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Brief Indonesia: The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos and more

By | Daily Briefs, Indonesia

In this briefing:

  1. The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos
  2. Are Risky Assets Overvalued?
  3. Taking Off: Vietnamese Exports Are Rocking and Rolling
  4. Coal Faces Disarray / Nursalims’ Reprieve? / Bantleman’s Clemency / 2 Ministers Rebuked
  5. Indofood (ICBP IJ) – Big Daddy of Branded Food in Indonesia; Proxy for Consumer Food Spend

1. The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos

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 pieces. Please find a brief summary below, with a fuller write up in the detailed section.

Macro Insights

In Singapore Is the First Domino to Fall Towards Stagnation (Approaching Recession), CrossASEAN Economist Prasenjit K. Basu revisits the Singapore economic outlook in light of recent indicative numbers that suggest that the economy has stalled. 

In Coal Faces Disarray / Nursalims’ Reprieve? / Bantleman’s Clemency / 2 Ministers Rebuked, CrossASEAN Indght Provider Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week. 

In Taking Off: Vietnamese Exports Are Rocking and Rolling,Dr. Jim Walker zeros in on the picture for Asia Exports as the US-China Trade War continues to simmer. 

In Thai Macro Watch: Huawei, Trade Wars, and More, our Thai Guru Athaporn Arayasantiparb, CFA looks at five news on the global front that may impact Thai equities directly or indirectly.

Equity Bottom-Up Insights

In Erajaya Swasembada (ERAA IJ) – Smoke Signals for Impending Catalysts, CrossASEAN Insight Provider Angus Mackintosh circles back to Indonesia’s leading smartphone retailer and finds plenty to cheer about after a conversation with management. 

In EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?,Nicolas Van Broekhoven revisits Alliance Mineral Assets (AMS SP) after attending the company’s recent EGM. 

In Indofood (ICBP IJ) – Big Daddy of Branded Food in Indonesia; Proxy for Consumer Food Spend, Consumer specialist Devi Subhakesan takes a close look at this leading Indonesian staples player. 

In Health Management Int’l Privatisation – Easy Peasy,Travis Lundy zeros in on this potential privatisation event. 

In IPO Radar: S Hotels & Resorts, Singha’s Hospitality Arm,Athaporn Arayasantiparb, CFA takes a close look at the upcoming IPO of Singha Group’s hotel arm. 

In Thanachart and TMB: On the Defensive. An Insurance Policy for Challenging Times, Banking Specialist looks at this impending merger of these two major financial institutions in Thailand. 

In StubWorld: Just Rumours (For Now) As SIA Engineering Pops,David Blennerhassett examines the possibility of privatisation of Sia Engineering (SIE SP). Sia Engineering (SIE SP) is not aware of any information, however last week’s 15% gain in two days rekindles privatisation talks by Singapore Airlines (SIA SP)

In Ascott & Ascendas Hospitality Merger – Not Unexpected and Should Be Easy,Travis Lundy looks at this proposed merger, which would create the largest hospitality trust in Asian Pac. 

Sector and Thematic Insights

In Indonesian Telecoms: The Recovery Continued in 1Q and We Expect It to Last, our friends at New Street Research circle back to the Indonesian Telco sector post 1Q19 results and maintain an upbeat view on the prospects for an increasingly data-driven market.

In Singapore REIT – Cautious Search for High Yield, property specialist Anni Kum revisits the REIT sector and identifies her top picks. 

In REIT Discover: Prime US REIT IPO Brief Review,Anni Kum takes a look at the initial public offer (IPO) of Prime Us Reit (PRIME SP)

2. Are Risky Assets Overvalued?

Cape to long term average log cape to average chartbuilder 2

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

3. Taking Off: Vietnamese Exports Are Rocking and Rolling

Asia%20exports%201

Whisper it quietly but not all Asian exporters are struggling. In the first six months of 2019 the dollar value of exports from Korea dropped 8.5% YoY. Taiwanese exports were down 3.6% YoY . Meanwhile, Chinese exports, the country at the heart of the trade war, were down just 0.1% YoY.  

4. Coal Faces Disarray / Nursalims’ Reprieve? / Bantleman’s Clemency / 2 Ministers Rebuked

Trade%2019 07 12%20oil

The Energy Minister finally enforced Mining Law stipulations on a coal mine with an expiring contract (CCOW), the small Tanito Harum — but this sets a precedent that augurs the eventual breakup of concessions that account for the bulk of the coal sector.  A presidential revision of the law next year seems likely, but mining investment will be subdued in the meantime.  The release of the Canadian educator Neil Bantleman, in a miscarriage of justice regarding supposed child sex abuse, mitigates damage from the six-year old saga.  Mitra Adiperkasa (MAPI IJ) owners Sjamsul and Itjih Nursalim may have won a reprieve when the KPK — for the first time in its 15 year history — lost a case in court related to their charges.  Widodo’s rebuke of the ministers of energy and state enterprises signals potential changes in those sectors in an eventual reshuffle; but whether their replacements would improve matters is questionable.

Politics: President Joko Widodo issued clemency for Neil Bantleman, the Canadian educator convicted in a clear miscarriage of justice regarding supposed child‑sex abuse in 2016.  He is now in Ontario, but the teacher Ferdi Tijon and several cleaning staff remain in prison (Page 2).  Prabowo Subianto’s party tied ‘reconciliation’ – sought by aides to Widodo – to the return of Islamic Defenders Front (FPI) leader Habib Rizieq from Mecca.  Presidential Chief of Staff Gen (ret) Moeldoko dismissed the possibility, noting that Rizieq’s exile is self‑imposed.  Gerindra officials also want the release of several hundred rioters arrested in May.  In effect, Gerindra is openly requesting legal‑system interference for political aims.  This highlights the weak prospects for constructive opposition from Prabowo’s party.  Widodo has shown no intention to help Rizieq, but risks exist that some sort of ‘reconciliation’ will involve impunity for the May rioting (p. 2).  The president pointedly admonished Energy Minister Ignasius Jonan and State Minister for State Enterprises Rini Soemarno for having allowed oil imports to increase (which occurred in 2018).  This may signal that the pair have lost favor and will exit the cabinet (p. 3).  Police generals are objects of scrutiny in a 170‑page report, due out soon, on the 2017 attack on corruption investigator Novel Bawesdan (p. 6).

Justice: For the first time since its founding 15 years ago, the Anti-Corruption Commission (KPK) lost a case in court – against former Bank Restructuring Agency (Ibra) head Syafruddin Temenggung, in a trial with implications for major business and political interests.  But KPK members have vowed to continue pursuing related suspects, the fugitive Gadjah Tunggal Group (GTG) owners Sjamsul and Itjih Nursalim (p. 8).  After a high school teacher in Mataram recorded her boss harassing her sexually over the phone, the boss filed charges against her for having electronically distributed lewd material (his own).  Supreme Court justices sentenced her to six months in prison (p. 9).  

Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news.  The writer is Kevin O’Rourke, author of the book Reformasi.  For subscription info please contact: <[email protected]>.

Policy News: The Energy Ministry shut down a mid‑sized coal producer, Barki’s Tanito Harum, due to the expiry of its Coal Contract of Work (CCOW).  Without a revision of the 2009 Mining Law, the same may happen to Bakrie’s giant Arutmin in November 2020.  CCOWs expiring through 2025 account for two‑thirds of Indonesia’s coal production and the bulk of its fuel for power generation.  Adaro, Indika, Sinar Mas and Bumi are among those in limbo (p. 11).  A sorely needed Land Bill could potentially pass by September – but the Forestry Association (Aphi) is mounting stiff resistance (p. 13).  Car producers are anticipating a regulation on electric vehicles (p. 14).

5. Indofood (ICBP IJ) – Big Daddy of Branded Food in Indonesia; Proxy for Consumer Food Spend

Indofood%20rev%20segment%20profit

Indofood Cbp Sukses Makmur T (ICBP IJ) is the largest packaged food producer in Indonesia with a wide portfolio of brands across food categories. With a stable economic/political outlook coupled with favourable demographics, Indonesia could continue to be a destination for Emerging market investments. Indofood CBP offers exposure to the country’s attractive household consumption growth prospects, especially for branded foods. The company known primarily for its Indomie brand of instant noodles with more than 70% market share in that segment has also expanded into other food categories – dairy, snacks, beverages, additives and nutrition. We take a quick look at Indofood CBP’s operational and financial strengths/concerns to assess its growth prospects. We also look at (1) why Indonesia is a compelling consumption growth market (2) the ownership/holding-structure of Indofood CBP, a Salim group company, (2) ESG-related issues involving the parent group and (3) Key financials and Valuation comparison with peers. This insight is the first in our series profiling leading consumer stocks in emerging Asia. 

Indonesia: Stable economy, Optimistic consumer outlook. Indonesia, with its favourable demographic metrics and relatively robust economic conditions, is expected to remain politically resilient even as global-trade/politics related uncertainty looms large on currency/commodity prices. In May 2019, S&P raised Indonesia’s sovereign credit rating to ‘BBB’ with a stable outlook following the re-election of President Joko Widodo stating that the ratings “..reflect Indonesia’s strong economic growth prospects and supportive policy dynamics, which we expect to remain..”. According to a consumer survey conducted by Bank Indonesia in May, consumer optimism in the country remained intact as indicated by a moderate increase in the Consumer Confidence Index. 

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Brief Thailand: The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos and more

By | Daily Briefs, Thailand

In this briefing:

  1. The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos
  2. USD/Thai Baht Macro Cycle Low
  3. IPO Radar: S Hotels & Resorts, Singha’s Hospitality Arm
  4. Are Risky Assets Overvalued?
  5. Taking Off: Vietnamese Exports Are Rocking and Rolling

1. The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos

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 pieces. Please find a brief summary below, with a fuller write up in the detailed section.

Macro Insights

In Singapore Is the First Domino to Fall Towards Stagnation (Approaching Recession), CrossASEAN Economist Prasenjit K. Basu revisits the Singapore economic outlook in light of recent indicative numbers that suggest that the economy has stalled. 

In Coal Faces Disarray / Nursalims’ Reprieve? / Bantleman’s Clemency / 2 Ministers Rebuked, CrossASEAN Indght Provider Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week. 

In Taking Off: Vietnamese Exports Are Rocking and Rolling,Dr. Jim Walker zeros in on the picture for Asia Exports as the US-China Trade War continues to simmer. 

In Thai Macro Watch: Huawei, Trade Wars, and More, our Thai Guru Athaporn Arayasantiparb, CFA looks at five news on the global front that may impact Thai equities directly or indirectly.

Equity Bottom-Up Insights

In Erajaya Swasembada (ERAA IJ) – Smoke Signals for Impending Catalysts, CrossASEAN Insight Provider Angus Mackintosh circles back to Indonesia’s leading smartphone retailer and finds plenty to cheer about after a conversation with management. 

In EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?,Nicolas Van Broekhoven revisits Alliance Mineral Assets (AMS SP) after attending the company’s recent EGM. 

In Indofood (ICBP IJ) – Big Daddy of Branded Food in Indonesia; Proxy for Consumer Food Spend, Consumer specialist Devi Subhakesan takes a close look at this leading Indonesian staples player. 

In Health Management Int’l Privatisation – Easy Peasy,Travis Lundy zeros in on this potential privatisation event. 

In IPO Radar: S Hotels & Resorts, Singha’s Hospitality Arm,Athaporn Arayasantiparb, CFA takes a close look at the upcoming IPO of Singha Group’s hotel arm. 

In Thanachart and TMB: On the Defensive. An Insurance Policy for Challenging Times, Banking Specialist looks at this impending merger of these two major financial institutions in Thailand. 

In StubWorld: Just Rumours (For Now) As SIA Engineering Pops,David Blennerhassett examines the possibility of privatisation of Sia Engineering (SIE SP). Sia Engineering (SIE SP) is not aware of any information, however last week’s 15% gain in two days rekindles privatisation talks by Singapore Airlines (SIA SP)

In Ascott & Ascendas Hospitality Merger – Not Unexpected and Should Be Easy,Travis Lundy looks at this proposed merger, which would create the largest hospitality trust in Asian Pac. 

Sector and Thematic Insights

In Indonesian Telecoms: The Recovery Continued in 1Q and We Expect It to Last, our friends at New Street Research circle back to the Indonesian Telco sector post 1Q19 results and maintain an upbeat view on the prospects for an increasingly data-driven market.

In Singapore REIT – Cautious Search for High Yield, property specialist Anni Kum revisits the REIT sector and identifies her top picks. 

In REIT Discover: Prime US REIT IPO Brief Review,Anni Kum takes a look at the initial public offer (IPO) of Prime Us Reit (PRIME SP)

2. USD/Thai Baht Macro Cycle Low

THB (USDTHB CURNCY) below 31 is flagging valuation concerns with high conviction chart bottoming signals. The macro cycle is due to bottom near the 30.50 level with risk toward the lower 30 area as the risk limit area. 

Micro and macro cycle bull divergence is maturing in the daily and weekly charts and forms when the trend is near a terminal point stemming from diminishing USD sell volumes and momentum (THB tends to spike into a low however) as the market finds itself very long the THB.

USD/THB macro cycle is etching out a cycle low at a time when intervention risk is rising to stem the Baht’s strength.

A USD cycle low will provide headwinds for the SET rally and front run an equity peak. Exports plays on our radar.

3. IPO Radar: S Hotels & Resorts, Singha’s Hospitality Arm

Sing%20hotel%20main

Singha Group plans to launch the IPO of its hotel arm SHR in Q3’19. Interestingly, they have more rooms and higher room rates than Erawan. These are some observations we make about this upcoming IPO:

  • Structure. The IPO will be firmly underwritten by CIMB and includes 70m warrants for executives and subsidiaries and staggered lock-up periods and expected free float of 40%. Singha Group already has four other listed entities we know of, namely S, NVD, SPRIME, and BGC.
  • Business. Over the past 3 years, SHR has grown revenues and earnings by 63% and 53% respectively. Their portfolio includes 39 hotel properties spread over 5 countries and 3 continents. They include several international brands (Hilton, Hard Rock, Holiday Inns) as well as a few in-house brands (Santiburi, Outrigger).
  • Valuation. We conservatively value SHR at Bt5.3/sh using DCF valuation and Bt10.5/sh using relative valuation. Depending on the market sentiment during the IPO period, we would expect the stock to be closer to one end of this spectrum.
  • Risk. The company/underwriter identifies many risks, most notably competitive risks. Others mentioned include those linked to branding, events risk, Brexit (since they have 29 in UK), and economic risks.

4. Are Risky Assets Overvalued?

Cape to long term average log cape to average chartbuilder 2

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

5. Taking Off: Vietnamese Exports Are Rocking and Rolling

Asia%20exports%201

Whisper it quietly but not all Asian exporters are struggling. In the first six months of 2019 the dollar value of exports from Korea dropped 8.5% YoY. Taiwanese exports were down 3.6% YoY . Meanwhile, Chinese exports, the country at the heart of the trade war, were down just 0.1% YoY.  

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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Singapore: The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos and more

By | Daily Briefs, Singapore

In this briefing:

  1. The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos
  2. Singapore Property – Jump in New Supply. Upcoming Mega-Launches to Test Buyers’ Appetite.
  3. Are Risky Assets Overvalued?
  4. Taking Off: Vietnamese Exports Are Rocking and Rolling
  5. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIA Engineering

1. The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos

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 pieces. Please find a brief summary below, with a fuller write up in the detailed section.

Macro Insights

In Singapore Is the First Domino to Fall Towards Stagnation (Approaching Recession), CrossASEAN Economist Prasenjit K. Basu revisits the Singapore economic outlook in light of recent indicative numbers that suggest that the economy has stalled. 

In Coal Faces Disarray / Nursalims’ Reprieve? / Bantleman’s Clemency / 2 Ministers Rebuked, CrossASEAN Indght Provider Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week. 

In Taking Off: Vietnamese Exports Are Rocking and Rolling,Dr. Jim Walker zeros in on the picture for Asia Exports as the US-China Trade War continues to simmer. 

In Thai Macro Watch: Huawei, Trade Wars, and More, our Thai Guru Athaporn Arayasantiparb, CFA looks at five news on the global front that may impact Thai equities directly or indirectly.

Equity Bottom-Up Insights

In Erajaya Swasembada (ERAA IJ) – Smoke Signals for Impending Catalysts, CrossASEAN Insight Provider Angus Mackintosh circles back to Indonesia’s leading smartphone retailer and finds plenty to cheer about after a conversation with management. 

In EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?,Nicolas Van Broekhoven revisits Alliance Mineral Assets (AMS SP) after attending the company’s recent EGM. 

In Indofood (ICBP IJ) – Big Daddy of Branded Food in Indonesia; Proxy for Consumer Food Spend, Consumer specialist Devi Subhakesan takes a close look at this leading Indonesian staples player. 

In Health Management Int’l Privatisation – Easy Peasy,Travis Lundy zeros in on this potential privatisation event. 

In IPO Radar: S Hotels & Resorts, Singha’s Hospitality Arm,Athaporn Arayasantiparb, CFA takes a close look at the upcoming IPO of Singha Group’s hotel arm. 

In Thanachart and TMB: On the Defensive. An Insurance Policy for Challenging Times, Banking Specialist looks at this impending merger of these two major financial institutions in Thailand. 

In StubWorld: Just Rumours (For Now) As SIA Engineering Pops,David Blennerhassett examines the possibility of privatisation of Sia Engineering (SIE SP). Sia Engineering (SIE SP) is not aware of any information, however last week’s 15% gain in two days rekindles privatisation talks by Singapore Airlines (SIA SP)

In Ascott & Ascendas Hospitality Merger – Not Unexpected and Should Be Easy,Travis Lundy looks at this proposed merger, which would create the largest hospitality trust in Asian Pac. 

Sector and Thematic Insights

In Indonesian Telecoms: The Recovery Continued in 1Q and We Expect It to Last, our friends at New Street Research circle back to the Indonesian Telco sector post 1Q19 results and maintain an upbeat view on the prospects for an increasingly data-driven market.

In Singapore REIT – Cautious Search for High Yield, property specialist Anni Kum revisits the REIT sector and identifies her top picks. 

In REIT Discover: Prime US REIT IPO Brief Review,Anni Kum takes a look at the initial public offer (IPO) of Prime Us Reit (PRIME SP)

2. Singapore Property – Jump in New Supply. Upcoming Mega-Launches to Test Buyers’ Appetite.

Picture3

Singapore’s Urban Redevelopment Authority (URA) today released the data on property developers’ private home sales for the month of June 2019.

A total of 670 non-land private residential units were launched for sale in June. This was 51% fewer than the number of units launched in the preceding month and 5% fewer year-on-year.

A total of 803 non-landed private residential units were sold in June. This was 14% fewer than the number of new units sold in the previous month.

10 new projects received their sales approval in June, adding a substantial 4,731 units to the launch pipeline. 2 mega-launches to watch out for in the coming months are Parc Clematis  and Avenue South Residence. 

Total developers’ inventory available for immediate launch jumped by 22.3% MoM in June to 20,531 units. This is the highest level since Jan 2015. Rising inventory is within expectation and will continue to affect the pricing power of developers.

3. Are Risky Assets Overvalued?

Cape to long term average log cape to average chartbuilder 2

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

4. Taking Off: Vietnamese Exports Are Rocking and Rolling

Asia%20exports%201

Whisper it quietly but not all Asian exporters are struggling. In the first six months of 2019 the dollar value of exports from Korea dropped 8.5% YoY. Taiwanese exports were down 3.6% YoY . Meanwhile, Chinese exports, the country at the heart of the trade war, were down just 0.1% YoY.  

5. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIA Engineering

Lennon

Last Week in Event SPACE …

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

EVENTS

Chiyoda Corp (6366 JP)  (Mkt Cap: $729mn; Liquidity: $15mn)

Travis Lundy calculated the total shares to be sold at 48-50m accounting for 20% of outstanding and 30% of float in Chiyoda’s upcoming removal from the Nikkei (and now confirmed – see Travis insight below) and Topix indexes, and referenced the exclusion trades resulted in Toshiba Corp (6502 JP) falling 24% and Sharp Corp (6753 JP) falling 31%. But Mio Kato, CFA feels that the company’s situation could skew the timing compared to what would be “normal”.

  • Mio believes that it may be more interesting to look for a reversion trade in the event that the stock price declines significantly into the exclusion. He feels that the fall may not be quite as steep as that for Toshiba or Sharp. In both Toshiba and Sharp’s cases there was still significant uncertainty surrounding the names as Toshiba had not completed or even announced its capital raise at the time and the sale of its memory subsidiary was still being hotly contested; while in Sharp’s case Hon Hai was playing hardball on deal terms.
  • In contrast, Chiyoda has already secured funding from a very stable and large partner and appears to have kitchen-sinked a lot of assumptions and faces a very bright operational outlook – its problems stem from poor risk management, which Mitsubishi is meant to solve, and not operations. 
  • In addition, due to Chiyoda’s previous operational struggles and write-downs there is already a very significant short base. This could distort the usual timing of the fall in the stock price and the fact that the stock has recovered to just 3.5% below the level prior to more widespread reporting of the exclusion points to this eventuality. It does seem likely that the size of the required sell could push Chiyoda’s price down at some point – Mio argues this could happen much closer to the actual event than usual. If borrow is difficult to come by, there could be money to be made on the other side around the turn of the month.

(link to Mio’s insight: Chiyoda: Risks to the Index Kick-Out Trade and Potential Volatility at Earnings the Next Day)


Bandai Namco Holdings (7832 JP)  (Mkt Cap: $12.6bn; Liquidity: $28mn)

The Nikkei Inc announced its “Changes to the Nikkei Indices” this week  which became inevitable when the Tokyo Stock Exchange announced on the 28th of June that Chiyoda Corp (6366 JP)s yuho (Annual Securities Report) had the company at a negative net worth, requiring a reassignment to the Second Section of the TSE. Nikkei 225 Methodology requires that members be TSE-1 listed. The Announcement surprised people. As expected, Chiyoda is Out – but Bandai is In.  Chiyoda closed down 2.6% on 2mm shares, and Bandai closed limit up +19.3% on 300k shares allocated at the limit on the close.

  • There are still something like 50 million shares of Chiyoda to sell. The significant shorts – which are likely well in excess of the 23+ million shares shown and reported – are likely sourcing a lot of their borrow from the shareholders (passive funds) who have to sell. Those shareholders will have to recall their borrow. Earnings come out the day after the exclusion. I would not want to be short that earnings number. Plus read Mio’s insight above.
  • There should be 27mm shares to buy in Bandai which is about 20% of float. However, if only half the foreigners and only half the individual holders would be willing to sell on a large jump in price in the next few weeks, then the net available to sell is probably closer to 80mm shares and 27mm to buy would be one-third. It’s a lot. Once it gets purchased by Nikkei 225 funds, it won’t come out anytime soon. This stock is likely to get squeezed.
  • Dmg Mori Co Ltd (6141 JP) was flagged by many as a good bet to replace Chiyoda. Since then, roughly 14 million shares of excess volume have traded. If half of that is a real displacement of holdings based on this event, 7mm shares would need to be sold. That is 3% of shares out and 4-5% of float. It is among the larger excess positioning situations in the last five years in the stock. DMG closed -10% on 7.3mm shares in response to the index changes.

(link to Travis’s insight: Nikkei 225 – Bandai Namco IN, Chiyoda OUT)


Kcc Corp (002380 KS)  (Mkt Cap: $2.2bn; Liquidity: $6mn)

KCC will split itself into two companies in the form of an equity spinoff with KCC the surviving company and KCG the new company. KCC will mainly comprise the B2B business (silicone, paint and varnish); KCG will get the B2C business such as glass and interior. An EGM will be held on Nov 13 and shareholder approval can be obtained with 2/3 of attending votes and 1/3 of shares out. Both companies will be listed – KCC on Jan 21 next year, but KCG’s listing date hasn’t been fixed.

  • Typically, demergers serve to streamline a business.  However, the major shareholder retains 40%, which Sanghyun Park considers to be weak. He believes the major shareholder intends to further solidify this controlling stake via a tender, possibly a month after the Jan 21 listing. 

(link to Sanghyun’s insight: KCC Corp Equity Spinoff: Summary & Mispricing Checkup)


R* Shares CPSE ETF (CPSEBE IN) 

The ETF is based on the Nifty CPSE index and currently includes 11 listed Central Public Sector Enterprises, declining to 10 after Rural Electrification (RECL IN) was kicked out this past Friday. The sixth tranche of the ETF is expected to open on July 18 to anchor investors and on July 19 to non-anchor investors. The new units are expected to start trading on July 29. The discount on the ETF will be 3%, opening up arbitrage opportunities to investors.

  • The CPSE ETF does not trade big volumes on a regular day. However, there is a huge volume surge following fund offerings as many investors look to flip their allocation back into the market and lock in a profit. The anchor portion was oversubscribed almost 6 times in the last tranche issued in March this year, though the number may be smaller this time with the tighter discount being offered.
  • The ETF will need to buy around 63m shares of Indian Oil Corp (IOCL IN) in the market on July 19. Brian Freitas estimates this number since the Government of India can only sell around 64m shares to the ETF as this will take their stake in the company down to 51.5%, the lowest percentage for the stock to remain in the Nifty CPSE index. Given the stock trades around 13m shares a day on average, he sees 4x of excess volume and expect the stock to rally in the lead up to July 19 and see buying over the day on July 19.

links to Brian’s insights:
The CPSE ETF Arb Is Back, but Tighter!
India – NIFTY CPSE Index Review.

M&A – ASIA-PAC

Unizo Holdings (3258 JP) (Mkt Cap: $913mn; Liquidity: $4mn)

Japan’s premier discount travel agency H I S Co Ltd (9603 JP) on Wednesday announced it would launch a Partial Tender Offer (commencing this past Friday) to purchase a 40+% stake in real estate and hotel business Unizo to raise its stake from ~4.8% to 45.0%. The Tender Offer price is at a 56% premium to the last trade and is at an 18-month high. But, this is a hostile tender.

  • A hostile tender offer by one company upon another conducted without warning, or with warning but without approval, is reasonably rare. In Japan, it is even rarer. This is, however, the second in six months – the first being Itochu Corp (8001 JP)‘s tender offer for shares of Descente Ltd (8114 JP).  HIS has decided to buy 40% of a company it hadn’t talked to. At a 50+% premium. And given this one has hostility AND a longer end date, there is more trading and event optionality than normal.
  • Unizo has several possible responses it could give. The right thing to do would be to establish an independent committee immediately. A rights offering might kill the deal. But it would be fair to investors. A White Knight is not unthinkable. Travis expects the odds are pretty good that Unizo does not have a great defense here. That means the Tender likely goes through.
  • Unless corporate and financial cross-holders tender, the pro-ration could end up being very high.  If crossholders tender, pro-ration goes way down and one is better off just selling everything in the market for a small loss. Travis is bullish that the tender goes through and bullish the profit opportunity. He thinks for the astute arbitrageur, there is a lot of room to play around the ranges here.

(link to Travis’s insight: HIS Hostile Tender for Unizo – Fun Ahead!)


Villa World Ltd (VLW AU)  (Mkt Cap: $203mn; Liquidity: $1mn)

VLW and AVID have (finally) entered into a Scheme Implementation Agreement at A$2.345/share yesterday, which is a 17.8% premium to the unaffected price of $1.99 on 14 March, and an A$0.115 bump over the initial pitch in March. Any final or special dividend paid on or prior to the implementation of the Scheme will reduce the Offer Price. The key nagging issue is Ho Bee Land Ltd (HOBEE SP).

  • Ho Bee, VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$2.04/share – and a high of A$2.18/share – lifting its stake to 9.41% on the same day as the initial Offer. Ho Bee further bumped its stake to 10.45% on the 25 March at an average price of A$2.21; and finally, to 11.62% on the 15 April at an average of $2.17. Its overall average in-price is A$1.98/share.
  • Would Ho Bee go to such extreme just to extract another 5% from the Offer? Maybe, but it is a little weird. Ho Bee did not buy over $2.23/share.
  • On balance, this deal should get up. Pricing appears fair with respect to peers. Ho Bee receives a decent premium to its overall average position. This is also not a material holding for Ho Bee – the 11.62% stake is equivalent to ~2% of its market cap – while it remains directly invested in the Melbourne JV.  With a late November/ early December completion, this is trading very tight to terms at 0.6% gross.

(link to my insight: Villa World Greenlights AVID’s Offer)


Ascendas Hospitality Trust (ASCHT SP) (Mkt Cap: $844mn; Liquidity: $3mn)

On 3 July, Ascott Residence Trust (ART SP) and ASCHT jointly announced a proposed combination, which would result in the combined entity becoming the largest hospitality trust in the Asia Pacific region, one of the top ten globally, with an asset value of S$7.6bn. It would – using data from the end of June – become the 7th largest trust on the SGX.

  • The deal is for Ascott to acquire ASCHT through a Scheme of Arrangement whereby ASCHT unitholders will receive what was – at the announcement – S$1.0868 per ASCHT Stapled Unit. The exact terms are S$0.0543 in cash and 0.7942 Ascott Reit-BT Stapled Units. That is a ratio of 0.836 but if you do the arithmetic, it comes out as a NAV-flat transaction. Neither ASCHT nor ART shareholders “overly benefit” at the expense of the other, but they both benefit from scale lowering future costs.
  • The deal is another REIT consolidation to create a LARGER NewREIT. It was also totally obvious, after the Ascendas-Singbridge deal was signed earlier this year, that within the Capitaland group (which meant Temasek was going to own 51% of Capitaland when completed), this was going to happen (even though the deal meant there were no chained transactions for the REITs). It makes one wonder if there is a deal for Ascendas Real Estate Investment Trust (AREIT SP) to come. 
  • The deal (at the time of the insight) showed a 4.5% spread being long ASCHT and short Ascott, which is slightly wide for a deal of ~five months. However, there is some uncertainty in the distributions. If you own Ascott and are in a position to switch out of Ascott into AREIT, Travis would do so. If you own ASCHT and you like the risk of owning the REIT, you own the right one. 

(link to Travis’s insight: Ascott & Ascendas Hospitality Merger – Not Unexpected and Should Be Easy)


Dalian Port (Pda) Co Ltd H (2880 HK)  (Mkt Cap: $3bn; Liquidity: $1mn)

Back on the 4 June, Dalian Port (Pda) announced a possible Mandatory General Offer (MGO) at $1.0127/share, a 0.27% premium to last close. The MGO would be triggered following the rearrangement of various companies under the PRC government, collectively holding 68.37% into Dalian Port (Pda), with the long-term objective of merging the ports in Liaoning province under a single platform. The shareholding structure is a spider’s web and understanding the share transfers is probably best done by studying the diagrams in the document and the insight.

  • The integration/consolidation process is complicated with local, provincial and central government holdings in port ownership. Further, local governments, which often trumpet their success in tandem with the performance of its port, may be less willing to forego such economic benefits by giving up absolute control.
  • China Merchant Holdings already has effective control of Dalian Port (Pda) – (47.31%) direct and 21.05% via Team Able/China Merchants Port (144 HK). The equity transfers forming part of the restructuring are being hived out from one SASAC entity into another SASAC-controlled entity. This should all go through and the unconditional MGO will be triggered, and potentially wrap up in October, provided the ETA completes on the long stop date.
  • Dalian Port (Pda) is trading in line with listed Hong Kong ports. You have a (likely) hard floor at $1.01, with expectations of further group restructuring, as the three Liaoning ports are integrated. However, HK port companies are down ~7.% in the past year, similar to Chinese-listed port companies.  The sentiment is decidedly downbeat as the trade war creates a less profitable business environment.

(link to my insight: Dalian Port – Rearranging The Deck Chairs)


Health Management Intl (HMI SP) (Mkt Cap: $844mn; Liquidity: $3mn)

The previous Friday, listed regional (Singapore, Malaysia, Indonesia) private healthcare provider HMI announced an Implementation Agreement for a privatisation by way of Scheme of Arrangement whereby private equity fund EQT would acquire HMI for S$0.73/share in cash or one share of the Acquirer. That price is a 25-30% premium to the 1, 3, 6, and 12-month VWAPs prior to the announcement and a 14% premium to the last “undisturbed” trading day.

  • It is not overly generous. The premium is small, and the forecast Next 12 Month EV/EBITDA multiple at 17+x is OK but compared to the other private hospital operators out there in Asia it is not overwhelmingly high-priced. It seems a bit of a stretch to see someone come over the top when this has been negotiated. However, if one asked me whether the likelihood of bump or deal failure is more likely, Travis would tilt towards bump, but it would be just a kiss.
  • It takes 75% of the 39% not owned by NSI and “concert parties” to get this done, but the 2018 Annual Report showed that 89.75% of the shareholders (i.e. 83.2% or so of the possible Scheme Shareholders) owned more than 1,000,000 shares. The top 40 shareholders determine the outcome of this deal as long as the rest generally are split 51/49 or better. It is difficult to see this one getting knocked down.
  • Travis expects the timeline of this deal is about 4 months plus perhaps a week. That means at S$0.72 the gross spread at 1.39% gets you an annualised spread of about 4.15%. At S$0.715, the gross spread is 2.10% (before comms, etc) so 4 months is 6+% annualised.  The trade here is to get queue priority at S$0.715. 

(link to Travis’s insight: Health Management Int’l Privatisation – Easy Peasy)


Briefly …

Harbin Electric Co Ltd H (1133 HK) this week announced there will be no further extension of its Offer which closes on the 19 July. By my estimate, tendered shares total 71.86%. The tendering condition is 90%.

M&A – UK

Telford Homes (TEF LN) (Mkt Cap: $335mn; Liquidity: $1mn)

On July 3rd, US-based commercial real estate services company, CBRE Group Inc A (CBG US)announced that they had reached an agreement with the board of London-based residential real estate developer, Telford, to acquire 100% of its shares by way of a Scheme of Arrangement at a price of GBP3.50/ share. The offer values the target at a market cap of GBP 265mn. 

  • While the Offer Price translates to premia of 11.1%, 14.3%, and 21.3% to the undisturbed price, 1-month VWAP and 3-month VWAP respectively, it remains 3.4% lower than the 1-year VWAP of Telford shares. Furthermore, the offer price also translates to discounts of 28.8% and 38.8% to the stock’s 1-year and 2-year highs respectively.
  • The company appears to have confidence its current build-plan and will come through on budget and so after a couple of project delays at the end of this past year, earnings will rebound and march higher. The few analysts who cover the stock are less bullish this year, but it appears they expect the company to meet its 2020 targets a year or two later. 8x EPS and 1.0x book seem quite low. It is below the mean of the selected comps.
  •  If Travis had to bet right now, it’s 50/50 it does not get done. Brexit worries could get this over the line but he expects there are some unhappy shareholders. He is not sure there is enough time to get a competitor in there to see the price lifted.  The deal timeline is very short. The indicative timeline suggests the Target Scheme Meeting could be in just four weeks. 

(link to Travis’s insight: Telford Homes Takeout – A Disappointing End?)

M&A – US

Avon Products (AVP US) (Mkt Cap: $1.8bn; Liquidity: $41mn)

On May 22, 2019, Avon announced that it had entered into a merger agreement to be acquired in an all-stock transaction by Brazilian Holding Company Natura & Co (NATUR3 BZ).  Natura will exchange 0.30 of its shares for each AVP share on a fixed exchange ratio basis, currently valuing AVP at ~US$2 bn. The merger agreement deadline is set for July 22, 2020. On completion of the merger, NATU3 shareholders will own 76% of the combination with AVP shareholders owning 24%. The transaction catapults NATU3 to becoming the world’s sixth largest consumer goods company.

  • Natura is paying ~10x consensus 2019 EBITDA for standalone AVP which is reasonable in comparison to prevailing peer group multiples averaging 17x and compares with Natura’s own standalone valuation multiple of ~14x.
  • The transaction could attract particular scrutiny from the antitrust authorities in Brazil, which represents the single largest market for both Natura and AVP. According to data from Euromonitor, Natura maintains a commanding lead in Brazil’s direct sales market for cosmetics with an estimated 31% market share followed by a ~ 16% share for AVP. That being said, the direct sales market is based around independent consultants/reps, many of whom already offer both Natura and Avon products in Brazil. 
  • The double-digits merger spread that prevails (14% at the time of the insight) could offer a lucrative opportunity for arbs. The complicating factor is that Natura is listed on the Brazilian Stock exchange (B3) and denominated in an historically volatile currency, the Brazilian Real, while AVP shares trade on the NYSE in US$. As some AVP shareholders may not want to own or are restricted from owning shares that trade on a non-US exchange, Natura will offer AVP shareholders the option to receive Natura shares in the form of Level-II ADRs to be traded on the NYSE or shares listed on B3. Natura does not currently have an ADR in issue.

(link to Robert Sassoon‘s insight: MergerTalk: Natura & Co/Avon Products -“Ding Dong, The Avon Spread Calling”)

STUBBS/HOLDCOS

Singapore Airlines (SIA SP) / Sia Engineering (SIE SP) 

SIE gained 15% the previous week, rekindling privatisation talks by SIA.  Despite the share price increase, SIE trades around November 2009 levels. SIE is not aware of any reasons for the jump. The stub is not terribly exciting with SIE accounting for 18% and 22% of NAV and market cap, and barely makes the grade with SIE trading ~US$1mn/day.

  • Last year’s privatisation of HAECO (44 HK) at $72/share (63.2% premium to last close) by Swire Pacific Ltd Cl A (19 HK) – which held 74.9% prior to the Offer – is not lost on investors. The takeover PER was 35x vs. 19x currently for SIE. Peer comps trade at 24x. SIE only appears fairly valued on an EV/EBITDA metric on account of the earnings from associated companies and JVs.
  • SIE is a maintenance, repair & overhaul company providing aircraft & component overhaul, fleet management and line maintenance services. The company also has material stakes in associated companies and JVs which contribute 71% of the Group’s profits in FY19, up from 58% in FY18.
  • The outcome, should an Offer be pitched, would cost SIA ~S$700mn to take out the shares it does not own. Not chump change, and it might have a slightly negative impact on SIA as it removes one layer of transparency. But given the stub weakness, the focus would be on the SIE arbitrage. I would not want to be short SIE here.

(link to my insight: StubWorld: Just Rumours (For Now) As SIA Engineering Pops)

SHARE CLASSIFICATIONS

My share class monitor provides a snapshot of the premium/discounts for 322 share classifications –  ADRs, Korean prefs, dual class, Thai (F/L) & A/Hs – around the region.

(link to my insight: Share Classifications: A Year In Review)

OTHER M&A UPDATES

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges – like Madison Holdings Group Ltd (8057 HK) on the 5 July.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

ISP Global (8487 HK)
50.50%
Bluemont
Outside CCASS
Camsing (2662 HK)
Great Roc
Founder
18.20%
Kingston
Citi
Source: HKEx

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Brief Singapore: ESR-REIT Placement: Acquisition and AEI Are DPU Accretive but Debt Payment Dilutes and more

By | Daily Briefs, Singapore

In this briefing:

  1. ESR-REIT Placement: Acquisition and AEI Are DPU Accretive but Debt Payment Dilutes

1. ESR-REIT Placement: Acquisition and AEI Are DPU Accretive but Debt Payment Dilutes

Highlight

ESR-REIT announced an S$100 million private placement and S$75 million preferential offerings for the existing unitholders. In this insight, we will provide our thoughts on the deal and score the deal in our ECM framework. 

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Brief Thematic: 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma and more

By | Daily Briefs, Thematic and Strategy

In this briefing:

  1. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma

1. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma

2019 06 12 19 11 00

TW3 NORTH ASIA 10-16TH JUNE

Smartkarma’s North Asian Insight providers were overwhelmingly bullish this week. In the Event-Driven space, Sanghyun Park provided an update on the Nexon Sale, and Michael Causton gave an excellent overview of the M&A permutations for Japan’s listed Drugstore companies. Douglas Kim reviews SKC’s purchase of KCFT and suggests that the SK Group appears intent on making more big M&A deals where it wants to have a leading presence – in this case in vertically integrating the lithium-ion batteries/components/materials.  Also in Korea, KCGI’s move on Hanjin Kal is running into funding problems, while a 3% stake has recently by purchased by Goldman Sachs, with the rumoured end-buyer being Delta Airlines.  

Only one IPO was commented on – Oshadhi Kumarasiri casts a dubious eye over the upcoming Shin-nihon-seiyaku Co Ltd (4931 JP) deal and suggests that management maybe selling out ahead of the peaking of the company main, and so-far only brand, Perfect One.

Bullish Equity Bottom-Up comments were published on Nissan (7201 JP), Renesas Electronics (6723 JP), Rakuten (4755 JP), Hitachi (6501 JP), Modec(6269 JP), Nintendo (7974 JP), and Life (8194 JP). Only ZOZO (3092 JP) saw (another) bearish call.

Bullish Thematic & Strategy Insights were released on Japanese Telcos from Kirk Boodry – highlighting another regulatory-driven boost for Rakuten, while Sanghyun Park delved into the murky world of high-speed trading (HST) in Korea where Citadel and Merrill Lynch have made some controversial moves. In Japan, HST has recently been regulated with all operators required to establish an onshore entity or appoint a local agent and meet stringent reporting requirements governing their trading activities. Perhaps Korea should follow this example? Lastly, this author updated his Relative Price Score data, although these Insights are not summarised below.  


EVENT DRIVEN: BULLISH

Nexon Sale: Current Status Checkup

Drug-Fuelled Marriages and Macho Shachos in Japan

Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion

EVENT DRIVEN: BEARISH

Hanjin Kal Special Situation: KCGI’s Takeover Is Tougher than Previously Appeared

IPOs & PLACEMENTS: BEARISH

Shinnihonseiyaku IPO: Perfect One, Not So Perfect Afterall

EQUITY BOTTOM UP: BULLISH

Nissan: Chances of the Alliance Surviving Have Dimmed Greatly

Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

Rakuten Pay Winning the Japanese Cashless War?

Hitachi Ltd. (6501 JP): Share Price Up on Restructuring News

MODEC: On Track to Win Roughly Half of Its Bids

Switch Production to Move From China; Nintendo Plunges After Dull E3 Presentation

Life Corp Ties with Amazon Japan

EQUITY BOTTOM UP: BEARISH

Zozo: The Underlying Operating Metrics Worry Us

THEMATIC & STRATEGY: BULLISH

Japan Telcos – Lower Cap for Early Cancellation: Positive for Rakuten

Algorithm Trading on KOSDAQ: Citadel Fund Case Checkup

THEMATIC & STRATEGY: BEARISH

🇯🇵 Japan • June Relative Price Scores: Market, Sectors & Peer Groups – More of The Same

🇯🇵 Japan • Relative Price Scores – Overbought & Oversold Companies – June 2019

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Brief Multi-Strategy: Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs
  2. What Would Happen If The Fed Cuts Rates?
  3. Budweiser Brewing Company APAC IPO: A Solid PHIP Update
  4. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma

1. Hong Kong /Trade War/Huawei/Stimulus/Stink Bugs

China News That Matters

  • Do you hear the people sing?
  • The deadline is in my head
  • A wealth of data on people, governments and companies
  • So stimulating: Beijing pushes funding for big infrastructure
  • Stink Bug vs Armyworm, amid food inflation battle 

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

2. What Would Happen If The Fed Cuts Rates?

As we look ahead to the FOMC meeting next week, the market has priced in three quarter-point rate cuts for 2019, with the first cut occurring at the July meeting.

A rate cut is not unexpected, as the bond market has pushed the Treasury yield curve down so far that only the 30-year Treasury bond is trading above the current Fed Funds target. It is likely too early for the Fed to cut rates at its June meeting next week, but if the market is discounting a July cut, the Fed is likely to signal it is either in agreement with that expectation or correct the market.

Rather than debate whether the Fed should cut rates, we consider the scenario of what might happen if it were to proceed with a July rate cut. What are the consequences for economic growth and the stock market?

We believe that while the Fed could decide to cut rates at its July FOMC meeting, the future path of interest rates and stock prices depends on the reasoning behind the rate cut. If the cut is in response to the eruption of a full-blown trade and economic cold war with China, it is likely to be the start of a protracted rate cut cycle, with bearish implications for equity prices. On the other hand, if the rate cut is an “insurance” cut designed to heed off further economic weakness in the face of a stalemated trade dispute, we expect the cut to be reversed relatively quickly because the global growth backdrop remains constructive. Equity prices would rise under such a scenario as the bullish implications of higher growth would overwhelm the bearish implications of higher interest rates.

3. Budweiser Brewing Company APAC IPO: A Solid PHIP Update

Volume

Budweiser Hong Kong Holding (0338867D HK)/Budweiser APAC is Anheuser Busch Inbev Sa/Nv (ABI BB)’s Asian business and is the largest beer company by retail sales value based in the Asia Pacific, according to GlobalData. On Thursday, Budweiser APAC received HKEX approval for a Hong Kong IPO to raise $5-10 billion, according to press reports.

In our IPO initiation note, we concluded that Budweiser APAC fundamentals are strong. The PHIP update which outlines 1Q19 financials reinforces our view).

4. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma

2019 06 12 19 11 00

TW3 NORTH ASIA 10-16TH JUNE

Smartkarma’s North Asian Insight providers were overwhelmingly bullish this week. In the Event-Driven space, Sanghyun Park provided an update on the Nexon Sale, and Michael Causton gave an excellent overview of the M&A permutations for Japan’s listed Drugstore companies. Douglas Kim reviews SKC’s purchase of KCFT and suggests that the SK Group appears intent on making more big M&A deals where it wants to have a leading presence – in this case in vertically integrating the lithium-ion batteries/components/materials.  Also in Korea, KCGI’s move on Hanjin Kal is running into funding problems, while a 3% stake has recently by purchased by Goldman Sachs, with the rumoured end-buyer being Delta Airlines.  

Only one IPO was commented on – Oshadhi Kumarasiri casts a dubious eye over the upcoming Shin-nihon-seiyaku Co Ltd (4931 JP) deal and suggests that management maybe selling out ahead of the peaking of the company main, and so-far only brand, Perfect One.

Bullish Equity Bottom-Up comments were published on Nissan (7201 JP), Renesas Electronics (6723 JP), Rakuten (4755 JP), Hitachi (6501 JP), Modec(6269 JP), Nintendo (7974 JP), and Life (8194 JP). Only ZOZO (3092 JP) saw (another) bearish call.

Bullish Thematic & Strategy Insights were released on Japanese Telcos from Kirk Boodry – highlighting another regulatory-driven boost for Rakuten, while Sanghyun Park delved into the murky world of high-speed trading (HST) in Korea where Citadel and Merrill Lynch have made some controversial moves. In Japan, HST has recently been regulated with all operators required to establish an onshore entity or appoint a local agent and meet stringent reporting requirements governing their trading activities. Perhaps Korea should follow this example? Lastly, this author updated his Relative Price Score data, although these Insights are not summarised below.  


EVENT DRIVEN: BULLISH

Nexon Sale: Current Status Checkup

Drug-Fuelled Marriages and Macho Shachos in Japan

Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion

EVENT DRIVEN: BEARISH

Hanjin Kal Special Situation: KCGI’s Takeover Is Tougher than Previously Appeared

IPOs & PLACEMENTS: BEARISH

Shinnihonseiyaku IPO: Perfect One, Not So Perfect Afterall

EQUITY BOTTOM UP: BULLISH

Nissan: Chances of the Alliance Surviving Have Dimmed Greatly

Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

Rakuten Pay Winning the Japanese Cashless War?

Hitachi Ltd. (6501 JP): Share Price Up on Restructuring News

MODEC: On Track to Win Roughly Half of Its Bids

Switch Production to Move From China; Nintendo Plunges After Dull E3 Presentation

Life Corp Ties with Amazon Japan

EQUITY BOTTOM UP: BEARISH

Zozo: The Underlying Operating Metrics Worry Us

THEMATIC & STRATEGY: BULLISH

Japan Telcos – Lower Cap for Early Cancellation: Positive for Rakuten

Algorithm Trading on KOSDAQ: Citadel Fund Case Checkup

THEMATIC & STRATEGY: BEARISH

🇯🇵 Japan • June Relative Price Scores: Market, Sectors & Peer Groups – More of The Same

🇯🇵 Japan • Relative Price Scores – Overbought & Oversold Companies – June 2019

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Brief Multi-Strategy: The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos
  2. DouYu IPO: Bull/​​​​Bear DCF Scenarios
  3. Douyu IPO: Cost Structure Disadvantage Vs. Huya Implies a Discount Not Premium Is Appropriate
  4. Weekly Oil Views: Barry Didn’t Chase the Bears Away
  5. CloudMinds IPO Initiation: Computer Says No

1. The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos

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 pieces. Please find a brief summary below, with a fuller write up in the detailed section.

Macro Insights

In Singapore Is the First Domino to Fall Towards Stagnation (Approaching Recession), CrossASEAN Economist Prasenjit K. Basu revisits the Singapore economic outlook in light of recent indicative numbers that suggest that the economy has stalled. 

In Coal Faces Disarray / Nursalims’ Reprieve? / Bantleman’s Clemency / 2 Ministers Rebuked, CrossASEAN Indght Provider Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week. 

In Taking Off: Vietnamese Exports Are Rocking and Rolling,Dr. Jim Walker zeros in on the picture for Asia Exports as the US-China Trade War continues to simmer. 

In Thai Macro Watch: Huawei, Trade Wars, and More, our Thai Guru Athaporn Arayasantiparb, CFA looks at five news on the global front that may impact Thai equities directly or indirectly.

Equity Bottom-Up Insights

In Erajaya Swasembada (ERAA IJ) – Smoke Signals for Impending Catalysts, CrossASEAN Insight Provider Angus Mackintosh circles back to Indonesia’s leading smartphone retailer and finds plenty to cheer about after a conversation with management. 

In EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?,Nicolas Van Broekhoven revisits Alliance Mineral Assets (AMS SP) after attending the company’s recent EGM. 

In Indofood (ICBP IJ) – Big Daddy of Branded Food in Indonesia; Proxy for Consumer Food Spend, Consumer specialist Devi Subhakesan takes a close look at this leading Indonesian staples player. 

In Health Management Int’l Privatisation – Easy Peasy,Travis Lundy zeros in on this potential privatisation event. 

In IPO Radar: S Hotels & Resorts, Singha’s Hospitality Arm,Athaporn Arayasantiparb, CFA takes a close look at the upcoming IPO of Singha Group’s hotel arm. 

In Thanachart and TMB: On the Defensive. An Insurance Policy for Challenging Times, Banking Specialist looks at this impending merger of these two major financial institutions in Thailand. 

In StubWorld: Just Rumours (For Now) As SIA Engineering Pops,David Blennerhassett examines the possibility of privatisation of Sia Engineering (SIE SP). Sia Engineering (SIE SP) is not aware of any information, however last week’s 15% gain in two days rekindles privatisation talks by Singapore Airlines (SIA SP)

In Ascott & Ascendas Hospitality Merger – Not Unexpected and Should Be Easy,Travis Lundy looks at this proposed merger, which would create the largest hospitality trust in Asian Pac. 

Sector and Thematic Insights

In Indonesian Telecoms: The Recovery Continued in 1Q and We Expect It to Last, our friends at New Street Research circle back to the Indonesian Telco sector post 1Q19 results and maintain an upbeat view on the prospects for an increasingly data-driven market.

In Singapore REIT – Cautious Search for High Yield, property specialist Anni Kum revisits the REIT sector and identifies her top picks. 

In REIT Discover: Prime US REIT IPO Brief Review,Anni Kum takes a look at the initial public offer (IPO) of Prime Us Reit (PRIME SP)

2. DouYu IPO: Bull/​​​​Bear DCF Scenarios

Sensitivity

Douyu International Holdings (DOYU US) is a leading game live streaming platform in China with a focus on e-sports content. DouYu which announced its IPO price range of $11.50-14.00 per ADS, will price its IPO on 16 July. 

In our valuation note, we stated that we would participate in the IPO at most at the mid-point of the proposed IPO valuation range. Our DCF analysis outlined in this note suggests a base-case valuation of $12.42 per ADS, 3% downside from the mid-point of the IPO price range. Our DCF sensitivity suggests that the top-end of the IPO price while achievable, prices in ambitious execution. 

3. Douyu IPO: Cost Structure Disadvantage Vs. Huya Implies a Discount Not Premium Is Appropriate

3

Douyu plans to list on the 16th of July on Nasdaq. Proceeds of the IPO are expected to be utilised to expand on content genres offered and provide premium esports content, improve existing technologies and big data analytics, invest in marketing activities and for general corporate purposes. At the mid-point of the offer price range, the company will raise approx. USD572.8m to carry out the above-mentioned investment activities.

Douyu mainly competes with Huya in the game streaming landscape in China. Huya listed in the US in May 2018 and the company has managed to make an operating profit and raise its gross profits in the last year. Meanwhile, Douyu continues to struggle to make operating profits, having just achieved gross profit status in the last fiscal year. Even though the company has a higher user base than Huya, Douyu continues to suffer with regards to efficiently managing costs related to revenue sharing fees and content costs.

Huya’s topline and bottomline performance seems much more favourable to us than Douyu’s. According to our estimates, Douyu has an EV of USD3,498m, which iterates to an FY1 EV/sales multiple of 4.4x, which we believe is expensive compared to peers. In comparison, peers Huya and iQiyi are trading at cheaper multiples of 3.4x and 3.1x respectively. 

4. Weekly Oil Views: Barry Didn’t Chase the Bears Away

Screen%20shot%202019 07 14%20at%203.21.08%20pm

It is the Atlantic hurricane season and severe tropical storms in the US Gulf of Mexico, depending on the damage and disruption to oil facilities caused by them, can be expected to splash the market with bouts of bullishness.  

The approach of Tropical Storm Barry (which reached hurricane strength as it made landfall in Louisiana), helped by the report of an unexpectedly large weekly drawdown in US crude inventories, prompted a 4-4.5% spike in crude prices last Wednesday. But the rally stalled as the week drew to a close.

It may have been expectations of no major disruption to oil facilities in the wake of Barry as the picture on the storm became clearer, that put a lid on crude’s rise. But perhaps more significantly, the market remained focused on the oversupply prognosis of all three major forecasters — the EIA, OPEC and IEA — in their latest monthly reports last week.

The oil bears may have temporarily taken shelter from Barry, but with the disruption to crude and refined product facilities in and around the US Gulf expected to be minor (if any) and short-lived, we expect them to remain in control.

5. CloudMinds IPO Initiation: Computer Says No

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CloudMinds (CMDS US) offers an end-to-end cloud robot system which is capable of operating consumer service robots, which include both in-house and third-party robots. It is backed by Softbank Group (9984 JP)’s Vision Fund, which is a 34.6% shareholder.

CloudMinds is big on vision and buzzword-laden rhetoric. Overall, we believe that CloudMinds is not an IPO for the faint-hearted, and it is not yet ready for the unforgiving glare of the public markets.

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Brief Thematic: The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos and more

By | Daily Briefs, Thematic and Strategy

In this briefing:

  1. The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos
  2. Singapore Property – Jump in New Supply. Upcoming Mega-Launches to Test Buyers’ Appetite.
  3. The Role of Election Polls, Credit Ratings, & KOSPI on Pressuring Moon Jae-In to Change His Mind
  4. Are Risky Assets Overvalued?
  5. The Path to a European Renaissance

1. The Week that Was in [email protected] – Singapore’s Stagnation, Vietnam Rocks, and Indonesian Telcos

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 pieces. Please find a brief summary below, with a fuller write up in the detailed section.

Macro Insights

In Singapore Is the First Domino to Fall Towards Stagnation (Approaching Recession), CrossASEAN Economist Prasenjit K. Basu revisits the Singapore economic outlook in light of recent indicative numbers that suggest that the economy has stalled. 

In Coal Faces Disarray / Nursalims’ Reprieve? / Bantleman’s Clemency / 2 Ministers Rebuked, CrossASEAN Indght Provider Kevin O’Rourke comments on the most important political and economic developments in Indonesia over the past week. 

In Taking Off: Vietnamese Exports Are Rocking and Rolling,Dr. Jim Walker zeros in on the picture for Asia Exports as the US-China Trade War continues to simmer. 

In Thai Macro Watch: Huawei, Trade Wars, and More, our Thai Guru Athaporn Arayasantiparb, CFA looks at five news on the global front that may impact Thai equities directly or indirectly.

Equity Bottom-Up Insights

In Erajaya Swasembada (ERAA IJ) – Smoke Signals for Impending Catalysts, CrossASEAN Insight Provider Angus Mackintosh circles back to Indonesia’s leading smartphone retailer and finds plenty to cheer about after a conversation with management. 

In EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?,Nicolas Van Broekhoven revisits Alliance Mineral Assets (AMS SP) after attending the company’s recent EGM. 

In Indofood (ICBP IJ) – Big Daddy of Branded Food in Indonesia; Proxy for Consumer Food Spend, Consumer specialist Devi Subhakesan takes a close look at this leading Indonesian staples player. 

In Health Management Int’l Privatisation – Easy Peasy,Travis Lundy zeros in on this potential privatisation event. 

In IPO Radar: S Hotels & Resorts, Singha’s Hospitality Arm,Athaporn Arayasantiparb, CFA takes a close look at the upcoming IPO of Singha Group’s hotel arm. 

In Thanachart and TMB: On the Defensive. An Insurance Policy for Challenging Times, Banking Specialist looks at this impending merger of these two major financial institutions in Thailand. 

In StubWorld: Just Rumours (For Now) As SIA Engineering Pops,David Blennerhassett examines the possibility of privatisation of Sia Engineering (SIE SP). Sia Engineering (SIE SP) is not aware of any information, however last week’s 15% gain in two days rekindles privatisation talks by Singapore Airlines (SIA SP)

In Ascott & Ascendas Hospitality Merger – Not Unexpected and Should Be Easy,Travis Lundy looks at this proposed merger, which would create the largest hospitality trust in Asian Pac. 

Sector and Thematic Insights

In Indonesian Telecoms: The Recovery Continued in 1Q and We Expect It to Last, our friends at New Street Research circle back to the Indonesian Telco sector post 1Q19 results and maintain an upbeat view on the prospects for an increasingly data-driven market.

In Singapore REIT – Cautious Search for High Yield, property specialist Anni Kum revisits the REIT sector and identifies her top picks. 

In REIT Discover: Prime US REIT IPO Brief Review,Anni Kum takes a look at the initial public offer (IPO) of Prime Us Reit (PRIME SP)

2. Singapore Property – Jump in New Supply. Upcoming Mega-Launches to Test Buyers’ Appetite.

Picture3

Singapore’s Urban Redevelopment Authority (URA) today released the data on property developers’ private home sales for the month of June 2019.

A total of 670 non-land private residential units were launched for sale in June. This was 51% fewer than the number of units launched in the preceding month and 5% fewer year-on-year.

A total of 803 non-landed private residential units were sold in June. This was 14% fewer than the number of new units sold in the previous month.

10 new projects received their sales approval in June, adding a substantial 4,731 units to the launch pipeline. 2 mega-launches to watch out for in the coming months are Parc Clematis  and Avenue South Residence. 

Total developers’ inventory available for immediate launch jumped by 22.3% MoM in June to 20,531 units. This is the highest level since Jan 2015. Rising inventory is within expectation and will continue to affect the pricing power of developers.

3. The Role of Election Polls, Credit Ratings, & KOSPI on Pressuring Moon Jae-In to Change His Mind

Kimdaejung

In this report, we provide a detailed analysis of the key factors/events that could cause Moon Jae-In to change his mind to become more friendly with Japan instead of maintaining his hostile position.

MAIN THESIS – Moon Jae-In is not likely to change his current hostile position towards Japan if the election polls, stock market, sovereign credit ratings do not change materially from where they are today. 

If the stock market drops a lot more, the global credit rating agencies such as Moody’s and S&P lower their sovereign credit rating of South Korea, and the major election polls significantly lower the chances of the ruling Democratic Party of Korea winning in the next National Assembly Election to its chief rival – the conservative Liberty Korea Party, then the chief members of the ruling Democratic Party of Korea could eventually pressure President Moon to change his mind so that that he starts to engage in more friendly policies towards Japan, flies over to Japan, shakes hands with Abe, and makes pleas to finally resolve this serious economic and political crisis between the two powers in East Asia. 

4. Are Risky Assets Overvalued?

Cape to long term average log cape to average chartbuilder 2

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

5. The Path to a European Renaissance

We had a number of discussions with readers in the wake of last week’s publication, Europe: An Ugly Duckling About To Be A Swan. The topics revolved mainly around further justification for buying into Europe, when U.S. equities had performed so well in the last 10 years.

European equities is a value play compared to the U.S., even after adjustments. We calculated what the aggregate forward multiple for Europe if its sector composition is the same as the S&P 500 to make an apples-to-apples comparison, but each sector retained its forward P/E multiple. We found that the adjusted MSCI Europe forward P/E ratio is 14.6, compared to stated multiple of 13.9 for MSCI Europe and 17.1 for the S&P 500.

We hypothesize that the catalyst for European outperformance is a turnaround in the value/growth cycle, and that catalyst might be found in increased regulatory and anti-trust scrutiny of U.S. Big Data companies.

Under a scenario where government agencies pursue FAANG stocks for antitrust violations, we expect these companies would, over time, relinquish their market leadership position. That might be the opening for value stocks to step up into the vacuum and begin a revival of the value/growth cycle.

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Brief Consumer: Naspers ➔ NewCo Spinoff III: The Most Interesting Arb In The World. Again. and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Naspers ➔ NewCo Spinoff III: The Most Interesting Arb In The World. Again.
  2. Nexon Sale: Kakao Is Emerging as the Leading Horse
  3. Budweiser Brewing Company APAC IPO: A Solid PHIP Update
  4. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

1. Naspers ➔ NewCo Spinoff III: The Most Interesting Arb In The World. Again.

Screenshot%202019 06 16%20at%209.01.47%20pm

In the first two pieces Naspers ➔ NewCo Spinoff I: Structure, Ownership, Index Effects and Naspers ➔ NewCo Spinoff II: Thoughts on the Appropriate Discount I looked at index effects from the issuance of NewCo shares. 

The treatment of NewCo N is considerably complicated by the nature of the Netherlands-SA tax treaty which enables the extremely considerate treatment of NewCo going forward. 

The way different investor types deal with this and the structural nature of NewCo’s difference to Naspers creates the possibility for dramatically different flow than expected around the event.

It is NOT a small thing. And it is not as people expect. 

And it is not necessarily easy to understand, or clear in its outcome even if it were. But for international investors and South African institutional investors in particular, getting into the details earlier rather than later is probably a good idea.

This is, once again, quite simply…

The Most Interesting Arb In The World. 

2. Nexon Sale: Kakao Is Emerging as the Leading Horse

Yeah, Nexon event is very quiet. Even we didn’t have rumor report from local media lately since the main bid closing. So, we are hearing all kinds of worrying voices that the deal may be falling apart. Then, MK, one of Korea’s top tier economic daily, put out a follow-up report on this event late today. MK quoted someone familiar with the matter, possibly a banker working on this deal or a Nexon insider, but MK doesn’t specify the identity further. This “someone” told MK that the deal is still very much alive. Just, it now seems that KKR and Bain are no longer in the race. According to MK (well actually this “someone”), it is now a three-horse race between Kakao, Netmarble and MBK. Is this a surprise? Of course, it is not. What’s really bothering me is why this “someone inside” has always been leaking inside info and mood to local media, mainly MK and HK. Is Nexon doing it on purpose to buttress the share price so that they can keep having the upper hand in the deal talking? Well, it may be, or I don’t know for sure. Alright, let’s put this intention thing aside for now, and let’s first take a look at what this “someone” told MK.

BTW, this is the link of this latest MK report. (Title is quite provocative…)

3. Budweiser Brewing Company APAC IPO: A Solid PHIP Update

Volume

Budweiser Hong Kong Holding (0338867D HK)/Budweiser APAC is Anheuser Busch Inbev Sa/Nv (ABI BB)’s Asian business and is the largest beer company by retail sales value based in the Asia Pacific, according to GlobalData. On Thursday, Budweiser APAC received HKEX approval for a Hong Kong IPO to raise $5-10 billion, according to press reports.

In our IPO initiation note, we concluded that Budweiser APAC fundamentals are strong. The PHIP update which outlines 1Q19 financials reinforces our view).

4. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

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Last Week in Event SPACE …

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

EVENTS

Huatai Securities Co Ltd (A) (601688 CH) (Mkt Cap: $20.7bn; Liquidity: $234mn)

The Huatai Sec GDR (Global Depositary Receipt) pricing came out the 11th of June at US$20.00 to US$24.50 per GDR, conveniently after a day with a 5% gain in both the H-share and the A-share issues, announcing the deal at a then 12.5-28+% discount, which was wider than most seemed to have expected.  Now with the deal well-subscribed at the low end, there are warnings investors need to be bid higher than the bottom end to get any paper. 

  • There is widespread scepticism as to why the deal needs to be done in the first place, and that gives many people some pause. Because of the discount and the liquidity on the A-shares, and the fact that the low end priced at a four to five year low, the margin of safety people perceive is quite high. 
  • There is a lot of talk about how the shares haven’t seen the bottom end price even in the trough post June 2015 A-share crash so that provides a kind of “virtual floor” at around RMB 14/share. The 2015 low price of around RMB 14/share in late Q3 early Q4 2015, was almost exactly one year after they were trading at RMB 8/share in 2014 before the margin-trading bubble-induced runup. 
  • Travis Lundy is bullish the GDRs Huatai Securities Co Ltd (HTSC LI) and not necessarily the A shares. He thinks the trade will end up making money for people, whether perfectly hedged or not. As of now, he would expect some softness in the As on the unwind. He also expected those with patience to go past 140 days could see the As rebound a bit after everyone assumes the GDR converters are out of their trade.

(link to Travis’ insight: Huatai GDRs – Prices Lower, Then Sooner, Then Later, Then Higher)

STUBS & HOLDCOS

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.9bn; Liquidity: $95mn)

KCGI has accumulated 15.95% in Hanjin at a cost of ₩270bn, the last 1% at a 5.3% premium to last close. KCGI appears to be angling for management takeover. The question is whether the Cho family – holding 28.93% of the common shares and 3.02% of the prefs – are willing/forced sellers. And there are also rumours Mirae is asking KCGI for full repayment on ₩40bn worth of stock collateral loans.

  • Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of  ₩230~240bn.
  • But that need not be paid at once, and can be paid over 5 years, with that clock starting in October. Taking into account Cho’s severance pay (net of inheritance tax) and stock collateral loans (up to 50% of their stock value), there doesn’t appear to be any urgency on the Cho family’s behalf to unload shares in Hanjin Kal to foot the tax bill.
  • At the time of Sanghyun’s note, Hanjin Kal was trading at a 28% premium to NAV. The trade approach was pretty straightforward – short it. That was the right call. I see the premium now at 6%.

links to Sanghyun’s insights: 
Hanjin Kal Special Situation: KCGI’s Takeover Attempt Is Tougher than Previously Appeared
Hanjin Kal Special Situation: Market Wide Shorting Looming

M&A – ASIA-PAC

Vocus Communications (VOC AU)  (Mkt Cap: $1.9bn; Liquidity: $10mn)

Vocus has announced it has received an A$3.02bn (US$2.1bn) non-binding, indicative proposal from Aussie energy outfit AGL Energy Ltd (AGL AU) by way of a Scheme, at A$4.85/share in cash, a 26.63% premium to last close. This proposal arrives one week after Swedish PE outfit EQT and Vocus terminated takeover talks – and just two weeks since that lofty $5.25/share indicative offer was first announced.

  • For EQT’s “hairy” pre-event proposal, I said that there was value; and there (potentially) were/are multiple players out there who could look at this situation, given Vocus’ fibre network offers efficient scale characteristics.
  • AGL views Vocus as providing a stronger product set/mix to its customers in the long-term. The opposing view is that AGL is getting desperate in the face of increased scrutiny of its electricity prices forcing a shift away from its core competence. AGL was down 7.2% on the news, although this was probably compounded by a reduced profit guidance announcement after an extended unit outage.
  • IF a deal does get done – this may complete around mid-November. That remains a big “IF”. Currently trading at A$4.36, which shows a return/risk of 11% up to the indicative offer vs. 12% down, roughly similar to where shares traded in response to EQT’s proposal.

(link to my insight: AGL Takes A Turn At Vocus)


Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)

Japan’s drugstore industry began a new era of consolidation after a decade of already unprecedented growth at the top. Cocokara Fine, the seventh-ranked drugstore retailer in Japan announced it was not only in talks with fourth-ranked Matsumotokiyoshi (Matsukiyo), as it had already confirmed a month before, but had now also begun negotiations with Sugi Holdings (7649 JP), the sixth largest firm. This was also discussed in Travis’ Insight Cocokara Fine は Cocokara いいね.

  • Unlike supermarkets and home centres, drugstore consolidation is not just about melding regional power into a national chain but is also about the additional pressure to acquire share in drugstore merchandise categories where the acquirer is weak. 
  • Michael Causton believes a merger between Sugi and Cocokara Fine is a natural fit because of the synergistic regional coverage but also their differing merchandise strengths. But, Matsukiyo also needs to acquire or merge, and fast. While it has stores in 45 of 47 prefectures, its presence outside the Tokyo region is minimal and it has dropped from first place to fourth in just three years, with even more headwinds going forward.
  • If there is a two or three-way merger, Aeon and Tsuruha are unlikely to stand still since even just a Sugi/Cocokara deal would create a new sector leader by sales. Aeon and Tsuruha already work together on sourcing and private brands through the Aeon-led Hapicom buying group. If the pressure builds and Aeon tries to force a merger on Tsuruha as it did with CFS in 2007-8, Tsuruha and Matsukiyo may find common cause and arrange partial merger.

(link to Michael’s insight: Drug-Fuelled Marriages and Macho Shachos* in Japan)


Ruralco Holdings (RHL AU) (Mkt Cap: $302mn; Liquidity: $1mn)

Although the release of the ACCC’s Statement of Issues (SOI) is less than ideal development in the Nutrien Ltd (NTR CN) / Ruralco merger – an informal clearance from the ACCC would have been preferable – it was not an unforeseen development, nor is it viewed as a deal breaker. The ACCC’s concerns are not definitive or strongly worded, therefore the possibility of a formal clearance remains. But on balance, my read is that there is sufficient weight surrounding merchandising issues such that a divestment of stores is likely required for this deal to get up.

  • The ACCC highlighted 7 areas (one each in WA and NSW, two in Queensland and three in the Northern Territories) where the remaining competition – subsequent to a successful merger – is limited. The ACCC also flagged some regional centres only source wholesale supplied from either Ruralco or Nutrien. This may lead to the amalgamated company discriminating on prices and supplies to stores within its own network compared to independent stores in the same catchment.

  • To this, Nutrien could lodge a proposed undertaking with the ACCC to divest certain stores in the 7 highlighted (by the ACCC) catchments to address competition concerns. Such a submission would likely be premised on the ACCC accepting the court-enforceable divestment proposal, and a rescheduled Scheme Meeting could probably be reconvened in around a month after the undertaking proposal. Should this transpire, I would expect no change to the Scheme Offer Price.
  • Currently trading at a gross/annualised spread of 5.5%/21% – with the annualised % roughly in line with the figure prior to the SOI announcement, suggesting a positive remedy to the issues raised by the ACCC is expected. The risk/reward looks attractive here.

(link to my insight: ACCC Raises Concerns With Ruralco/Nutrien)


Skc Co Ltd (011790 KS) (Mkt Cap: $1.1bn; Liquidity: $4mn)

SKC has agreed to acquire a 100% stake in KCFT (KCF Technologies) for ₩1tn (US$1bn) from KKR. SKC plans to use about ₩400bn-₩500bn of its own equity capital to fund the transaction with the remaining ₩700bn-₩800bn sourced from debt financing. KKR will make a tidy profit from the deal – in February 2018, it acquired a 100% stake of LS Mtron’s copper foil and thin film business for ₩300bn and renamed it KCFT. 

  • KCFT has the number one market share globally (15% share) for making copper foil and thin film products used in lithium ion battery based EVs. 
  • SK Group is currently the third largest player in the EV batteries and related components/materials in Korea, after LG Chem Ltd (051910 KS) and Samsung Sdi (006400 KS). The acquisition of KCFT should accelerate SK Group’s efforts to vertically integrate the value chain of the lithium ion batteries/components/materials.
  • KCFT’s finances are mainly kept under wraps, however, based on the acquisition price, this suggests 4x P/S and 40x P/E, using estimated sales and net profits in 2018.

(link to  Douglas Kim‘s insight: Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion)


Briefly …

Reportedly LG Corp (003550 KS) plans to sell a 35% or more stake of LG CNS for about ₩1tn. LG CNS is the system integration IT service unit of the LG Group. Douglas believes this sale will provide a positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends. (link to Douglas’ insight: Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won)

M&A – US

United Technologies (UTX US)  (Mkt Cap: $108bn; Liquidity: $100mn)

The market raction to the proposed ‘merger of equals’ between aerospace giant UTX and US defense  contractor Raytheon Company (RTN US) announced at the beginning of the week, has so far been underwhelming. 

  • Robert Sassoon believes the major complicating factor in this situation is that UTX is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price.
  • This has significant ramifications for an all-stock deal in which the substantially undervalued UTX stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which he assesses should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected.

(link to Robert’s insight: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms)

M&A – EUROPE

Italian Banks

The Italian banking system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A. Yet prospective Italian banking M&A activity has more recently been domestic, largely due to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically.

(link to Victor’s insight: Italian Banks M&A – The Complex Italian Job)

OTHER M&A UPDATES

  • Three weeks have now elapsed since the Offer for Harbin Electric Co Ltd H (1133 HK) was extended. That means shareholders who had previously tendered are now entitled to withdraw their acceptances, if they so choose, which takes about 10 days. I estimate ~9.2mn shares have additionally tendered since the extension, or 1.4%, giving a total acceptance level of 87.2%. But, 9.5mn shares or ~1.4% have now moved back into CCASS – which appear to be shares to be withdrawn. Shares closed Friday at $4.41, the lowest since the extension announcement. ~5.8% of issued shares have changed hands since the extension, more than enough for the deal to get up.

  • Shortly after publishing my insight, Netcomm Wireless (NTC AU) released the supplementary disclosure. The directors reaffirm their recommendation to vote for the Scheme. The disclosure sought to clarify how the directors can recommend the Offer yet maintain a bright future. In short, the directors consider the Scheme crystalises value now. There doesn’t appear to be any news out of the ordinary here. But delaying the vote so as to make this disclosure is unusual. Shares closed firm at $1.08 compared to the $1.10/share Scheme Offer. The Scheme Meeting will be held on the 18th June.

  • Indofood Agri Resources (IFAR SP) issued a notice which simply reiterates the final Offer Price and the closing date (25 June – 60th day from dispatch). No update to the % tendered was provided.

  • DuluxGroup Ltd (DLX AU)‘s Scheme Meeting will be held on the 31 July.

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

RMH (8437 HK)
59.67%
UBS
Pacific Found
33.93%
HSBC
CCB
22.15%
HK Stock Link
Citi
12.19%
China Int
Outside CCASS
23.08%
Yuet
Outside CCASS
Ever Sunshine (1995 HK)
18.68%
BOCI
Outside CCASS
12.00%
Ever Joy
Outside CCASS
27.43%
Hang Seng
Outside CCASS
10.00%
Kingston
Satinu
19.00%
Morgan Stanley
Outside CCASS
15.01%
HSBC
Outside CCASS
14.81%
JPM
Outside CCASS
Source: HKEx

For the past fifteen months, I’ve flagged 345 large moves (>10%) in my weekly Event SPACE insights. So I analysed those moves across 112 brokers. Some of the observations include:

  • Overall, 50% of stocks demonstrating a large CCASS movement underperformed the HSI in the first week after the share transfer, which is neither here nor there, however, this number gradually increased over time, touching 70% one-year after the share transfer.
  • Share transfers involving stocks with a market capitalisation of less than US$250mn AND between US$500mn to US$1bn, were the worst performers, in absolute terms and relative to the HSI.
  • When combining the % CCASS change and market capitalisation, stocks with a market capitalisation in excess of US$1bn at the time of the shares transferred displayed a reduced tendency to underperform. 

(link to my insight: CCASS: Why Large Moves Matter Redux)

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Brief Equities Bottom-Up: Shanghai/​Shenzhen Connect Ideas: Moutai Inflows Were Back, Tsingtao Too (2019-06-14) and more

By | Bottom-Up Equities, Daily Briefs

In this briefing:

  1. Shanghai/​Shenzhen Connect Ideas: Moutai Inflows Were Back, Tsingtao Too (2019-06-14)
  2. HK Connect Ideas: Five Weeks of Inflows, Dalian Port Outflows (2019-06-14)
  3. Bank of China – An SOE Bank that Is Not Immune
  4. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric

1. Shanghai/​Shenzhen Connect Ideas: Moutai Inflows Were Back, Tsingtao Too (2019-06-14)

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In our weekly Shanghai/Shenzhen Connect Ideas series, we aim to help our investors understand the flow of northbound trades via the Shanghai and Shenzhen Connect, as analyzed by our proprietary data engine and highlight interesting trade ideas. 

We split the stocks eligible for the Shanghai/Shenzhen Connect trade into two groups: stocks with a market capitalization above USD 5 billion, as well as between USD 1 billion and USD 5 billion. 

In this insight, we will highlight the consecutive two weeks of inflow into the A-share market. We highlight the inflow reversal into Kweichow Moutai Co Ltd A (600519 CH), a leading premium hard liquor manufacturer, as well as Tsingtao Brewery Co Ltd A (600600 CH).

2. HK Connect Ideas: Five Weeks of Inflows, Dalian Port Outflows (2019-06-14)

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In our weekly HK Connect Snippet series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine, and highlight interesting observations. 

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this insight, we will highlight the five weeks’ consecutive inflow into HK Stocks via the southbound trade, led by Financials sector. Inflows into Tencent have been consistently positive. We also highlight strong outflows from Dalian Port. In the mid-cap space, we highlight Man Wah, a furniture exporter. 

3. Bank of China – An SOE Bank that Is Not Immune

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Rural banks come to mind. Medium-sized banks as well. But it is not one of the large four SOE banks that we to feel will have some of the highest impairment cost growth. Yet, Bank Of China (601988 CH) ranks second of the largest 10 listed China banks for impairment cost growth in 1Q19 YoY at a staggering 76%. And this can continue through 2Q19 and through 2019. The reason is simple: BOC’s impairment costs remain far lower than large peer banks. With the profit warning from Bank Of East Asia (23 HK; BEA) due to worsening China credit metrics, worsening industrial output data (just out) and the full effects of US-China trade war yet to hit, BOC may have to play catch-up with peers. This is also apparent with its HK subsidiary, where credit costs are lower than most all peer banks at just 10bps of loans in 2018; BEA was 2.4x higher. See valuation, fundamental and momentum (VFM) research done by our Smartkarma colleague Paul Hollingworth on BOC and BEA in the past.

4. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric

My previous insight Top Consumer Themes in Vietnam noted some of the top consumer themes in Vietnam and how Phu Nhuan Jewelry Jsc (PNJ VN) and Mobile World Investment (MWG VN) stood out.  MWG is a stand out in the consumer space because of the following: 1) strong initiatives from management to seek new sources of growth, 2 ) historical favorable financial performance and 3) its current discount to consumer stocks and even the VN Index ( ex. premium for buying shares).  MWG”s financial growth has been outpacing many of its consumer peers in recent years, while other consumer stocks have begun to see single digit growth rates.

Consistent Financial Performance: MWG was able to surpass its growth target for 2018 and this marked the fifth consecutive year that MWG achieved its annual target.  Its 2018 revenue rose by 30.4%, which was driven by the strong growth of its consumer electronics products. MWG is positioned to continue delivering favorable growth ( above 20%) in the coming years and to improve margins as Baxhoaxanh’s operations become more mature.

Finding new sources of growth: The company is positioned to withstand the relative slowdown of the consumer electronics segment through company specific developments, while the favorable macro picture in Vietnam is also supportive of strong financial growth.  As traditional sources of growth begin to become exhausted, MWG can find new growth driven by the expansion of its Dien May Xanh stores and its new grocery stores ( Bax Hoa Xanh).

Moats are lame: MWG has been seeking new sources of growth rather than relying merely on its favorable market share and the high growth rates of various sectors in Vietnam.  Several consumer stocks that were less aggressive in this manner have seen single digit top-line growth in recent years.  Stocks in Vietnam are likely to face increasingly saturated markets in the future and innovation will be the key for companies to outperform during the 2020s-2030s ( not to mention the fact that Vietnam’s circa 30% discount to emerging Asia no longer exists).

It is imperative to note that MWG trades at a notable discount to other consumer stocks in Vietnam despite the company’s consistent financial performance and management’s initiative to identify new sources of growth.  The market appears to be undervaluing this unique initiative/ability from management and focusing more on the short term transitions taking place.

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