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Brief Multi-Strategy: Crazy Golf: A Plain Person’s Guide to the Forthcoming Brexit Negotiations and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. Crazy Golf: A Plain Person’s Guide to the Forthcoming Brexit Negotiations
  2. 🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores
  3. Apple and Big Tech Fade and Fresh Buy Levels in March
  4. EV Batteries Monthly: COVID 19 Risks; Panasonic-Tesla Gigafactory Profits & CATL Partners with Tesla
  5. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst

1. Crazy Golf: A Plain Person’s Guide to the Forthcoming Brexit Negotiations

Over the next eighteen months the airwaves in the UK will be filled with a relentless bombardment of mindless jargon as the media report on the progress of the negotiations between the EU and the Government on the terms on which trade between them will be carried on after Brexit. (Right now, the UK has left the EU in name only). Words and phrases like ‘free trade’, ‘competitiveness’ and ‘regulatory alignment’ will be bandied about, without anyone who uses them saying what they mean. Quite often the speakers will not know. All of which will have the effect of obscuring from the view of the ordinary person what is actually going on.

In this insight, David Simpson, our guest writer, explains what to expect from the forthcoming Brexit negotiations.


David Simpson is an Economics graduate of University of Edinburgh (First Class Honours) and Trinity College, Dublin (PhD). He served as research assistant to Nobel Laureate Wassily Leontief at Harvard University in the 1960s. He was co-founder of the Fraser of Allander Institute for Research on the Scottish Economy and then, latterly, Chief Economist at Standard Life Plc in Edinburgh. He has published numerous books and articles on economic theory and input-output analysis. Since his retirement he has lived in his native East Lothian, near Edinburgh.

2. 🇯🇵 JAPAN • IT’S A WRAP! Part 2: 2020-Q1 Results & Revision Scores

2020 02 18 11 54 10

Source • Japan Analytics

THREE-YEAR LOW – With Bridgestone (5108 JP)‘s results and revision now added, our final tally for this season is a 196 basis point decline in our Results Sore – the lowest since March 2017.  In contrast, the Forecast/Revision Score reached a three-month high as the 470 companies with December year-ends put an optimistic gloss on their medium-term outlook. As we have noted in our recent daily roundups, a normal precondition for a cycle low is for the Forecast/Revision Score to rise above the Results Score. Forecast/Revision Score peaks and troughs usually occur one to two quarters ahead of those for the Results Score.  Covid-19’s impact will likely see the 2016 ‘playbook’ repeated next quarter with a lower Results Score and a ‘sideways’ Forecast/Results Score. The Results Score cycle low point will be reached with the mostly-interim results to be released in six months. 

Source • Japan Analytics

LEADING INDICATOR – By including several momentum factors into our Scoring (see below), we can provide a better indication of future business conditions. Indeed there is a 0.83 correlation between the Cabinet Office’s Business Condition Leading Indicator and the Forecast/Revision Score. Reported earnings, as well as company forecasts, are lagging indicators and, as shown in Part 1 of this Insight. Both data series peaked one year after our Scores and the market peaked in early 2018. 

SCORING METHODOLOGY – For those new to these Insights, we briefly recap our scoring methodology below:-

  • Results Scores are calculated using the most recent eight quarters of company data for Revenues, Operating Income and Operating Margin and, for each, measure the rate, degree and consistency of change. The Results Score has a maximum of +30 and a minimum of -30 for each period. Our data series commences from the time a particular company issues quarterly results. The sample size becomes significant from March 2005.

  • The Forecast/Revision Score is based on both Annual and Interim period company forecasts and compares changes from previous forecasts as well as against the trailing twelve-month (TTM) or previous first-half results, with annual forecasts being double-weighted. This Score also has a maximum of +30 and a minimum of -30 for each period.  For this series, our data samples start from August 2008.

  • The combined Results & Revision Score (RRS) is the average of the Results Score and the Forecasts/Revision Score.

  • All company Scores are then cap-weight-aggregated into Sector, Peer Group and Market Composite Scores for which the seventeen-year monthly and two-year daily track records are shown above. Only currently listed-companies are covered in the aggregate Scores, and the Total Market Capitalisation excludes delisted entities. REITs are not included.


    • SECTOR SCORES •

    Source • Japan Analytics

    In the DETAIL Section below, we provide a detailed breakdown of our RRS Scoring for Sectors, Peer Groups and individual companies, highlighting this quarter’s ‘winners’ and ‘losers’. The chart above shows a  seventeen-year ‘timeline’ of the cap-weight-aggregated Sector RRS Scores and the ebbs and flows around the business cycles. The Metals Sector is the most volatile on the downside and has yet to ‘bottom’ this cycle. Technology Hardware appears to have already rebounded; however, Covid-19 suggests this Sector may relapse. On the upside, the Information Technology Sector has replaced the Internet and Telecoms Sectors as the contra-cyclical ‘champion’. 

3. Apple and Big Tech Fade and Fresh Buy Levels in March

Focus is on Apple Inc (AAPL US) and the rising wedge as well as big tech upside fade levels and pullback targets for March. We cover cycles levels in Amazon.com Inc (AMZN US)Alphabet Inc Cl C (GOOG US)Facebook Inc A (FB US)Microsoft Corp (MSFT US) .

Apples’ exhaustive rising wedge stands out as a peak set up with uptick resistance within yesterdays’ gap zone.

As breadth narrows, it comes down to top tech holding the market together. If big tech rolls over then so does the NDX and SPX and the global cycle.

Note that recent tech strength has been on diminishing buy volumes from early February (x Microsoft) for this group which often precedes pullbacks from current overbought readings. Pullback levels and fresh buy zones in March hinge on price congestion and trendline supports holding. Apple and Facebook display the weaker underlying structures. Google and Microsoft show extended rises with pullback risk but remain macro bullish. Amazon exhibits the more bullish underlying technical posture.

4. EV Batteries Monthly: COVID 19 Risks; Panasonic-Tesla Gigafactory Profits & CATL Partners with Tesla

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Highlights since our last monthly- ‘EV Battery Monthly: No Further Cut in Subsidies for NEVs in China Suggests Better Market Conditions’ are as follows:

  • In the last monthly, we stated that no further cut in NEV subsidy in China would suggest better market conditions for battery players there. However, the recent coronavirus outbreak and the production stoppage signal possible supply chain disruption risk for the battery players, although their key plants are currently located away from the affected province.
  • Panasonic Corp (6752 JP):
    • 3Q results point to recovery.
    • Gigafactory with Tesla made profits during the quarter. However, stabilisation of profits depends on Tesla’s ability to meet production targets.
    • The company continues moving towards Toyota Motor (7203 JP) regardless of the Gigafactory making profits.
  • CATL (A) (300750 CH) confirms tie-up with Tesla Motors (TSLA US). While the move might benefit Tesla, we think otherwise for CATL, as mentioned in CATL Could Be Tesla’s New Battery Supplier- Panasonic in Trouble?. We feel that Panasonic is not losing much by not joining Tesla in China, given its tie-up with Toyota to serve the Chinese market.
  • Tesla has reportedly started the process for building its own battery plant. While this might be true, we think that the success rate of this move and the time period for such an achievement are still questionable.
  • South Korean players seemed rather quiet, except that LG Chem Ltd (051910 KS) has also partnered with Tesla, taking on some risk, while Samsung Sdi (006400 KS) is bent on building its upstream by securing supplies, possibly to serve the deals it has already signed up for.
  • CATL’s share price continued to rise, followed by the Korean players, both outperforming the market. Panasonic’s share price regained following the 3Q earnings release and news on its Gigafactory reporting profits. BYD (1211 HK) continued to see relatively weak performance.

 Source: CapIQ

5. Doosan Heavy Industries – A Massive Restructuring & Big Political Event Catalyst

On February 18th, Doosan Heavy Industries (034020 KS) announced a massive restructuring plan, one of its biggest ever in its 58 years of history. As of the end of September 2019, the company had 6,784 employees, of which about 2,600 are 45 years old or more. This restructuring plan includes a voluntary ERP (early retirement program) for these 2,600 employees.

It has been estimated that nearly 1,000 employees could seek this ERP program, which would represent nearly 15% of its total workforce. Although this massive restructuring program is not good news for the employees of Doosan Heavy Industries, this should act as a positive factor on the stock price of the company since it should be able to boost its operating profit starting 2021.

The United Future Party is pro-nuclear power and if they are able to win the General National Assembly election, it would certainly have a major positive impact on Doosan Heavy Industries (034020 KS). Nonetheless, there are still nearly two months left until the election and in Korea, that is like a lifetime in political ages and so much could change during this period.

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Brief Multi-Strategy: UK: Employment Booms Before Boris-Bounce and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. UK: Employment Booms Before Boris-Bounce
  2. Elite Commercial REIT IPO – Probably Just About Fairly Valued at the Low-End
  3. SK Holdings SoTP Valuation Sensitivity Analysis
  4. Corporate Governance In Japan

1. UK: Employment Booms Before Boris-Bounce

2020 01 21%20lab6

  • Employment unexpectedly surged by 208k 3m-o-3m in Nov-19, even ahead of any potential Boris-bounce to other activity data. The labour market still looks much healthier to me than widely perceived elsewhere, including by policymakers.
  • Vacancies also started to recover in Q4, although most new job adverts will have been held until the new year. A bullish vertical normalisation in the Beveridge curve has begun, in my view, which would remove its recent disinflationary signal.
  • Headline wage growth has slowed slightly, but disinflation and falling productivity support underlying pressures. Unit wage cost growth is more consistent with rate hikes than cuts, but that doesn’t mean the MPC won’t mistakenly cut next week.

2. Elite Commercial REIT IPO – Probably Just About Fairly Valued at the Low-End

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Elite Commercial REIT (ELITE SP) (ECR) plans to raise up to US$170m in its Singapore listing. 

The initial portfolio will comprise of 97 commercial buildings located across the UK with a total net internal area of approximately 2.6m sqft. The REIT is being sponsored by Elite Partners, Ho Lee Group and Sunway Bhd (SWB MK)

I covered the company’s background and financials in Elite Commercial REIT IPO – Stable Rentals but Small and Old Assets.

In this insight, I’ll talk about valuations and run the deal through our ECM framework.

3. SK Holdings SoTP Valuation Sensitivity Analysis

Skinn

In this insight, we provide an updated sum-of-the parts (SoTP) valuation on SK Holdings (034730 KS). There are many moving parts of SK Holdings and it helps to review the main factors that have been impacting its share price. Our base case valuation of SK Holdings is 326,550 won, which represents a 36% upside from current levels. 

We believe that the 7 MOST IMPORTANT FACTORS impacting the share price of SK Holdings are currently as follows:

1) Share price trend of Sk Innovation (096770 KS)

2) IPO of SK Biopharm 

3) Share price trend of SK Telecom (017670 KS)

4) Changing values of SK Siltron, SK E&S and other private companies

5) Changing values of Sk Materials (036490 KS), SK Networks (001740 KS), and other public companies

6) Shareholder boosting measures (Share buybacks, dividends)

7) The ongoing divorce proceedings between SK Chairman Chey Tae-Won & his wife Roh So-Young

4. Corporate Governance In Japan

Vote

If effectively implemented, the Japan Corporate Governance Code, the Japan Stewardship Code, the Engagement Guidelines and the CGS Guidelines would also represent a sea change in the role of Japanese boards in terms of management selection, management compensation, and capital deployment. If. This is largely a ‘soft” law rather than a hard regulatory change, limiting the regulator’s power to address minority rights.

There is a need to see improvement in governance, independence, board structure, and capital stewardship by a very large number of companies in Japan. Enhancement of diversity on the board will enable increased effectiveness and also strengthen companies’ governance structure.

Investors are calling on companies to hire outside board members and tackle cross-holdings. The TSE-mandated Corporate Governance Code seeks at least two independent outside board members for listed companies and preferably a third, a majority, and provides an example of “at least one-third independent directors”. But these examples, and other much-needed changes, remain inadequate.

One of the fundamental problems with the combination of the Japanese Corporate Governance Code and the Companies Act, and the lack of liability of directors for their own decisions, is that they can hang their hat on irrational economic arguments and there are no repercussions. 

Investors want better “governance”, however, international investors seek more than improving the box-ticking form prized by many Japanese companies. Analysing non-box-ticking ESG/governance is difficult. It is difficult to track and analyse. And even if box-ticking is evident, it is not necessarily true that doing so will raise long-term equity returns. It is possible it will raise costs, which would lower profit growth – this may be good for society, it may not be good for valuations.

International investors are more concerned with improving information access, management responsiveness to investors, and management efforts to make companies become better economic engines. International investors would like to see companies concentrate on their business rather than see them run long-short funds (i.e. hold cross-holdings) with investor capital, hold excess cash, or invest in real estate as an alternative source of income.

A Consultation Paper reviewing the TSE cash equity market – first mentioned in December 2018, followed by a Market Consultation, culminating in four documents posted on the FSA’s website last November – make it clear to the TSE, governmental, and regulatory authorities that existing governance and stewardship levels don’t cut it.

For now, there’s a lot of technocratic navel-gazing.

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Brief Thailand: Central Retail Corp IPO: Valuation Palatable at the Low-End and more

By | Daily Briefs, Thailand

In this briefing:

  1. Central Retail Corp IPO: Valuation Palatable at the Low-End
  2. WICE: Promising Earnings Growth in 2020
  3. Double Divergence: Malaysia and Thailand Mixed Signals
  4. China Outbreak Theme: Winners and Losers

1. Central Retail Corp IPO: Valuation Palatable at the Low-End

Forecasts

Central Retail (CRC TB), the retail arm of Central Group, is the leading multi-format, multi-category retailing platform in Thailand, Italy and Vietnam. Central Retail has set its IPO price range at THB40-43 per share to raise a total of THB67.6-72.7 billion ($2.2-2.4 billion).

In our initiation note, we stated that that Central Retail’s fundamentals are less than inspiring and characterised by pressure on the top-line and bottom-line along with low returns. Based on our assertion that the IPO needs to be priced at a discount to the sector to reflect the fundamentals, we would participate at most at the low-end of the IPO price range.

2. WICE: Promising Earnings Growth in 2020

Wice%20update%202.3

We came out from WICE’s analyst meeting on 20th January with positive tone given the company’s earnings recovery that expect to kick in by 1Q20 driven by cross boarder transportation business that started to turn profit and easing concern over trade war dilemma support freight unit. We forecast 2020 earnings to grow 34% a strong recovery from low base in 2019 (-35%YoY)

The Story:

• Cross broader is the key earnings growth in 2020
• We cut our 2019-20E earnings forecast by 26%-38% to reflect lower -than-expected gross margin for freight forwarding business.

WICE is currently trading at 23x trailing PE, the lowest level since IPO in mid 2015. Meanwhile, we maintain our BUY rating with a new target price of Bt3.20 (previous TP at Bt4.70) derived from 0.9xPEG’20E, Asia ex-Japan transportation sector or equivalent to 24.4xPE’20E or 40% discount to Thai peers.

3. Double Divergence: Malaysia and Thailand Mixed Signals

Image 19473379881574908510972

In an earlier Insight, Malaysia and Thailand Divergence, 30 Sep, we drew attention to diverging trends in two of Southeast Asia’s more mature economies, Malaysia and Thailand. At that time second quarter headline GDP numbers showed Malaysia on a rising trend and Thailand on a declining trend. But when investment was examined Thailand was still growing while Malaysia was contracting. Have the third quarter releases changed the picture any? Yes and no…

4. China Outbreak Theme: Winners and Losers

Image%20result%20for%20wuhan%20train%20stations%20virus?1579582756

Not all stocks are losers for the China coronavirus contagion, Health And Happiness (H&H) (1112 HK) is a potential winner due to potential higher demand from its adult nutrition care. Surgical gloves producers such as Top Glove Corp (TOPG MK) and Hartalega Holdings (HART MK) will also benefit from higher turnover.

Tourism-related names such as Airports Of Thailand (AOT TB) , Beijing Capital International Airport (BCIA) (694 HK) , Air China Ltd (H) (753 HK) and Travelsky Technology Ltd H (696 HK) will suffer during this contagion period due to softer revenue growth. Hotel Shilla (008770 KS) is very popular with Chinese tourists hence a less number of Chinese going out to Korea due to potential travel ban may hurt their sales. 

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Brief Japan: Corporate Governance In Japan and more

By | Daily Briefs, Japan

In this briefing:

  1. Corporate Governance In Japan
  2. Pasona: Odd Man Out In Set-Up Trade
  3. GMO Internet: Listed Holdings Preferred
  4. Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing

1. Corporate Governance In Japan

Vote

If effectively implemented, the Japan Corporate Governance Code, the Japan Stewardship Code, the Engagement Guidelines and the CGS Guidelines would also represent a sea change in the role of Japanese boards in terms of management selection, management compensation, and capital deployment. If. This is largely a ‘soft” law rather than a hard regulatory change, limiting the regulator’s power to address minority rights.

There is a need to see improvement in governance, independence, board structure, and capital stewardship by a very large number of companies in Japan. Enhancement of diversity on the board will enable increased effectiveness and also strengthen companies’ governance structure.

Investors are calling on companies to hire outside board members and tackle cross-holdings. The TSE-mandated Corporate Governance Code seeks at least two independent outside board members for listed companies and preferably a third, a majority, and provides an example of “at least one-third independent directors”. But these examples, and other much-needed changes, remain inadequate.

One of the fundamental problems with the combination of the Japanese Corporate Governance Code and the Companies Act, and the lack of liability of directors for their own decisions, is that they can hang their hat on irrational economic arguments and there are no repercussions. 

Investors want better “governance”, however, international investors seek more than improving the box-ticking form prized by many Japanese companies. Analysing non-box-ticking ESG/governance is difficult. It is difficult to track and analyse. And even if box-ticking is evident, it is not necessarily true that doing so will raise long-term equity returns. It is possible it will raise costs, which would lower profit growth – this may be good for society, it may not be good for valuations.

International investors are more concerned with improving information access, management responsiveness to investors, and management efforts to make companies become better economic engines. International investors would like to see companies concentrate on their business rather than see them run long-short funds (i.e. hold cross-holdings) with investor capital, hold excess cash, or invest in real estate as an alternative source of income.

A Consultation Paper reviewing the TSE cash equity market – first mentioned in December 2018, followed by a Market Consultation, culminating in four documents posted on the FSA’s website last November – make it clear to the TSE, governmental, and regulatory authorities that existing governance and stewardship levels don’t cut it.

For now, there’s a lot of technocratic navel-gazing.

2. Pasona: Odd Man Out In Set-Up Trade

Image 67830987161576827527837

The Pasona Group (2168 JP) story is not new – but worth repeating.

Pasona owns ~51% of Benefit One Inc (2412 JP) valued at ¥190bn, exceeding the market capitalisation of Pasona by 197%.  The NAV discount and the implied negative stub have never been larger.

Benefit One’s profit continues to grow, in stark contrast to flat to retracing earnings at the remaining unlisted operations.  Management has guided an approach to improving underlying profits. Those efforts continue to fall short of expectations.

The simplest and easiest fix is to divest unrelated, non-core, loss-making unlisted operations. For the remaining unlisted segments, forward guidance as to profit forecasts, sustainability, KPIs and/or even budgets thereon would all be welcomed by investors as measures towards clarifying management’s long-term vision. They would facilitate narrowing of the discount.  

Until a concerted effort is made along these lines, Pasona is cheap. And will remain cheap. But at this extreme discount to NAV levels, I’d get involved.

3. GMO Internet: Listed Holdings Preferred

Image 20528794951576833734184

Applying a deconsolidated book value for the unlisted operations, I see GMO Internet (9449 JP) at a ~30% discount to NAV, a reasonable level for an active holding company structure with eight listed subsidiaries.

It is the complexity of the holdings, both listed and unlisted, and the inability to look through into the financials of the key operating segments, that suggest the 54% gain in the past twelve months is overdone.

Gaining traction on the merits of the unlisted ops at the Holdco have proven to be fleeting, as seen with GMO-i’s cryptocurrency frenzy in 2018. The division remains profitable, however, the top-line revenue in the most recent quarter of ¥1.57bn is the second-lowest since the 2018 June-end quarter peak. Shares bottomed out on the 25 December 2018 at ¥1,325 – its lowest level since Aug 2017 and down 56% from its June 2018 high – the same day GMO-i announced a cryptocurrency-related impairment of  ¥35.5bn.

Returns from the incubation segment are lumpy with limited visibility; the internet advertising segment recently recorded its second-lowest quarterly operating profit in the last thirteen years; leaving the core competitiveness and inaugural internet infrastructure businesses, which continue to eke out new highs, and the internet finance business. 

Given current levels, the opaqueness within the Holdco structure, and perhaps ambitious thinking value can be unlocked via ongoing activism; the recommendation is to be directly invested with the listed subsidiaries in place of the parent.

4. Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing

Screenshot%202020 01 20%20at%204.38.35%20pm

This is a follow-on insight to Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road which discusses the Maeda Corp (1824 JP) hostile Tender Offer for Maeda Road Construction Co (1883 JP)

The first insight deals with the Tender Offer, and the possible responses Maeda Road might be able to call upon to defend itself.

Proper models for how this could play out would include the Itochu/Descente situation from early 2019 (see insights here), or situations such as the Steel Partners bids for Sotoh Co Ltd (3571 JP) or Yushiro Chemical Industry Co (5013 JP) in early 2014. Other models for defense reaction could include the reaction by Unizo Holdings (3258 JP) to the hostile partial offer by H I S Co Ltd (9603 JP) last summer. 

This insight deals with the Arbitrage Grids for Partial Tender Offers, the Funky Arbitrage Grids, and a discussion of how to think about front-end pricing before you have further news.

More below.

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Brief Event-Driven: Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing

1. Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing

Screenshot%202020 01 20%20at%204.38.35%20pm

This is a follow-on insight to Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road which discusses the Maeda Corp (1824 JP) hostile Tender Offer for Maeda Road Construction Co (1883 JP)

The first insight deals with the Tender Offer, and the possible responses Maeda Road might be able to call upon to defend itself.

Proper models for how this could play out would include the Itochu/Descente situation from early 2019 (see insights here), or situations such as the Steel Partners bids for Sotoh Co Ltd (3571 JP) or Yushiro Chemical Industry Co (5013 JP) in early 2014. Other models for defense reaction could include the reaction by Unizo Holdings (3258 JP) to the hostile partial offer by H I S Co Ltd (9603 JP) last summer. 

This insight deals with the Arbitrage Grids for Partial Tender Offers, the Funky Arbitrage Grids, and a discussion of how to think about front-end pricing before you have further news.

More below.

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Brief Industrials: Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing

1. Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing

Screenshot%202020 01 20%20at%204.38.35%20pm

This is a follow-on insight to Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road which discusses the Maeda Corp (1824 JP) hostile Tender Offer for Maeda Road Construction Co (1883 JP)

The first insight deals with the Tender Offer, and the possible responses Maeda Road might be able to call upon to defend itself.

Proper models for how this could play out would include the Itochu/Descente situation from early 2019 (see insights here), or situations such as the Steel Partners bids for Sotoh Co Ltd (3571 JP) or Yushiro Chemical Industry Co (5013 JP) in early 2014. Other models for defense reaction could include the reaction by Unizo Holdings (3258 JP) to the hostile partial offer by H I S Co Ltd (9603 JP) last summer. 

This insight deals with the Arbitrage Grids for Partial Tender Offers, the Funky Arbitrage Grids, and a discussion of how to think about front-end pricing before you have further news.

More below.

You are currently reading Executive Summaries of Smartkarma Insights.

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Brief M&A: Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing

1. Maeda Corp Tender for Maeda Road – Arb Grids & Front End Pricing

Screenshot%202020 01 20%20at%204.38.35%20pm

This is a follow-on insight to Not All “Parent-Sub” Situations Are Friendly: Maeda Corp Goes Hostile On Affiliate Maeda Road which discusses the Maeda Corp (1824 JP) hostile Tender Offer for Maeda Road Construction Co (1883 JP)

The first insight deals with the Tender Offer, and the possible responses Maeda Road might be able to call upon to defend itself.

Proper models for how this could play out would include the Itochu/Descente situation from early 2019 (see insights here), or situations such as the Steel Partners bids for Sotoh Co Ltd (3571 JP) or Yushiro Chemical Industry Co (5013 JP) in early 2014. Other models for defense reaction could include the reaction by Unizo Holdings (3258 JP) to the hostile partial offer by H I S Co Ltd (9603 JP) last summer. 

This insight deals with the Arbitrage Grids for Partial Tender Offers, the Funky Arbitrage Grids, and a discussion of how to think about front-end pricing before you have further news.

More below.

You are currently reading Executive Summaries of Smartkarma Insights.

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Brief Thailand: Central Retail Corp Trading – Robins Trading Is Not a Good Look but Passive Buying Should Help and more

By | Daily Briefs, Thailand

In this briefing:

  1. Central Retail Corp Trading – Robins Trading Is Not a Good Look but Passive Buying Should Help
  2. BEM: Leading Mass Transit Operator Is About to Get Huge
  3. Central Retail IPO: Trading Debut, Valuation Scenario Analysis
  4. The Guerrilla War Against The PBOC
  5. The Week That Was in [email protected] – The Omnibus Law, Bank Risk, and Mobile World

1. Central Retail Corp Trading – Robins Trading Is Not a Good Look but Passive Buying Should Help

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Central Retail (CRC TB) raised about US$2.32bn at THB42 per share, just above the mid point of its IPO price range. We have covered the IPO in our previous two notes:

In this insight, we will look at the IPO deal dynamics and updated valuation.

2. BEM: Leading Mass Transit Operator Is About to Get Huge

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We initiate coverage of BEM with a HOLD rating, based on a target price of Bt11.70 derived from a sum-of-the-parts methodology, which implies 45xPE’20E, or a 10% premium to the Thailand transportation sector

The story:

• Extensive transportation network in metropolitan areas
• Growth phase for MRT is just around the corner
• Upside from Orange and South Purple MRT lines
• Steady cash flow from toll businesses
• Plenty of opportunities for commercial development business
• Potential upside from airport-linked fast track 

Risks:  Concession termination, interest rate fluctuation and legal disputes

3. Central Retail IPO: Trading Debut, Valuation Scenario Analysis

Dcf

Central Retail (CRC TB), the retail arm of Central Group, is the leading multi-format, multi-category retailing platform in Thailand, Italy and Vietnam. Central Retail will commence trading on Thursday, 20 February. Central Retail set the offer price at THB42.00 per share, which is around the mid-point of the indicative price range of THB40-43 per share.

In our valuation note, we grudgingly noted that we would participate at most at the low-end of the IPO price range due to an undemanding rating. However, in a follow-on note, we stated that recent events have tipped the balance in favour of giving the IPO a pass. Our DCF analysis supports this view and our DCF-based scenario analysis suggests that the IPO price is unattractive.

4. The Guerrilla War Against The PBOC

In the wake of the news of the coronavirus infection, the Chinese leadership went into overdrive and made it a Draghi-like “whatever it takes” moment to prevent panic and stabilize markets. When the stock markets opened after the Lunar New Year break, the authorities prohibited short sales, directed large shareholders not to sell their holdings and the PBOC turned on their firehose of liquidity to support the stock market. Those steps largely succeeded. China’s stock markets stabilized and recovered, and so too did the markets of China’s Asian trading partners.

However, there were signs that the market is unimpressed by the steps taken by Beijing to control the outbreak and limit its economic impact. Market participants were conducting a guerrilla campaign against the PBOC.

While stock markets have been strong, commodity markets have been weak. Foreign exchange markets are also taking a definite risk-off tone, contrary to the PBOC’s efforts to support risk appetite. Even Chinese market internals are exhibiting skepticism, as financial stocks have lagged the market rally.

This argues for a contrarian position of long EM, commodities, and commodity producers and short U.S. equities. Aggressive traders could enter into a long and short pairs trade, while more risk-controlled accounts could just overweight and underweight.

If the bulls are right, and the coronavirus outbreak recedes and comes under control, U.S. equities should begin to underperform as the demand for safe havens, while cyclically sensitive EM and commodities would rally. On the other hand, if the outbreak were to spiral out of control and global growth collapses, U.S. equities would correct, but there is likely less downside risk in EM and commodity exposure because they have already fallen substantially.

5. The Week That Was in [email protected] – The Omnibus Law, Bank Risk, and Mobile World

This past week’s offering of Insights across [email protected] is filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up and credit insights. Please find a brief summary below, with a fuller write up in the detailed section. We also include in the detailed section the past week’s relevant Discussions in [email protected], this week including discussions on Ace Hardware Indonesia (ACES IJ),XL Axiata (EXCL IJ), and Indocement Tunggal Prakarsa (INTP IJ).

Macro

In Vast Omnibus Holds Promise but May Languish / Would Halve Severance / Health Minister Vs Harvard, CrossASEAN Insight Provider Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week. 

Equity Bottom-Up

In Lippo Karawaci (LPKR IJ) – Green Shoots Ahead?, CrossASEAN Insight Provider Angus Mackintosh revisits Indonesia’s largest property company and sees the potential for better times ahead. 

In Mobile World Investment (MWG VN) – From Mobile Phones to Groceries, Cross ASEAN Insight Provider Angus Mackintosh finds value in one of Vietnam’s fastest-growing consumer companies. 

In BAT Malaysia: Trading Lower than 1997 Asian Financial Crisis, Cheapest in 27 Years, Div Yield at 11%, Nicolas Van Broekhoven revisits Malaysia’s leading tobacco player and finds deep value. 

In OCBC – Wing Hang Bank and Oil Price Risk, banking specialist Daniel Tabbush revisits Oversea Chinese Banking Corp. (OCBC SP) which has exposure in a number of areas which are likely to impact both growth and credit quality. 

In Thinking About BBL’s Buy of Permata – Buy the Dips, events specialist Travis Lundy circles back to this ongoing M&A situation. 

In Bangkok Bank: Deal or No Deal, Shares Are Too Depressed, Emerging Markets banks specialist Paul Hollingworth takes a closer look at Bangkok Bank Public (BBL TB) in light of the ongoing takeover of Bank Permata (BNLI IJ).

In Tesco to Offload Its Thai & Malaysia Business: Generous Valuation but Value Is in the UK BusinessOshadhi Kumarasiri takes a look at the potential sale of Tesco PLC (TSCO LN)’s Thai and Malaysian Assets. 

In Central Retail Listing and SET50/MSCI Index Inclusion,Brian Freitas looks at the implications from Central Retail (CRC TB) being included in key indices after listing. 

In ThaiBev Beer Brewery Pre-IPO/Spin-Off – Early Take – Aiming to Build an ASEAN Champion?,Zhen Zhou, Toh zeros in on the impending spin-off of Thai Beverage (THBEV SP)’s beer assets.

In a second insight ThaiBev Beer Brewery Pre-IPO/Spin-Off – Valuation Estimates and Implications,Zhen Zhou, Toh zeros in on the potential valuations for this impending spin-off.

In Noble Development Base Support with Volume Concerns, technical analysis specialist Thomas Schroeder looks at Thai property developer Noble Development (NOBLE TB) and works his magic.

In TASCO: Surfing the Spread Uptrend in 2020, our friends at Country Group initiate coverage of Tipco Asphalt (TASCO TB) with a BUY rating and a 2020E target price of Bt27, derived from 12.8xPE’20E, which is in line with valuations of the Asia-ex Japan materials sector. 

In BCPG: Upside from Second Hydro Power Plant Acquisition in Laos,Country Group comment on the recent hydro acquisition by Bcpg Pcl (BCPG TB) and increase their target price as a result. 

In PTTEP: Thai E&P Leader with Promising Growth Outlook, Country Group initiate coverage of PTTEP with a BUY rating, based on a 2020E target price of Bt142, derived from a discounted cash flow valuation (WACC of 10% and TG of 2%). Their valuation implies 11.3x PE’20, which is in line with the Thai Energy Sector.

Sector and Thematic

In Asian Banks – Material Event banking specialist Daniel Tabbush suggests that the impending results may include statements of impending risks related to the Corona Virus.

In Thai Media Spotlight: An Early Quarter of Blockbusters, our Thai guru Athaporn Arayasantiparb, CFA highlights four interesting trends/developments in the Thai media sector.

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Brief China: Top Short Triggers in Asia for a Q1 Pullback and more

By | China, Daily Briefs

In this briefing:

  1. Top Short Triggers in Asia for a Q1 Pullback
  2. Smoore Intl (思摩尔国际) Pre-IPO: Tripling Capacity in Three Years
  3. New Oriental (EDU): Stock Up 120% in 2019, But Still 23% Upside Due to Excellent Q2
  4. Huaneng Renewables: Tendering Condition Satisfied. Offer Remains Conditional

1. Top Short Triggers in Asia for a Q1 Pullback

We have outlined increasing risk of tops forming into the late January cycle timeline with some markets peaking before the SPX. The first top cycle date comes near January 23 and appears to be rolling in a touch early. The bigger cycle inflection comes between January 27 and February 9th. Our base case called for an equity cycle peak into late January and Q1 pullback into March.

Our short group in Asia is comprised of Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) , FTSE Straits Times Index (STI) (STI INDEX) , Kuala Lumpur Composite Index (Klci) (FBMKLCI INDEX) , FTSE China A50 Index (XIN9I INDEX) , Hong Kong Hang Seng Index (HSI INDEX) and NIFTY Index (NIFTY INDEX) .

The common thread is an oversold USD, slated cycle peaks in line with the global cycle, severe RSI divergence and sell signals in A50, HSI, Korea and India. This technical set up warns of a harder decline in Q1. Today’s price action aligns with power moves associated with non confirmation divergences.

EEM is also at a clear cycle peak as the USD makes key lows vs EM FX at a time when consensus is USD bearish (we have a bullish take on the green back).

2. Smoore Intl (思摩尔国际) Pre-IPO: Tripling Capacity in Three Years

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Smoore Tech is a leading e-cigarette and component manufacturer in China. The company was delisted from the venture board in China, the NEEQ, and is seeking a listing in Hong Kong to raise up to USD 400 million. In our previous note, we have looked at the company’s background, its brief financials, and its shareholders. We are impressed by the company’s stellar growth in the past and its technology-driven business. 

In this note, we take a closer look at the company’s latest IPO filing and the latest fund-raising before the listing. The main driver of the company’s 178% YoY revenue growth in 1H2019 was the ODM device business. The company is the number one e-cigarette OEM player in the world with the US being its largest source of revenue. The company is undergoing its capacity expansion plan in the next three years to triple its production capacity. In the pre-IPO fundraising in late last year, we note that there was a lack of presence of institutional investors. 

Our previous coverage on Smoore International

3. New Oriental (EDU): Stock Up 120% in 2019, But Still 23% Upside Due to Excellent Q2

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  • EDU’s stock price had risen more than 120% in 2019.
  • The growth rate of both students and revenues accelerated in 2Q2020 (ended November 2019).
  • The operating margin turned to 3% in 2Q2020 versus -5% in 2Q2019.
  • The classroom-based business grew more rapidly than the online business and EDU has been utilizing learning centers more efficiently.
  • We believe, in fiscal 2020 (ended May 2020), total revenues will grow 29% and the operating margin will improve to 14% versus 10% in F2019.
  • The P/E band suggests an upside of 23%.

Our previous coverage on New Oriental:

4. Huaneng Renewables: Tendering Condition Satisfied. Offer Remains Conditional

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On the First Closing Date – today – China Huaneng received valid acceptances representing 90.80% of Huaneng Renewables Corp H (958 HK)‘s total H Shares. This satisfies the 90% “acceptance condition” attached to the Offer.

This follows the EGM and H Share Class Meeting of HRC held on 6 January 2020 in which the special resolution to approve the delisting by the independent H shareholders was passed

What now? The Offer remains conditional on: 

… obtaining all necessary authorisations, consents and approvals (including approval in-principle) of any governmental or regulatory body in relation to the H Share Offer (including its implementation) (if applicable); and the condition on the completion of the filing of NDRC and MOFCOM and the registration of SAFE in relation to the H Share Offer.

Both these conditions have not been filled as at the First Closing Date. 

Should the Offer be declared unconditional in all respects, it will remain open for acceptance for not less than 28 days. However, as the Offer remains conditional, the Offer “will remain open for acceptance until further notice“. 

I’m not aware of similar wording – until further notice – in an Offer. As per page 3 of the Composite Document:

Pursuant to Rule 15.5 of the Takeovers Code, except with the consent of the Executive, the H Share Offer may not become or be declared unconditional as to acceptance after 7:00 p.m. on the 60th day after the posting of the Composite Document.

Evidently, the Executive (of the SFC) has consented to an extension.

Be that as it may, the outstanding regulatory conditions were likely contingent on the acceptance condition. This is China Huaneng – no one expects an issue with the authorities.

This is a done deal. Expect shares to trade tighter to terms tomorrow.

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Brief USA: Sprint/T-Mobile: Markets Building in a 60% Probability Deal Is Rejected and more

By | Daily Briefs, United States

In this briefing:

  1. Sprint/T-Mobile: Markets Building in a 60% Probability Deal Is Rejected

1. Sprint/T-Mobile: Markets Building in a 60% Probability Deal Is Rejected

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Sprint shares now trade at a 43% discount to the implied value based on the original merger terms, down from <10% last July when the DoJ approved the deal and from 27% when we last wrote about this in November. Based on our range of outcomes, that appears to imply a 60%+ probability that the TMUS merger will not pass muster in the courts. That ruling should be out in February and whilst we do not have any special insight (nor does anyone which is why deal odds are priced like this) we did think it worthwhile to look at the state of play. TMUS should trade steadily no matter the result whilst Sprint is almost assuredly mis-priced as markets give meaningful weight to both sides of a binary outcome.

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