In today’s briefing:
- MSCI May 2022 Index Rebalance: Flow Due to FIF Changes
- MSCI May 2022 Index Rebalance: Small Cap Changes and Flow
- Cosmo Oil (5021) Shareholder Return Policy Is Bigger Than It Looks
- Sihuan Pharma (460 HK) Denies China Resources Approach
- Short-Term Reverse Flow Trading on SK Telecom
- Link Risk/Reward Benefits with the Messaging from DND’s Earnings Call
- MSCI May 2022 Rebalance: South Korea
- NTT (9432) – Salutary Earnings Salutary Buyback, More to Go
- Swedish Match Set Alight by Philip Morris
MSCI May 2022 Index Rebalance: Flow Due to FIF Changes
- There are quite a lot of stocks that have changes to their Foreign Inclusion Factor (FIF) at the May SAIR since MSCI comprehensively assesses the float for stocks.
- The largest passive inflows will be on Tencent, Kuaishou Technology, JD Health, Macquarie Group, Shin Etsu Chemical, Recruit Holdings, Olympus Corp, Naver Corp and Sun Hung Kai Properties.
- Changes to FIFs are tougher to forecast and not very widely tracked, so pre-positions are likely to be lower and the stocks with higher ADV to buy/sell should outperform/underperform.
MSCI May 2022 Index Rebalance: Small Cap Changes and Flow
- MSCI has announced changes to the Small Cap Index. For Asia Pacific, there are 220 adds and 160 deletes. Most adds are in India, most deletes are in Japan.
- Flows are not huge, but there is a big impact on a lot of stocks. Some of the stocks have moved today and there could be more.
- There are a lot of stocks that crossover with changes on other indices and there will be same way flow on a lot of stocks over the next few weeks.
Cosmo Oil (5021) Shareholder Return Policy Is Bigger Than It Looks
- Cosmo Energy Holdings (5021 JP), subject of a selldown by its major shareholder (discussed here), then a large stake purchase by activist Murakami-san (discussed here) announced earnings and a buyback.
- The buyback is large enough to matter to other shareholders.
- The shareholder structure is interesting enough that investors need to pay attention to the possibilities.
Sihuan Pharma (460 HK) Denies China Resources Approach
- Sihuan Pharmaceutical (460 HK) has shot down rumours that it is under negotiation with potential investors in respect of privatisation.
- Reportedly SOE China Resources is in talks with Sihuan Pharma’s chairman in a deal valuing the company at US$3bn or a 114% premium to the current price.
- The logic of a privatisation makes sense. I would not be so quick to dismiss the denial. Plus Sihuan Pharma is very cash-rich.
Short-Term Reverse Flow Trading on SK Telecom
- Heavy shorts came out in a short trading window. Usually, this is likely to be strategic trading by a few institutional investors, which causes PBS to set up loan transactions.
- We should then consider the possibility that short positions betting on MSCI deletion will be sold back to the market by PBS who set up loan transactions after short-covering
- SKT is likely to undergo a share price correction due to a short-term overhang, and we need to consider setting up a position aimed at this.
Link Risk/Reward Benefits with the Messaging from DND’s Earnings Call
- DND’s 3QFY22 last night continued to suggest DND’s commitment to complete the Link Administration Holdings (LNK AU) acquisition.
- DND management’s messaging in the call downplayed the MAC risk of a contract renewal but shifted incrementally more bearish on the ACCC review, in our view.
- The risk-reward calculus is now incrementally more positive. The gross spread is wide at 24.4% with the “deal-break” valuation of A$4.18 (-5% below the last close) limiting downside risk.
MSCI May 2022 Rebalance: South Korea
- MSCI announced its May 2022 rebalance results today. Hyundai Heavy Industries was the only new addition, which was mostly expected.
- Despite continued concerns about SK Telecom being excluded in the next round of MSCI rebalancing, its improving fundamentals and shift to more value stocks are more important factors.
- There are 18 additions and 17 deletions for the MSCI Korea small cap index. Among the additions, 6 of them are also potential inclusions in the KOSDAQ150 rebalance in June.
NTT (9432) – Salutary Earnings Salutary Buyback, More to Go
- The three Japanese telecoms reported earnings this week. Softbank Corp (9434 JP) was disappointing (and slightly confusing). KDDI Corp (9433 JP) was much of a muchness.
- NTT (Nippon Telegraph & Telephone) (9432 JP) looked the best, and announced the largest buyback – ¥400bn or 3%. But it comes from a government sale, not the market.
- Nevertheless, the company is doing what it promised and executing on its promise. And despite the “bullishness” in the revenue forecast, earnings forecasts to March 2023 look conservative.
Swedish Match Set Alight by Philip Morris
- PMI is making a recommended cash offer for the Swedish Match at SEK106/share, valuing it at SEK161.2 billion ($16 billion), 39% premium, 17.5x EV/Fwd EBITDA and 23.1x Fwd P/E.
- Swedish Match is strategic for PMI and a valuable asset amidst big tobacco diversification drive. Some shareholders make this point to try to extract a higher price.
- As of close of 12 May, gross spread is 3.3%, an interesting 8.7% annualised (assuming settlement by 7 October). The risk of not completing the offer seems low.
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