Equity, Bottom-up Analyst, Investics Research

Sameer Taneja

Equity, Bottom-up Analyst

Investics Research

It is important to note that the information provided by Investics Research is based on publicly available data and own knowledge, which has been gathered and analyzed from a variety of sources. While every effort has been made to ensure the accuracy and completeness of the information provided, it is not guaranteed to be free from errors or omissions. All forecasts and estimates are based on information that has been obtained from public sources that are considered to be reliable. The sources include but are not limited to, company announcements, exchange filings, presentations, etc. Investics does not guarantee the accuracy and completeness of the forecasts, estimates, and/or other information.

Equity Bottom-up Research

Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/china-meidong-auto-holdings-limited" target="_blank" data-smartkarma-citation="entities:10795:1" rel="noopener">China Meidong Auto (1268 HK)</a> trades at a 12x/9x PE FY22/23E with a 6.5% dividend yield at a 20 HKD/share price (assuming an 80% payout ratio).</li>
<li>In buying <a href="https://www.smartkarma.com/entities/china-meidong-auto-holdings-limited" target="_blank" data-smartkarma-citation="entities:10795:1" rel="noopener">China Meidong Auto (1268 HK)</a>, you get an industry leader in the dealership space with supreme execution (35% ROE/47% CAGR profit growth/best capital allocator).</li>
<li>The integration of the Starchase Porsche Dealerships provides an upside potential, as the management, with their superior track record, can significantly improve the target's operations.</li>
</ul>



China Meidong Auto (1268 HK) trades at a 12x/9x PE FY22/23E with a 6.5% dividend yield at a 20 HKD/share price (assuming an 80% payout ratio).
In buying China Meidong Auto (1268 HK), you get an industry leader in the dealership space with supreme execution (35% ROE/47% CAGR profit growth/best capital allocator).
The integration of the Starchase Porsche Dealerships provides an upside potential, as the management, with their superior track record, can significantly improve the target's operations.


China Meidong: Back the Porsche at 20 HKD

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>The speculation and conjecture continues in the takeover of <a href="https://www.smartkarma.com/entities/soho-china-ltd" target="_blank" data-smartkarma-citation="entities:4123:1" rel="noopener">Soho China Ltd (410 HK)</a>'s tier-1 property assets.</p>
<p>The last piece of positive news occurred on the 3 August 2021, when Blackstone received a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0806/2021080600685.pdf" target="_blank" rel="noopener">notice</a> from SAMR dated 2 August that the case concerning its notification under the PRC Anti-Monopoly Law (AML) had been formally accepted by SAMR for review. </p>
<p>The announcement, however, stopped short of stating the review was simplified, and simply said the application has been formally accepted, and "<em>notwithstanding such formal acceptance, the Offeror and the Company may still be requested to provide further information and materials for the regulators’ review</em>".</p>
<p>In 2020, simple cases took 14 days on average to process. By the middle of last month, you knew you were in for the long haul, and the 30-day Phase 1 period expired on the 1 September.</p>
<p>I'm not aware an official announcement occurs when the review spills into Phase 2 (ostensibly another 90 calendar days); but Blackstone/SOHO were expected to clarify proceedings in its monthly update announcement.</p>
<p>On the 6 September, SOHO <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2021/0906/2021090600341.pdf" target="_blank" rel="noopener">announced</a> its SAMR application was still ongoing, and that...</p>
<blockquote>
<p>The Offeror has received further requests to provide additional information for the regulators’ review. It is uncertain when the review process will be completed.</p>
</blockquote>
<p>The Composite Document is now expected to be dispatched on or before the 31 December 2021. </p>
<p>Without either party expounding on the situation, the application now moves into Phase II.</p>
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<div>China's AML provides the following periods for review:</div>
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<ul style="list-style-type: disc;">
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<div>Phase I. The initial review period is for 30 calendar days. Under the simplified procedure, SAMR generally grants clearance in Phase I.</div>
</div>
</div>
</li>
<li>
<div>
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<div>Phase II. If necessary, the Phase I period will be followed by an additional 90-calendar day review period</div>
</div>
</div>
</li>
<li>
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<div>Phase III review period. The review period may then be extended for a further 60 calendar days if need be.</div>
</div>
</div>
</li>
</ul>
</div>
<p>Additional information? One media source reckoned this was in regards to Blackstone providing more details  - such as GFA - on its property interests.</p>
<p>This is doubtful - SAMR would likely know Blackstone's property exposure, right down to the last wastepaper basket.</p>
<p>More likely the "additional info" concerns the seller, although pertaining to what, it's unclear. Cue all the rumours and the ensuing backlash from Pan Shiyi son's comments last year (see <a href="https://skr.ma/nQLF3" target="_blank" rel="noopener">here</a> for more detail). </p>
<p>The takeaways from all of this? At the very least, there is a modicum of dialogue between the parties and the regulator. Often the clock runs down on the review process with little to no information made public, before a deal is blocked/prohibited.</p>
<p>Perhaps there are alternative means to lock-up the proceeds to Pan in escrow - sort of like an elevated withholding tax applied in the <a href="https://www.smartkarma.com/entities/baoxin-auto-group-ltd" target="_blank" data-smartkarma-citation="entities:20829:1" rel="noopener">Grand Baoxin Auto (1293 HK)</a> case (see further details below) - so as to progress the deal.</p>
<p>The negatives, apart from the extended review process over property assets, which historically have not triggered similar treatment - SOHO sold Sky SOHO to Gaw Capital Partners in <a href="https://www.mingtiandi.com/real-estate/finance-real-estate/gaw-closes-on-798m-purchase-of-sky-soho-in-shanghai/" target="_blank" rel="noopener">2018</a> for RMB5bn, plus entered into an <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0930/ltn20190930413.pdf" target="_blank" rel="noopener">agreement</a> to sell car parking spaces for RMB761mn, none of which attracted security concerns - is that the clock does indeed run down to the long-stop date (31 December 2021), and both parties agree to terminate negotiations.</p>
<p>But I'd be surprised to see Blackstone walk. The underlying assets on a stand-alone basis are worth considerably more, potentially &gt;HK$8/share by some asset valuation models. </p>
<div class="content-highlight">
<p><strong>The Trade?</strong> I still like SOHO here - a high probability of a break is already priced in. I just don't see Beijing setting a precedent and outright blocking the deal on anti-trust grounds.</p>
</div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/229/063/original/image_47029318541631239524443.png?1631239525" class="editor-image img-responsive" data-smartkarma-image-id="229063"></figure>

The speculation and conjecture continues in the takeover of Soho China Ltd (410 HK)'s tier-1 property assets.
The last piece of positive news occurred on the 3 August 2021, when Blackstone received a notice from SAMR dated 2 August that the case concerning its notification under the PRC Anti-Monopoly Law (AML) had been formally accepted by SAMR for review. 
The announcement, however, stopped short of stating the review was simplified, and simply said the application has been formally accepted, and "notwithstanding such formal acceptance, the Offeror and the Company may still be requested to provide further information and materials for the regulators’ review".
In 2020, simple cases took 14 days on average to process. By the middle of last month, you knew you were in for the long haul, and the 30-day Phase 1 period expired on the 1 September.
I'm not aware an official announcement occurs when the review spills into Phase 2 (ostensibly another 90 calendar days); but Blackstone/SOHO were expected to clarify proceedings in its monthly update announcement.
On the 6 September, SOHO announced its SAMR application was still ongoing, and that...

The Offeror has received further requests to provide additional information for the regulators’ review. It is uncertain when the review process will be completed.

The Composite Document is now expected to be dispatched on or before the 31 December 2021. 
Without either party expounding on the situation, the application now moves into Phase II.

China's AML provides the following periods for review:






Phase I. The initial review period is for 30 calendar days. Under the simplified procedure, SAMR generally grants clearance in Phase I.






Phase II. If necessary, the Phase I period will be followed by an additional 90-calendar day review period






Phase III review period. The review period may then be extended for a further 60 calendar days if need be.





Additional information? One media source reckoned this was in regards to Blackstone providing more details  - such as GFA - on its property interests.
This is doubtful - SAMR would likely know Blackstone's property exposure, right down to the last wastepaper basket.
More likely the "additional info" concerns the seller, although pertaining to what, it's unclear. Cue all the rumours and the ensuing backlash from Pan Shiyi son's comments last year (see here for more detail). 
The takeaways from all of this? At the very least, there is a modicum of dialogue between the parties and the regulator. Often the clock runs down on the review process with little to no information made public, before a deal is blocked/prohibited.
Perhaps there are alternative means to lock-up the proceeds to Pan in escrow - sort of like an elevated withholding tax applied in the Grand Baoxin Auto (1293 HK) case (see further details below) - so as to progress the deal.
The negatives, apart from the extended review process over property assets, which historically have not triggered similar treatment - SOHO sold Sky SOHO to Gaw Capital Partners in 2018 for RMB5bn, plus entered into an agreement to sell car parking spaces for RMB761mn, none of which attracted security concerns - is that the clock does indeed run down to the long-stop date (31 December 2021), and both parties agree to terminate negotiations.
But I'd be surprised to see Blackstone walk. The underlying assets on a stand-alone basis are worth considerably more, potentially &gt;HK$8/share by some asset valuation models. 

The Trade? I still like SOHO here - a high probability of a break is already priced in. I just don't see Beijing setting a precedent and outright blocking the deal on anti-trust grounds.



SOHO China (410 HK): At Least There Is Dialogue

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Index Rebalance

<p>The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 26 February. The constituent changes will be effective after the close of trading on 12 March.</p><p>For the Hang Seng Composite Index (HSCI) there are 36 inclusions and 29 deletions, taking the number of index constituents up to 500.</p><p>Although there are almost no assets indexed to the HSCI, the index forms the basis of stocks that are eligible for Southbound Stock Connect. Stocks that are included in the HSCI and subsequently included in the Stock Connect program get inflows from mainland investors. Secondary Listings are not eligible for inclusion in the Stock Connect program.</p><p>Of the 36 inclusions, 4 are already a part of Stock Connect by virtue of having listed A-shares, 2 are Secondary listings and will not be included in Stock Connect, 9 will be added to Shanghai and Shenzhen Stock Connect, while 21 stocks will only be added to Shenzhen Stock Connect.</p><p>Of the 29 index deletions, 13 are not a part of Stock Connect, 7 will continue to remain a part of Stock Connect by virtue of having listed A-shares, while 9 will be deleted from the Stock Connect program.</p><p>We identify 4 stocks that could sell off ahead of their removal from the Stock Connect Buy list, while Biotech stocks could be in focus ahead of their inclusion in the Stock Connect Buy and Sell list.</p>

The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 26 February. The constituent changes will be effective after the close of trading on 12 March.For the Hang Seng Composite Index (HSCI) there are 36 inclusions and 29 deletions, taking the number of index constituents up to 500.Although there are almost no assets indexed to the HSCI, the index forms the basis of stocks that are eligible for Southbound Stock Connect. Stocks that are included in the HSCI and subsequently included in the Stock Connect program get inflows from mainland investors. Secondary Listings are not eligible for inclusion in the Stock Connect program.Of the 36 inclusions, 4 are already a part of Stock Connect by virtue of having listed A-shares, 2 are Secondary listings and will not be included in Stock Connect, 9 will be added to Shanghai and Shenzhen Stock Connect, while 21 stocks will only be added to Shenzhen Stock Connect.Of the 29 index deletions, 13 are not a part of Stock Connect, 7 will continue to remain a part of Stock Connect by virtue of having listed A-shares, while 9 will be deleted from the Stock Connect program.We identify 4 stocks that could sell off ahead of their removal from the Stock Connect Buy list, while Biotech stocks could be in focus ahead of their inclusion in the Stock Connect Buy and Sell list.

HSCI Index Rebalance & Stock Connect: Inclusions & Exclusions

<div>
<p>After <a href="https://www.smartkarma.com/entities/oriental-watch-holdings" target="_blank" data-smartkarma-citation="entities:19950:1" rel="noopener">Oriental Watch (398 HK)</a> ("OWH") was <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0831/2020083100161.pdf" target="_blank" rel="noopener">suspended</a> <em>"pursuant to the Codes on Takeovers and Mergers and Share Buy-backs</em>", the immediate takeaway was to conclude the company would be subject to a Privatization Offer. But in what is becoming increasingly more common, OWH has announced a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0914/2020091400003.pdf" target="_blank" rel="noopener">partial buyback</a> from the company - 14.55% of shares out or 83mn shares, at HK$3.00/share, a 53.85% premium to last close.</p>
</div>
<div>
<p>This will cost the company HK$0.25bn (US$32mn). OWH had net cash on hand of ~HK$0.65bn as at Mar 2020.</p>
</div>
<div>
<p>Yeung Ming Biu &amp; concert parties hold 30.85% of shares out and will not tender. That leaves 69.15% of the register subject to the buyback, implying a minimum pro-ration of 21.04%.</p>
</div>
<div>
<p>Should the partial buyback complete (i.e. fully exercised) Yeung &amp; concert parties will hold 36.10% of shares out, before the exercise of any outstanding share options. That step-up in %-held oversteps Hong Kong's "creeper rule", and therefore Independent Shareholders are required, by way of a special resolution (75% vote), to approve a whitewash waiver such that Wong is not obligated to make a general offer for shares not held. </p>
</div>
<div>
<p>As always, more below the fold. Plus<em><strong> Ye Olde Arb Grids</strong></em>.  </p>
</div>


After Oriental Watch (398 HK) ("OWH") was suspended "pursuant to the Codes on Takeovers and Mergers and Share Buy-backs", the immediate takeaway was to conclude the company would be subject to a Privatization Offer. But in what is becoming increasingly more common, OWH has announced a partial buyback from the company - 14.55% of shares out or 83mn shares, at HK$3.00/share, a 53.85% premium to last close.


This will cost the company HK$0.25bn (US$32mn). OWH had net cash on hand of ~HK$0.65bn as at Mar 2020.


Yeung Ming Biu &amp; concert parties hold 30.85% of shares out and will not tender. That leaves 69.15% of the register subject to the buyback, implying a minimum pro-ration of 21.04%.


Should the partial buyback complete (i.e. fully exercised) Yeung &amp; concert parties will hold 36.10% of shares out, before the exercise of any outstanding share options. That step-up in %-held oversteps Hong Kong's "creeper rule", and therefore Independent Shareholders are required, by way of a special resolution (75% vote), to approve a whitewash waiver such that Wong is not obligated to make a general offer for shares not held. 


As always, more below the fold. Plus Ye Olde Arb Grids.  


Oriental Watch (398 HK): Conditional Partial Offer

<p>After <a href="https://www.smartkarma.com/entities/skyworth-digital-holdings-ltd" target="_blank" data-smartkarma-citation="entities:10941:1" rel="noopener">Skyworth Digital (751 HK)</a> was <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0617/2020061700221.pdf" target="_blank" rel="noopener">suspended</a> "<em>pursuant to the Codes on Takeovers and Mergers and Share Buy-backs</em>", the immediate takeaway as the company would be subject to a privatization Offer <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2019/0812/ltn20190812773.pdf" target="_blank" rel="noopener">similar</a> to <a href="https://www.smartkarma.com/entities/tpv-technology-ltd" target="_blank" data-smartkarma-citation="entities:17232:1" rel="noopener">TPV Technology (903 HK)</a>'s.</p>
<p>But in a twist, Skyworth announced a <a href="https://www1.hkexnews.hk/listedco/listconews/sehk/2020/0617/2020061701026.pdf" target="_blank" rel="noopener">partial buyback</a> - 12.83% of shares out or 392.8mn shares, at HK$2.80/share, a 32.1% premium to last close.</p>
<p>This will cost the company HK$1.1bn (US$141mn). Skyworth had cash on hand of HK$5.4bn as at Dec-19, or ~HK$3bn at the parent level, netting off cash held in 57.8%-held subsidiary <a href="https://www.smartkarma.com/entities/skyworth-digital-co-ltd-a" target="_blank" data-smartkarma-citation="entities:13735:1" rel="noopener">Skyworth Digital Co Ltd A (000810 CH)</a>.</p>
<p>Stephen Wong &amp; concert parties hold 40.88% of shares out and will not tender. Additional directors holding 0.9% have given an undertaking not to tender. That leaves 58.22% of the register subject to the buyback, implying a minimum pro-ration of 22.04%.</p>
<p>Should the partial buyback complete (i.e. fully exercised) Wong &amp; concert parties will hold 46.90% of shares out, before the exercise of any outstanding share options. That step-up in %-held oversteps Hong Kong's "creeper rule", and therefore Independent Shareholders are required, by way of a special resolution (75% vote), to approve a whitewash waiver such that Wong is not obligated to make a general offer for shares not held. </p>
<p>As recently seen in other deals, that whitewash waiver approval is not always a given.</p>
<p>As always, more below the fold. Plus <em><strong>Ye Olde Arb Grids</strong>. </em></p>

After Skyworth Digital (751 HK) was suspended "pursuant to the Codes on Takeovers and Mergers and Share Buy-backs", the immediate takeaway as the company would be subject to a privatization Offer similar to TPV Technology (903 HK)'s.
But in a twist, Skyworth announced a partial buyback - 12.83% of shares out or 392.8mn shares, at HK$2.80/share, a 32.1% premium to last close.
This will cost the company HK$1.1bn (US$141mn). Skyworth had cash on hand of HK$5.4bn as at Dec-19, or ~HK$3bn at the parent level, netting off cash held in 57.8%-held subsidiary Skyworth Digital Co Ltd A (000810 CH).
Stephen Wong &amp; concert parties hold 40.88% of shares out and will not tender. Additional directors holding 0.9% have given an undertaking not to tender. That leaves 58.22% of the register subject to the buyback, implying a minimum pro-ration of 22.04%.
Should the partial buyback complete (i.e. fully exercised) Wong &amp; concert parties will hold 46.90% of shares out, before the exercise of any outstanding share options. That step-up in %-held oversteps Hong Kong's "creeper rule", and therefore Independent Shareholders are required, by way of a special resolution (75% vote), to approve a whitewash waiver such that Wong is not obligated to make a general offer for shares not held. 
As recently seen in other deals, that whitewash waiver approval is not always a given.
As always, more below the fold. Plus Ye Olde Arb Grids. 

China

Grand Baoxin Auto Group Limited is an automobile sales and service group operating primarily in Mainland China, specializing in mid-to-high-end, luxury, and ultra-luxury brands. The company provides integrated services including new car sales, after-sales maintenance, auto beauty, used car sales, auto insurance, and parts sales, alongside finance leasing and automobile finance businesses. Headquartered in Shanghai, China, the company was founded in 1999.

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Grand Baoxin Auto (1293 HK)

China Meidong: Back the Porsche at 20 HKD

China Meidong Auto (1268 HK) trades at a 12x/9x FY22/23E with a 6.5% dividend yield at a 20 HKD/share price ( assuming an 80% payout ratio ). We...

Sameer Taneja

SOHO China (410 HK): At Least There Is Dialogue

I still like SOHO here - a high probability of a break is already priced in. I just don't see Beijing setting a precedent and outright blocking the...

David Blennerhassett

HSCI Index Rebalance & Stock Connect: Inclusions & Exclusions

There are 36 inclusions/ 29 exclusions for the Hang Seng Composite Index. 9 stocks will be deleted from the Stock Connect Buy list & there are a...

Brian Freitas

Oriental Watch (398 HK): Conditional Partial Offer

After Oriental Watch (398 HK) was suspended "pursuant to the Codes on Takeovers and Mergers and Share Buy-backs", the immediate takeaway as the...

David Blennerhassett

Skyworth (751 HK)'s Partial Buyback

After Skyworth Digital (751 HK) was suspended "pursuant to the Codes on Takeovers and Mergers and Share Buy-backs", the immediate takeaway as the...

David Blennerhassett

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