.


More below the fold.


Global Emerging Market Equities, Propitious Research

Wium Malan, CFA

Global Emerging Market Equities

Equity Bottom-Up

<p><a href="https://www.smartkarma.com/entities/baidu-inc" target="_blank" data-smartkarma-citation="entities:179:1" rel="noopener">Baidu (BIDU US)</a>, and the rest of the Chinese Online Search industry, has consistently been losing market share to the likes of <a href="https://www.smartkarma.com/entities/alibaba-group" target="_blank" data-smartkarma-citation="entities:28434:1" rel="noopener">Alibaba Group (9988 HK)</a>, <a href="https://www.smartkarma.com/entities/bytedance-technology" target="_blank" data-smartkarma-citation="entities:27936:1" rel="noopener">ByteDance (1460967D CH)</a>, <a href="https://www.smartkarma.com/entities/tencent-holdings-ltd" target="_blank" data-smartkarma-citation="entities:26:1" rel="noopener">Tencent Holdings (700 HK)</a>, <a href="https://www.smartkarma.com/entities/pinduoduo-inc" target="_blank" data-smartkarma-citation="entities:27250:1" rel="noopener">Pinduoduo (PDD US)</a> and <a href="https://www.smartkarma.com/entities/meituan-dianping" target="_blank" data-smartkarma-citation="entities:26970:1" rel="noopener">Meituan Dianping (3690 HK)</a> over the past two years. Although I still believe there is significant long term growth left for the Chinese digital advertising market, it can easily be argued that this growth will be heavily skewed and that the “pure” Search market is in effect an “industry in decline”. </p>
<p>In his book “Competitive Strategy: Techniques for Analysing Industries and Competitors”, Michael Porter expands on four key strategies which firms could successfully follow when they find themselves in a declining industry. In this insight, I analyse Baidu’s current strategy against these offered strategies to assess if there is indeed value left in the company (or at least the core search business). </p>
<p>Baidu should be able to continue to produce significant cash flow from its core search business as long as it sticks to the “leadership” strategy – given their dominant share of search queries, the low penetration they have in the SME market, the suitability to Search advertising for certain industry verticals and their superior profitability. I estimate Baidu’s fair value at US$168/ADS based on a SOTP valuation. The values used in my SOTP for <a href="https://www.smartkarma.com/entities/iqiyi-inc" target="_blank" data-smartkarma-citation="entities:26755:1" rel="noopener">iQIYI Inc (IQ US)</a>, <a href="https://www.smartkarma.com/entities/trip-com-group-ltd" target="_blank" data-smartkarma-citation="entities:180:1" rel="noopener">Trip.com (TCOM US)</a> (market value), Net Cash and Other investments (book value) would imply that Baidu’s core operations are currently valued at only $10.4bn ex-cash, which equates to only 9.1x 2021F PE (only 3.9x PE ex-cash).</p>

Baidu (BIDU US), and the rest of the Chinese Online Search industry, has consistently been losing market share to the likes of Alibaba Group (9988 HK), ByteDance (1460967D CH), Tencent Holdings (700 HK), Pinduoduo (PDD US) and Meituan Dianping (3690 HK) over the past two years. Although I still believe there is significant long term growth left for the Chinese digital advertising market, it can easily be argued that this growth will be heavily skewed and that the “pure” Search market is in effect an “industry in decline”. 
In his book “Competitive Strategy: Techniques for Analysing Industries and Competitors”, Michael Porter expands on four key strategies which firms could successfully follow when they find themselves in a declining industry. In this insight, I analyse Baidu’s current strategy against these offered strategies to assess if there is indeed value left in the company (or at least the core search business). 
Baidu should be able to continue to produce significant cash flow from its core search business as long as it sticks to the “leadership” strategy – given their dominant share of search queries, the low penetration they have in the SME market, the suitability to Search advertising for certain industry verticals and their superior profitability. I estimate Baidu’s fair value at US$168/ADS based on a SOTP valuation. The values used in my SOTP for iQIYI Inc (IQ US), Trip.com (TCOM US) (market value), Net Cash and Other investments (book value) would imply that Baidu’s core operations are currently valued at only $10.4bn ex-cash, which equates to only 9.1x 2021F PE (only 3.9x PE ex-cash).

Baidu: Strategies for Operating in an Industry in Decline

United States

Sogou Inc. operates as a Chinese online search engine. The Company develops Internet applications such as map, voice search, and smart phone assistant, as well as web directory and browser. Sogou serves clients in China.

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Sogou Inc (SOGO US)

Sogou/Tencent: Anti-Trust Wobble As Deal Nears Finish Line

The new SAMR rules came into effect this week. I suspect Tencent/Sohu are largely playing nice by proving an extended timetable to facilitate the...

David Blennerhassett

Leyou Tech (1089 HK): Offer Doc Despatched

The Court Meeting will be held on the 9 December. There's not a lot left on the table for around 6 weeks of work. If you can get in below $3.30, do...

David Blennerhassett

Evergrande/ Golden Week/ Economy/ US-China/ Autos

China News That Matters

Diana Choyleva

Sogou/Tencent: And That's A Wrap

Chinese search-engine Sogou Inc (SOGO US), majority-owned by Sohu.com Inc (SOHU US) and Tencent Holdings (700 HK), has announced it has received...

David Blennerhassett

Baidu: Strategies for Operating in an Industry in Decline

Baidu, and the rest of the Chinese Online Search industry, has consistently been losing market share to the likes of Alibaba, ByteDance, Tencent,...

Wium Malan, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

Sogou/Tencent: Anti-Trust Wobble As Deal Nears Finish Line

The new SAMR rules came into effect this week. I suspect Tencent/Sohu are largely playing nice by proving an extended timetable to facilitate the...

David Blennerhassett

Leyou Tech (1089 HK): Offer Doc Despatched

The Court Meeting will be held on the 9 December. There's not a lot left on the table for around 6 weeks of work. If you can get in below $3.30, do...

David Blennerhassett

Evergrande/ Golden Week/ Economy/ US-China/ Autos

China News That Matters

Diana Choyleva

Sogou/​Tencent: And That's A Wrap

Chinese search-engine Sogou Inc (SOGO US), majority-owned by Sohu.com Inc (SOHU US) and Tencent Holdings (700 HK), has announced it has received...

David Blennerhassett

Baidu: Strategies for Operating in an Industry in Decline

Baidu, and the rest of the Chinese Online Search industry, has consistently been losing market share to the likes of Alibaba, ByteDance, Tencent,...

Wium Malan, CFA

Sogou/Tencent: And That's A Wrap