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Smartkarma Daily Briefs

Brief China: E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help and more

By | China, Daily Briefs

In this briefing:

  1. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help
  2. Health & Happiness (1112): No Soy Please and Still Cheap
  3. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals
  4. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

1. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help

Image?1582850753

E-Star Commercial Management (ESCM HK) is looking to raise US$150m in its upcoming Hong Kong IPO.

ESCM is a commercial operational service provider focused on the Greater Bay Area (mostly in Shenzhen) although it does have a national presence. The company is ranked first and third in terms of the number of shopping centers and GFA in operation in Shenzhen, respectively.

The company has good long-term commercial properties under management (average of about 15 years). About half of the contracted GFA that has yet to commence operation and fully contribute to revenue. It will start between 2020 to 2023 which will drive revenue growth

2. Health & Happiness (1112): No Soy Please and Still Cheap

Image 52456268121582847562786

Health And Happiness (H&H) (1112 HK) subsidiary has agreed to purchase a stake in Else Nutrition, a plant-based alternative IMF made of almond, buckwheat, and tapioca. 

Else Nutrtion complements the existing product line in the company i.e. Biostime (children probiotics and infant milk formula), Swisse (adult nutrition and supplements), Healthy Times (organic food and formula for toddlers), Dodie (baby glass bottles and accessories), Good Gout (organic food for children), and Aurelia Probiotic Skincare.

In this difficult times in China, HH is better than most of its peers in China and Asia. It has 38% higher ROIC, 82% higher in gross margin, 84% higher in net margin yet it is trading at 25% lower than its peers. Yet its share price has underperformed compared to Ausnutria Dairy Corp (1717 HK) whose exposure to adult nutrition is very small. 

3. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals

Image 17126494871582841706083

Guoxuan High-Tech Co Ltd (002074 CH) is lithium battery producers for electric commercial and passenger vehicles. The company has a market cap of US$4B and is listed in Shenzhen stock exchange. The stock has rallied in the last month on the news that Volkswagen is in discussion to invest 20% stake in the company.

The company has been burning cash and leveraging its balance sheet. The recent rally does not appear to be grounded in fundamentals but appears to have been primarily driven in anticipation of funding to deleverage the balance sheet. We believe that in the absence of a turnaround strategy the company will face headwinds if the negotiations with Volkswagen fail. In such situation we expect the stocks to revert back to its long-term mean valuations, a drop of 50% from current levels.

4. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

Image 41514005621582821543929

Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

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Brief Consumer: The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production
  2. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core
  3. Health & Happiness (1112): No Soy Please and Still Cheap

1. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production

Image 75244167121582876867359

On the 26th of February, it was reported that Tesla Motors (TSLA US) and Panasonic Corp (6752 JP) will end their joint solar cell production. Although the two companies will still operate their EV battery Gigafactory jointly, the two are increasingly parting ways. The news has it that Panasonic’s production of solar cells did not meet Tesla’s expected standards (mainly on price).

  • We expected Panasonic to reduce its reliance on Tesla – the news only confirms our thoughts, and we view this as positive for Panasonic. For Panasonic, the solar business seems to not have yielded the results expected. Thus, the decision to end production (especially with Tesla) makes sense.
  • Tesla, on the other hand, expects its solar energy business to do well, given the price competitiveness (on its Powerwall product) from sourcing from Chinese suppliers alongside economies of scale benefits. However, even if demand conditions are good, it seems questionable as to whether Tesla’s production would come in time to meet the demand (now that the JV is no more as well).
  • On a side note, Tesla recently partnered with CATL for prismatic batteries while Panasonic is developing cylindrical batteries for Toyota’s BEVs. Given the limited use of prismatic batteries in BEVs, we do not really think such moves by Tesla should pressure Panasonic or be seen as a downside for the latter.

2. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core

Screenshot%202020 02 28%20at%208.16.03%20am

Matahari Department Store (LPPF IJ)‘s new CEO Terry O’Connor hosted a conference call for the company’s FY19 results yesterday afternoon. The surprise did not come in the numbers but in his forthright and adamant statements that he was making big changes to the company’s future strategy and addressing past missteps immediately. There is a full strategic review underway. Is this the catalyst investors have been waiting for to return to the stock? 

Firstly, the company will continue to address the company’s lingering inventory issues, which although improving will take another two quarters to put straight, as it streamlines its assortment and depth of products and flushes out products that should not be there.

Secondly, the company will abandon its speciality store strategy with no more speciality store openings. It will close its 361 Degrees International (1361 HK) stores, whilst monitoring its OVS stores. He stressed that this was not the brands they were abandoning but the format, which was not working for those brands.

Thirdly, the company would reassess its omnichannel approach to online sales, which remain slow but this would not happen immediately with the immediate focus on getting the core department store business right. 

Matahari Department Store (LPPF IJ) will continue to expand and will open 4-6 new large-format stores in 2020, all to be opened before Lebaran. It will also focus on improving existing store design. 

Corona Virus has started to impact sales but mainly in areas such as Batam and Bali, which are impacted by falling tourism. The supply chain may be impacted by “a single-digit percentage” if manufacturing gets delayed much longer. 

This is a company with no debt and a forecast ROE of 55% for FY20E, trading on a forward PER of 6.2x and with a forecast dividend yield of 8.7%. Now that we have a number of positive catalysts for change, investors should now revisit the company’s fundamentals. 

3. Health & Happiness (1112): No Soy Please and Still Cheap

Image 52456268121582847562786

Health And Happiness (H&H) (1112 HK) subsidiary has agreed to purchase a stake in Else Nutrition, a plant-based alternative IMF made of almond, buckwheat, and tapioca. 

Else Nutrtion complements the existing product line in the company i.e. Biostime (children probiotics and infant milk formula), Swisse (adult nutrition and supplements), Healthy Times (organic food and formula for toddlers), Dodie (baby glass bottles and accessories), Good Gout (organic food for children), and Aurelia Probiotic Skincare.

In this difficult times in China, HH is better than most of its peers in China and Asia. It has 38% higher ROIC, 82% higher in gross margin, 84% higher in net margin yet it is trading at 25% lower than its peers. Yet its share price has underperformed compared to Ausnutria Dairy Corp (1717 HK) whose exposure to adult nutrition is very small. 

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Brief Industrials: AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank? and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank?
  2. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help
  3. A Pair-Trade Between Korean Air Corp & HanjinKal (In-Play)
  4. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals

1. AKR Corporindo (AKRA IJ) – Time to Fill-Up the Tank?

Screenshot%202020 02 27%20at%203.13.50%20pm

A meeting with AKR Corporindo (AKRA IJ) management in Jakarta last week, confirmed that despite last year’s issues over subsidised fuel pricing, the company is set up for strong growth going forward driven by a number of factors. These include strong growth in non-subsidized fuel distribution, and a marked pick-up in land sales at its JIIPE Surabaya Industrial estate, as well as longer-term a number of JV projects with BP PLC (BP/ LN) including retail petroleum distribution and aviation fuel distribution to begin with, and it is exploring the possibility of LNG storage and distribution. AKR Corporindo (AKRA IJ) should be a defensive stock in this environment and the recent correction is a buying opportunity.

The company ceased to distribute subsidized diesel in May 2019 due to a change in the pricing formula which made it uneconomic to do so. The change in pricing was to be applied retrospectively, which the company is challenging. The company is making a provision for the charge for this in 2019, on the advice of its auditors. AKR Corporindo (AKRA IJ) will resume subsidized fuel distribution this year as the new Minister reversed the pricing change, making it more economical to cover costs and assure a decent margin. 

AKR Corporindo (AKRA IJ) has been growing sales of non-subsidized fuel, which generates twice the margin as that of subsidized fuel, which is going some way to offset the decline in Subsidized fuel. Despite the potential charge, management has confirmed that FY19 Net profit will not be lower than the recurrent profit in 2018 of IDR712bn, which should be taken positively.

The company is moving forward with Freeport Mcmoran (FCX US) ‘s new smelter at the company’s JIIPE industrial estate (100 ha plot), which will bring with it leasing revenues, revenues from utilities, and demand for land plots from supporting industries. AKR Corporindo (AKRA IJ) secured a deal with the local government to supply power directly to its customers on its estate and will build a 515MW power plant there. The pipeline in demand at JIIPE could see a further boost with a Taiwanese steelmaker conducting a feasibility study for a 200 ha plot in 2020. 

AKR Corporindo (AKRA IJ) is trading at close to a 3-year low and its valuations are also approaching very attractive levels, with the stock trading on 11.5x FY20E PER plus it pays a good dividend, with an FY20E yield of 3.5%. 

2. E-Star Commercial Management Pre-IPO – Still Largely Reliant on Galaxy, Poor Disclosure Doesn’t Help

Image?1582850753

E-Star Commercial Management (ESCM HK) is looking to raise US$150m in its upcoming Hong Kong IPO.

ESCM is a commercial operational service provider focused on the Greater Bay Area (mostly in Shenzhen) although it does have a national presence. The company is ranked first and third in terms of the number of shopping centers and GFA in operation in Shenzhen, respectively.

The company has good long-term commercial properties under management (average of about 15 years). About half of the contracted GFA that has yet to commence operation and fully contribute to revenue. It will start between 2020 to 2023 which will drive revenue growth

3. A Pair-Trade Between Korean Air Corp & HanjinKal (In-Play)

Chowontae

In this report, we provide a pair trade idea between Korean Air Lines (003490 KS) and Hanjin Kal Corp (180640 KS). Our strategy will be to go long Korean Air Lines and to go short on Hanjin Kal. Hanjin Kal Corp’s stock price is near its one-year highs and Korean Air Lines’ stock price is near its one-year lows. 

Our base case valuation of the company is 1.8 trillion won 30,476 won, which is 53% below the current share price. Some of the investors may be asking this question, “How can Hanjin Kal shares rise so much higher than its intrinsic value?” At this point, there are three major scenarios:

  • First, Hanjin Kal Corp shares may be valued correctly while Korean Air, Jin Air, and other Hanjin affiliates may be vastly underpriced and need to catch up to Hanjin Kal Corp.
  • Second, Hanjin Kal Corp shares may be overvalued right now while Korean Air, Jin Air, and other Hanjin affiliates may be fairly priced. (Our view)
  • Third, it could be a combination of the first two scenarios.

The key wildcards in this M&A fight have been Delta Air Lines and the Bando Group as both companies have been increasing their stakes of Hanjin Kal in the past several weeks. In the midst of this M&A fight, the COVID-19 has become a serious issue and likely to get worse in the coming weeks. Therefore, in the midst of a severe further downturn in the overall economy, especially in the construction sector (especially in the southeastern part of Korea), can the Bando Group continue to remain such a strong ally to KCGI and Cho Hyun-ah? This remains very shaky, in our view. 

4. Gouxuan Hi Tech: Valuation Decoupled From Fundamentals

Image 17126494871582841706083

Guoxuan High-Tech Co Ltd (002074 CH) is lithium battery producers for electric commercial and passenger vehicles. The company has a market cap of US$4B and is listed in Shenzhen stock exchange. The stock has rallied in the last month on the news that Volkswagen is in discussion to invest 20% stake in the company.

The company has been burning cash and leveraging its balance sheet. The recent rally does not appear to be grounded in fundamentals but appears to have been primarily driven in anticipation of funding to deleverage the balance sheet. We believe that in the absence of a turnaround strategy the company will face headwinds if the negotiations with Volkswagen fail. In such situation we expect the stocks to revert back to its long-term mean valuations, a drop of 50% from current levels.

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Brief Japan: Softbank Vision Fund: Not Enthused About DoorDash IPO Filing but Vir Biotech Rally Could Be Positive and more

By | Daily Briefs, Japan

In this briefing:

  1. Softbank Vision Fund: Not Enthused About DoorDash IPO Filing but Vir Biotech Rally Could Be Positive
  2. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

1. Softbank Vision Fund: Not Enthused About DoorDash IPO Filing but Vir Biotech Rally Could Be Positive

Vf%20highlights%20q3

Moving away from the sordid details on Vision Fund’s inner workings we tagged yesterday, we though there were a couple items out of the US worth mentioning. First, portfolio company DoorDash has confidentially filed for an IPO…we think the timing has more to do with last week’s bull market than this week’s Coronavirus reversal but the lackluster record of IPOs for loss-making companies likely means the chances of a valuation bump for Softbank as we saw before Uber and WeWork are less.  Second, Vir Biotech shares surged another 72% today, enough to outpace erosion in the Uber value and keep Vision Fund performance flat in a day markets fell 3-4%.  Monetisation of part or all of that stake would be positive for funding Vision Fund 2 and flattering to the P&L.  

2. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

Image 41514005621582821543929

Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

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Brief Event-Driven: Maeda Road Starts Talks With Nippo (1881) As a White Knight. Not a Winner Yet. and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Maeda Road Starts Talks With Nippo (1881) As a White Knight. Not a Winner Yet.

1. Maeda Road Starts Talks With Nippo (1881) As a White Knight. Not a Winner Yet.

Screenshot%202020 02 28%20at%2012.10.11%20am

Maeda Road Construction Co (1883 JP) today announced the start of talks with Nippo Corp (1881 JP) as a measure to counter Maeda Corp (1824 JP)‘s Tender Offer. 

It is a very hand-wave-y announcement with comments about cost pull, resource allocation, efficiencies, working towards the public good by constant improvement of social infrastructure, and then at the very end…

The two companies will proceed with the discussions on the specific terms of the alliance while complying with the antimonopoly law and other relevant laws and regulations.

The history here – the reason why that last line is needed – tells you something about what this announcement means. 

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Brief M&A: Maeda Road Starts Talks With Nippo (1881) As a White Knight. Not a Winner Yet. and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Maeda Road Starts Talks With Nippo (1881) As a White Knight. Not a Winner Yet.

1. Maeda Road Starts Talks With Nippo (1881) As a White Knight. Not a Winner Yet.

Screenshot%202020 02 28%20at%2012.10.11%20am

Maeda Road Construction Co (1883 JP) today announced the start of talks with Nippo Corp (1881 JP) as a measure to counter Maeda Corp (1824 JP)‘s Tender Offer. 

It is a very hand-wave-y announcement with comments about cost pull, resource allocation, efficiencies, working towards the public good by constant improvement of social infrastructure, and then at the very end…

The two companies will proceed with the discussions on the specific terms of the alliance while complying with the antimonopoly law and other relevant laws and regulations.

The history here – the reason why that last line is needed – tells you something about what this announcement means. 

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Brief Thailand: RATCH: Stern and Steady Player in Thai Utility Sector and more

By | Daily Briefs, Thailand

In this briefing:

  1. RATCH: Stern and Steady Player in Thai Utility Sector
  2. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

1. RATCH: Stern and Steady Player in Thai Utility Sector

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Yesterday analyst meeting came out in a neutral tone. Expect 2020E earnings to remain healthy backed by profit contribution from newly COD projects in 2019.

  • Expect 1Q20 earnings to improve both YoY and QoQ, given the profit recognition from 290MW capacity expansion in 2019. 
  • Positive Long term (2020-21) earnings outlook backed by COD 782 MWe projects in pipeline, representing 11% expansion by 2022.
  • Estimate 7% CAGR EPS growth in 2020-22E.
  • The share has fallen 17% since early 2020 due to the negative sentiments of expected economic slowdown from COVID-19 spread. We believe this should be a short-term impact and recommend to accumulate the stock for 12-month period.

We maintain the BUY rating with a target price of Bt74.5 is based on sum-of-the-parts (SOTP) methodology, implying 16.6xPE’20E or 0.71x relative PE to Thai utility sector.

2. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

Image 41514005621582821543929

Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

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Brief Consumer: The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production
  2. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core
  3. Health & Happiness (1112): No Soy Please and Still Cheap
  4. Trip.com – Pandemic

1. The Panasonic & Tesla Split Continues: The Two End Their Joint Solar Cell Production

Image 75244167121582876867359

On the 26th of February, it was reported that Tesla Motors (TSLA US) and Panasonic Corp (6752 JP) will end their joint solar cell production. Although the two companies will still operate their EV battery Gigafactory jointly, the two are increasingly parting ways. The news has it that Panasonic’s production of solar cells did not meet Tesla’s expected standards (mainly on price).

  • We expected Panasonic to reduce its reliance on Tesla – the news only confirms our thoughts, and we view this as positive for Panasonic. For Panasonic, the solar business seems to not have yielded the results expected. Thus, the decision to end production (especially with Tesla) makes sense.
  • Tesla, on the other hand, expects its solar energy business to do well, given the price competitiveness (on its Powerwall product) from sourcing from Chinese suppliers alongside economies of scale benefits. However, even if demand conditions are good, it seems questionable as to whether Tesla’s production would come in time to meet the demand (now that the JV is no more as well).
  • On a side note, Tesla recently partnered with CATL for prismatic batteries while Panasonic is developing cylindrical batteries for Toyota’s BEVs. Given the limited use of prismatic batteries in BEVs, we do not really think such moves by Tesla should pressure Panasonic or be seen as a downside for the latter.

2. Matahari Department Store (LPPF IJ) – About Turn and Back to the Core

Screenshot%202020 02 28%20at%208.16.03%20am

Matahari Department Store (LPPF IJ)‘s new CEO Terry O’Connor hosted a conference call for the company’s FY19 results yesterday afternoon. The surprise did not come in the numbers but in his forthright and adamant statements that he was making big changes to the company’s future strategy and addressing past missteps immediately. There is a full strategic review underway. Is this the catalyst investors have been waiting for to return to the stock? 

Firstly, the company will continue to address the company’s lingering inventory issues, which although improving will take another two quarters to put straight, as it streamlines its assortment and depth of products and flushes out products that should not be there.

Secondly, the company will abandon its speciality store strategy with no more speciality store openings. It will close its 361 Degrees International (1361 HK) stores, whilst monitoring its OVS stores. He stressed that this was not the brands they were abandoning but the format, which was not working for those brands.

Thirdly, the company would reassess its omnichannel approach to online sales, which remain slow but this would not happen immediately with the immediate focus on getting the core department store business right. 

Matahari Department Store (LPPF IJ) will continue to expand and will open 4-6 new large-format stores in 2020, all to be opened before Lebaran. It will also focus on improving existing store design. 

Corona Virus has started to impact sales but mainly in areas such as Batam and Bali, which are impacted by falling tourism. The supply chain may be impacted by “a single-digit percentage” if manufacturing gets delayed much longer. 

This is a company with no debt and a forecast ROE of 55% for FY20E, trading on a forward PER of 6.2x and with a forecast dividend yield of 8.7%. Now that we have a number of positive catalysts for change, investors should now revisit the company’s fundamentals. 

3. Health & Happiness (1112): No Soy Please and Still Cheap

Image 52456268121582847562786

Health And Happiness (H&H) (1112 HK) subsidiary has agreed to purchase a stake in Else Nutrition, a plant-based alternative IMF made of almond, buckwheat, and tapioca. 

Else Nutrtion complements the existing product line in the company i.e. Biostime (children probiotics and infant milk formula), Swisse (adult nutrition and supplements), Healthy Times (organic food and formula for toddlers), Dodie (baby glass bottles and accessories), Good Gout (organic food for children), and Aurelia Probiotic Skincare.

In this difficult times in China, HH is better than most of its peers in China and Asia. It has 38% higher ROIC, 82% higher in gross margin, 84% higher in net margin yet it is trading at 25% lower than its peers. Yet its share price has underperformed compared to Ausnutria Dairy Corp (1717 HK) whose exposure to adult nutrition is very small. 

4. Trip.com – Pandemic

  • Lack of Global Leadership During Pandemic: The current corona virus situation remains very fluid, and leadership is NOT inspiring confidence. National Security Communications report in UK exhibited a “reasonable” worst case scenario of the corona virus infecting 80% of the population with a 2%-3% fatality rate. The Center for Disease Control (CDC), however, confirmed that test kits sent to local US authorities were ineffective, which could likely explain the low infection count in the US. Moments after President Trump addressed the nation, California officials confirmed the first unconnected/untraced corona virus case.   
  • Mainland China Was Already In a Financial Crisis Prior to the Virus: Mainland China has gone from one of the most unlevered countries prior to the Global Financial Crisis to amongst the highest on a debt/GDP basis. It had absolutely refused to address the credit quality and liquidity issues within its banking system. WMP/vehicles hold questionably valued assets funded on a short-term basis. The US/China trade rift has caused a major supply chain upheaval. A reasonable 5% decline in global tourism in 2020  world GDP  will be negatively impacted by 70bps. There is already talk of major mainland Chinese airline defaults and bankruptcy – just under two months into this pandemic. Further, mainland China’s debt-laden developers were already facing a cash-crunch and developer problems are now exacerbated. 
  • Jimmy Carter/Three Mile Island-Type Visit Required to Stem Fears: There are three things, in our view, which will signal that the corona virus is under control in manainland China: 1) President Xi Xinping visits Wuhan province; 2) A firm date is set for the “two sessions” – National People’s Congress, and the Chinese People’s Political Consultative Conference; and 3) Children in both Hong Kong and mainland China physically head back to school. 

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Brief Healthcare: Fresenius (FRE GR) Holdco at a Premium and more

By | Daily Briefs, Healthcare Sector

In this briefing:

  1. Fresenius (FRE GR) Holdco at a Premium

1. Fresenius (FRE GR) Holdco at a Premium

Image 64662493421582886593854

Fresenius Se & Co Kgaa (FRE GR) is controlled by the non-profit Else Kröner-Fresenius Foundation. The combination of the parent (subsidiary holding structure) and the use of the KGaA allow Else Krone (a charitable foundation) to control both Fresenius and Fresenius Medical Care Ag & Co (FME GR) , although it only holds a minority of both companies.

  • The Else Kröner-Fresenius foundation has 26.6% of the shares of Fresenius.
  • Fresenius controls FME through a holding of 30.8% of the share capital and the use of the KGaA form, where Fresenius is a general partner.
  • This means that the Else Kröner Foundation indirectly controls the crown jewel, FME, with an 8.2% economic interest.

Fresenius Medical Care is fully consolidated in the financial statements of Fresenius.

  • This stake in FME is strategic as it contributes to nearly 49% of turnover and 49% of Fresenius group EBITDA (2019).
  • FME dividends fund c. 75% of the dividend of FRE (2018).

Both companies are rated BBB.

From my calculations, Fresenius is trading at a premium of 14.2% to its SOTP. A reason for this could be higher growth prospects for Kabi and Helios. Please note that the market is valuing the rump 5% higher than my estimates (EV of EUR 31,501 million vs an EV of EUR 29,740 million).

FME is the single largest contributor to Fresenius group earnings. Unsurprisingly, Fresenius tracks the share price performance of FME.

I believe that Fresenius Medical Care offers better earnings growth potential in the wake of good prospects for the business (see Capital IQ consensus).

I suggest the trade long FME, short FRE, with a hedge ratio of 0.6 (of FME shares for each FRE share). I would target a nil premium, at least.

The main risks to this trade are:

  • Underperformance of FME
  • The position is not completely hedged, we are not protected against better growth prospects for the infusion/nutrition business (Kabi) and hospital management (Helios)

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Brief Hong Kong: (Mostly) Asia M&A: February 2020 Roundup and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. (Mostly) Asia M&A: February 2020 Roundup
  2. Wharf REIC/Wharf Holdings – Index Impact of Wheelock Privatisation
  3. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

1. (Mostly) Asia M&A: February 2020 Roundup

For the month of February, 21 new deals were discussed on Smartkarma with an overall announced deal size of ~US$24bn.

Clicking on the company name in the table below will take you to the entity page where you can read the initial insight(s) written by Smartkarma contributors on these new deals and follow up discussions, or simply click on the insight link(s) below the name.

New Deals

Industry

Size (US$bn)

Type

Premium

Australia
Healius (HLS AU) Medical1.4Indicative Scheme23%
Healius: Partners And Heads In The Cloud
National Storage Reit (NSR AU) Storage REIT1.3Indicative Scheme16.5%
National Storage: A Public/Gaw Tussle
Spectrum Metals (SPX AU) Mining0.125Off-market52%
Spectrum Metals: Inside Ramelius’ Wheelhouse
China
Sichuan Road A (600039 CH) Construction0.177Partial12.9%
Sichuan Road & Bridge: A PRC Partial Offer
Hong Kong
Wheelock (20 HK) Property5.7Scheme52.2%
Wheelock’s Privatisation Offer
Japan
Japan U Pica (7891 JP) Polyester play0.024Tender Offer81.7%
Smallcap Japan U-Pica (7891) Tender Offer Buyout
Mamezou Holdings (3756 JP) Consulting0.03MBO Tender Offer34.2%
Mamezou Holdings MBO – Nice Premium, Non-Extravagant Multiple 
Odelic Co Ltd (6889 JP) Lighting solutions0.166MBO Tender Offer26.3%
Odelic MBO Going Too Cheaply – Vaguely Kosaido-Ish
Odelic MBO – STILL The Wrong Takeover Price, It’s a Good Long Here
Sogo Medical Holdings (9277 JP) Drugstore0.007MBO Tender Offer22.6%
Sogo Medical (9277) Tender Offer:
Sawada Holdings (8699 JP) Finance0.189Partial Offer4%

Sawada Holdings Partial Tender – An Odd Duck

Sawada Withholds Opinion on TOB – Mongolia Deal Risk May Exist

Yamaha Motor Robotics (6274 JP) Auto-molding0.12Tender Offer44.5%
Yamaha Motor Robotics TOB/Buyout
Malaysia
Ta Global Bhd (TAGB MK) Property0.05Vol Offer21.7%
TA Global: Minorities Get The Short End
Singapore
Breadtalk (BREAD SP) F&B0.09Vol Offer19.4%
Breadtalk: Privatisation Opportunism
Taiwan
Growww Media (8497 TT) Advertising0.06Tender Offer13.7%
Taiwan’s GROWWW Media to Be Acquired by Hakuhodo (2433 JP)
Thailand
Bumrungrad Hospital Pub Co (BH TB) Hospitals2.2VTO11.6%
Bumrungrad: Bangkok Dusit’s Poor Diagnosis
Middle East
DP World (DPW DU) Ports2.7MBO28.8%
DP World Squeezeout – Governance Discount Deserved (And Served) So Minorities Lose
Europe/UK
Godewind Immobilien AG (GWD GR) Real estate0.75Vol. takeover14.9%
Godewind-Covivio: German Real Estate Deal Trading at Terms
Ingenico Group Sa (ING FP) 
Unione Di Banche Italiane (UBI IM) Banking5.4Vol. takeover23.7%
Intesa SanPaolo Swoops on UBI for a Win-Win Deal
Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation
BPER (BPE IM) – Tougher Targets to This Intesa-UBI Banca Side-Deal)
North America
Delphi Technologies PLC (DLPH US) Auto parts1.5Scheme77.4%
Delphi-BorgWarner: Why Are Acquirer Shareholders Unhappy?
Front Yard Residential (RESI US) Rental homes0.68Merger10.5%
Front Yard Residential: Awaiting a Bump?
Northview Apartment (NVU-U CN) REIT1.8SPA11.5%
Northview REIT: A Good Arb and Optionality To Boot
Source: Smartkarma Insights, SPA = Statutory Plan of Arrangement
National Storage Reit (NSR AU) announced a non-binding indicative proposal from Hong Kong-based real estate private equity firm Gaw Capital Partners last month – and who has now walked away from negotiations – but only first discussed on Smartkarma this month.

The merger of auto parts manufacturers Borgwarner Inc (BWA US) and Delphi Technologies PLC (DLPH US) was announced last month but only first discussed on Smartkarma this month.

The premium for Bumrungrad Hospital Pub Co (BH TB) could be 33.9% if using THB 150/share, the high-end of the implied range. But for now, the headline conditional offer price is THB 125/share. 

The average premium for the new deals announced in February was ~29% and the YTD average premium for all deals discussed on Smartkarma is 25%.

The average for all deals discussed on Smartkarma in 2019 (145 all-in) was 31.5%.

Brief Summary of News in February of Arb Situations On Smartkarma’s Radar

(Again, click on the company names to take to you to the insights and/or discussion posts for a more comprehensive read-through on each situation. Where a new insight was written on these names in June, I’ve included a link to that insight in italics.)

Australia

Comments (with links to announcements and insights)

3 Feb: AUIREL, the responsible entity of AOF – and whose issued capital is owned by AOF – announced it will now be owned JV 50:50 by AOF and Keppel Capital subsequent to an agreement. Despite the sale being a defeating condition to the current takeover offer, Starwood remains committed to pursuing its AOF bid. 4 Feb: The independent board of AOF is advising (page 17) shareholders to reject Starwood’s Offer. Separately, Hume Partners does not plan to accept the Offer.
6 Feb:Starwood/AOF: Sixth Time’s A Charm?

13-Feb: Alimentation Couche-Tard (ATD/A CN)bumped its offer by 2% to A$35.25.
16-Feb: CTX to allow ATD to conduct additional due diligence on a non-exclusive basis.
19-Feb: EG Group throws its hat into the ring
Caltex: EG Inconveniences ATD’s Offer

25-Feb: CTX announced its “CEO transition” whereby CEO Julian Segal will step down, effective 2 March. This is not a new development. Caltex previously announced on the 14 August that Segal would retire and step down once the Board had completed a formal succession and transition process. However, it is still a tad odd to depart in the midst of a competitive bidding process.

14-Feb: Scheme Booklet lodged with ASIC. The Scheme Meeting will be on the 19 March
20-Feb: FIRB approval

6-Feb: QMS shareholders overwhelmingly approve the Scheme. The Scheme is expected to become effective on the 11 Feb with payment expected on the 21 Feb.

No Feb update

3- Feb: 95.25% of Webster’s shareholders – present and via proxy – voted For the Scheme. 86.83% of the register rolled up. The effective and implementation dates are the 6 & 17 Feb. The last day of trading is expected to be the 6 Feb.

Hong Kong

Comments (with links to announcements and insights)

14-Feb: AVIC overwhelmingly gains shareholder approval for the merger by absorption. The next step is to clear the 90% acceptance condition. 

AVIC: The Vote Is In; Now For The Acceptances

19-Feb: BBI announced BGI Tech Holdings, with 4.10% if shares out, has given an irrevocable to vote for the Scheme. 
4 Feb: China Agri) declared an interim dividend of HK$0.04 in lieu of the final dividend for the year ended 31 Dec 2019. The Offeror has consented this dividend will not be netted off the Offer price.
14-Feb: China Agri: Done Deal As IFA Signs Off
19 Feb: Apparently, on account of difficulties – due to the virus – in preparing China Agri’s Profit Forecast, which was supposed to form part of the Scheme Document, the SFC granted a waiver not to include it. The IFA now says that taking into account the Profit Forecasts, its “fair & reasonable” opinion remains unchanged. 
16-Feb: The Potential Offeror announced it is continuing to explore a possible privatisation.

16-Feb: iDreamsky Technology Limited (1119 HK)‘s exclusivity period in a possible MOU with sellers of shares in Leyou has expired with no further extension.  However, the selling shareholders and the iDreamsky have reached an “advanced stage of negotiation and are in the course of finalising the transaction and financing documents”.

6-Feb: Springland’s Scheme was approved yesterday – 96.59% present and proxy voting FOR. Today is the last day of trading. Cheques will be dispatched on the 9 March.

6-Feb: Yixin announced DD in regards to the US$16/share Offer from Tencent Holdings (700 HK), Hammer Capital for Bitauto Holdings Ltd Adr (BITA US) is ongoing.

Indonesia

Comments (with links to announcements and insights)

12-Feb: Bangkok Bank Public (BBL TB)‘s IFA recommends shareholders approve the acquisition of Bank Permata.
13-Feb: Thinking About BBL’s Buy of Permata – Buy the Dips 
No Feb update

Japan

Comments (with links to announcements and insights)

No Feb update
Feb-25: China’s State Administration for Market Regulation (SAMR) unconditionally approved the purchase of Hitachi Chem by Showa Denko K K (4004 JP) as of the 21st of February according to an announcement on the SAMR website today. 
Feb-6: Keihin announced Q3 results on 4 Feb. 
As expected something of a disaster. 
The company did not revise full year from the last time, but one wonders whether production stoppages across China will have any significant effect anywhere.
18-Feb: Mitsubishi Chemical (4188 JP) has now cleaned out the minorities of Tanabe through the Demand for Shares.  Money should be in the bank in the not distant future.
4-Feb: Nissin Kogyo announced Q3 results and a sharply revised fiscal year forecast which suddenly makes this Tender Offer look less interesting to sell into than before. This is mostly because the company announced an increased stake in its Chinese subsidiaries.
18-Feb: Result of the J Front Retailing (3086 JP)Tender Offer for Parco is 96.43%. Minorities will get squeezed out cleanly, quickly.
No Feb update
10-Feb: The Tender Offer for by Bain started
6-Feb: Showa posted Q3 results. A bit slow, but not overwhelming. No change to full-year forecast.
18-Feb: Murakami extends the tender deadline to April 16

10-Feb: Chitocea raisees its bid to Y5,700/share from Y5,100.
24-Feb: Blackrock increased its indicative bid to JPY 6000/share, meaning its bid is 5% higher than Chitocea’s bid, which is due to expire this Friday. 
25-Feb:  Chitocea has extended their JPY 5700/share bid to expire March 18 (from Feb 28th) as Blackstone has indicatively bid JPY 6000/share.
27-Feb: Fortress has extended their Tender Offer deadline from 6 March to 26 March. This is probably still too early and would likely be extended again. Price is unchanged at JPY 5200. 

Malaysia

Comments

No Feb update.

New Zealand

Comments (with links to announcements)

No Feb update.
1-Feb: In a Scheme update notice, Metlifecare announced that it is working to send “detailed information” ahead of the shareholders’ meeting on the 29 April; and contemplates the transaction will be implemented in May, as per initially guided (page 46-47).

Philippines

Comments (with links to announcements and insights)

1 Feb: The Mergers and Acquisitions Office of the Philippine Competition Commission (PCC) has raised concerns that the takeover of Holcim by San Miguel (SMC PM) might lead to a monopoly in the grey cement industry. The PCC said the deal might result in “increased market power, and potential collusion arising from the merger” as well as “substantial lessening of competition in the market for grey cement in 4 key areas in the Philippines.”

PCC Concludes Merger-To-Monopoly In Holcim/San Miguel Tie-Up

South Korea

Comments 

No Feb update

Thailand

Comments (with links to insights)

No Feb update

18-Feb: Robinson’s Delisting Offer obtained 98.39% of shares outstanding in the hands of Central and affiliates. 
That leaves 1.61% outstanding in public hands. The subsequent price movement from Jan31 to yesterday was executed on a total of 1.2mm shares (undoubtedly some of it was also people trading in and out), which is about 0.11% of shares out. The reason why the price movement since then is irrelevant is that shareholders have NO recourse to that THB 66.5 price. The IFA’s fair price was below that price. And shareholders will simply hold delisted shares as of tomorrow.

Central Retail IPO Day 20 Feb – Basis Risk, Flow, and Index Dynamics

UK

Comments (with links to announcements)

27-Feb: Court sanctions Scheme. Shares suspended.
No Feb updsate

1 Feb: Declared unconditional now. 

27-Feb: What should have been the last day on the London Stock Exchange, this now need s FCA clearance

Europe

Comments (with links to insights)

10-Feb: Tender Offer closed. But optionality remains. Effectively there is a 2-month put option,  struck at €14.50. 

Capgemini/Altran: Optionality Window

2. Wharf REIC/Wharf Holdings – Index Impact of Wheelock Privatisation

Image

Yesterday, Wheelock (20 HK) announced a proposal to privatise the company by distributing its equity holdings in Wharf Holdings (4 HK) and Wharf Real Estate Investment (1997 HK) to shareholders, plus HK$12 per share for its other holdings.

The implied premium to Wheelock (20 HK)‘s previous close was 52.17%, though this will keep changing with movements in the price of Wharf Holdings (4 HK) and Wharf Real Estate Investment (1997 HK). At yesterday’s closing prices, the premium to Wheelock (20 HK)‘s undisturbed price was 46.88% and will probably be lower today once Wharf Holdings (4 HK) resumes trading.

In this Insight, we look at the impact of the privatisation on Wharf Real Estate Investment (1997 HK) due to its inclusion in the Hong Kong Hang Seng Index (HSI INDEX) and MSCI Hong Kong indices, and of Wharf Holdings (4 HK)‘s inclusion in the MSCI Hong Kong index. 

3. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

Image 41514005621582821543929

Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

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