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Daily Briefs

Brief Multi-Strategy: Japan Banks – Unloved for Many Reasons and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. Japan Banks – Unloved for Many Reasons
  2. LG Electronics’ Decision to Halt Smartphone Production in Korea – No Mas!
  3. ZOZO: No More Thank Yous and Less Profit Too

1. Japan Banks – Unloved for Many Reasons

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The Bank of Japan (BOJ) offers negative interest rates on monies deposited. Japan’s banks are largely wholesale, with lumpy corporate loans and in many cases, where they look after corporate interests more than shareholders. Some consider the largest banks in Japan like closed-end mutual funds – but with credit risk -due to their gigantic equity holdings. These all remain valid reasons to shun Japan’s banks in favor of others in the region.  Credit costs are another concern. With BOJ’s new announcement of continuing low rates there remains even less hope that loan volume will support profit and that NIM pressure will remain. A negative delta in credit costs is not easily absorbed by anaemic ROA. 

2. LG Electronics’ Decision to Halt Smartphone Production in Korea – No Mas!

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Chairmain Koo wants to make some big changes to improve profitability of LG Electronics – The company’s decision to stop production of smartphones in Pyeongtaek, Korea by end of this year and move this operation to Hai Phong, Vietnam has been received with mixed reactions by the shareholders so far and its share price is up 2% after this announcement.

  • Workers’ pay in Vietnam is nearly 1/8 of the levels in Korea.
  • LG is now likely to focus on the low-to-mid end of the global smartphone segment.
  • Moon Jae-In administration’s socialist policies are not business friendly.
  • We think that the annual potential savings of shifting the manufacturing to Vietnam could be about 50 billion won or 2% of the company’s annual operating profit. 

3. ZOZO: No More Thank Yous and Less Profit Too

Zozoresults

ZOZO’s (3092 JP) announced its FY18 results today, with operating profit down 21% despite sales increasing by 20.3%.

What was more surprising was a clear sign of retreat and even some humility as the online fashion mall announced it would end its disastrous Zozoarigato campaign.

Merchants are delighted but the damage has already been done and it will take time to repair merchant trust at a time when headwinds are building for Zozotown and the private brand is no longer expected to deliver growth as forecast.

The company is much less optimistic about growth for the current year; it forecasts a 24.7% increase in OP to ¥32 billion but much slower GMV growth of just 13.6% to ¥367 billion. The private brand will shrink by 38.5% to just ¥1.7 billion.

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Brief Thematic: Smartkarma’s Week That Was in JP/​​​​​​​​​KR: -0.3% GDP Growth, Intel’s Warnings, & The Next Joker? and more

By | Daily Briefs, Thematic and Strategy

In this briefing:

  1. Smartkarma’s Week That Was in JP/​​​​​​​​​KR: -0.3% GDP Growth, Intel’s Warnings, & The Next Joker?
  2. Japan Banks – Unloved for Many Reasons

1. Smartkarma’s Week That Was in JP/​​​​​​​​​KR: -0.3% GDP Growth, Intel’s Warnings, & The Next Joker?

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  • KOSPI is up 7% YTD and Nikkei is up 11% YTD. 
  • South Korea reported horrible GDP data in 1Q19. It was reported in the past week that South Korea’s GDP declined 0.3% QoQ in 1Q19, which was the worst figure in nearly 11 years since 2008. What’s so bad about this is the fact that back in 2008, all the major economies were in the midst of the Great Recession whereas today, that is not the case with the US economy that is in much better shape as compared to other emerging countries such as South Korea.
  • Intel Corp (INTC US) and Texas Instruments (TXN US) made warnings on the semiconductor sector this week. Intel now expects revenue of $69 billion in 2019, down 3% YoY. This revenue guidance is 3.5% lower than its previous guidance given in January 2019.

2. Japan Banks – Unloved for Many Reasons

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The Bank of Japan (BOJ) offers negative interest rates on monies deposited. Japan’s banks are largely wholesale, with lumpy corporate loans and in many cases, where they look after corporate interests more than shareholders. Some consider the largest banks in Japan like closed-end mutual funds – but with credit risk -due to their gigantic equity holdings. These all remain valid reasons to shun Japan’s banks in favor of others in the region.  Credit costs are another concern. With BOJ’s new announcement of continuing low rates there remains even less hope that loan volume will support profit and that NIM pressure will remain. A negative delta in credit costs is not easily absorbed by anaemic ROA. 

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Brief Macro: Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN and more

By | Daily Briefs, Macro

In this briefing:

  1. Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN
  2. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

1. Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN

Prabowo persists in refusing to acknowledge the election outcome, while attempting to delegitimize electoral authorities.  He has rejected an emissary from the president and declared victory four times, while top figures in his campaign are issuing bellicose remarks about ‘no return’ and ‘total war’.  A Third Clerics Conference is undergoing preparation and Prabowo seems likely to eventually deploy Islamist demonstrators, who have proven their ability to inundate Jakarta.  Security forces are assembling personnel and preparing for confrontations, although these might not occur until late May or June.  Ultimately, a second term for Widodo is not in jeopardy.  But, in the meantime, disruptions seem likely to damage Indonesia’s image, spook investors (especially domestic) and pressure the exchange rate. 

Politics: Tensions remain elevated as Gerindra Chair Prabowo Subianto has shown no signs of wavering from his stance that he is the rightful winner of the presidential election.  He has conducted four victory celebrations to date, while rejecting Quick Count indications of the result, impugning the work of the General Election Commission (KPU) and refusing to meet with the president’s ‘emissary’ (Coordinating Maritime Affairs Minister Luhut Panjaitan).  Bellicose rhetoric has emanated from top aides: the chair of Prabowo’s official campaign team, former Military Chief Gen (ret) Djoko Santoso, insisted that the declaration of a win with 62 percent of the vote is a “point of no return”.  The Prabowo supporter Amien Rais, founder of the National Mandate Party (Pan), warned that, “If [the administration] wants to engage in ‘total war’, we are better able to wage it.”  Prabowo conducted a rally for campaigners on 24 April but prohibited journalists from covering it (when one activated a camera, he reportedly suffered a beating).  The Islamic Defenders Front (FPI) is calling for a Third Conference of Clerics to address election cheating.  Tensions could subside if Prabowo changes course – which, given his mercurial character – could occur at any time.  But indications to date suggest he will continue rejecting the Real Count, eventually reject the official count and finally reject a Constitutional Court ruling if it is adverse.  He would then likely mobilize strident Islamic groups to protest, with potential for disruptions in Jakarta (Page 2).  Security officials generated headlines by transferring several Police Mobil Brigade (Brimob) companies from remote provinces to Jakarta (p. 4).  Prabowo’s running mate, Sandiaga Uno, ruled out returning to the Jakarta vice‑governor post (p. 5).

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]>.

Justice: State Power Company (PLN) Chief Director Sofyan Basir became a suspect in the Riau-1 powerplant case.  Since 2014 he has dominated decisions on structuring pro­jects, and his removal may therefore trigger changes.  State Minister for State Enterprises Rini Soemarno will likely attempt to impose control through PLN’s interim head (p. 6).

Policy News: For the second time this month, the labor minister made uncharacteristic calls for regulatory reform to realize flexibility and encourage investment.  But he has also pledged to satisfy demands made during the campaign by labor unions (p. 8).

Vote Count: With 36% of the Real Count uploaded, Widodo has 56.1% (p. 11).

Economics:  GDP growth may have reached 5.2 percent during the first quarter, according to Bank Indonesia (BI).  First quarter revenues are low and budget cuts may receive consideration (p. 13). 

2. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

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  • World (gross) cross-border flows have rebounded strongly
  • Global Liquidity and World Business cycle are increasing driven by cross-border flows
  • Strong cross-border flows drive outperformance of cyclicals and non-US markets

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Brief China: Spring Seasonality and Commodities and more

By | China, Daily Briefs

In this briefing:

  1. Spring Seasonality and Commodities
  2. Iron Ore and the Inventory Mystery

1. Spring Seasonality and Commodities

Slide7

We have not taken a good look at seasonality in a few months. In light of the GDP rates last week and other first quarter data we are taking a look at seasonal commodities. Copper is lower in comparison to 2018 and 2017. In February 2019 copper rates actually crosses 2017 more than 2018 in recent trading. In recent trading copper pricing is a relatively flat and has in fact shifted very little. Copper had a difficult late 2018 due to a strong dollar and that appears to still be the case. There is clear pressure on copper that is not giving up anytime soon.

2. Iron Ore and the Inventory Mystery

Slide1

Just days after China makes a big push to keep supporting the economy, iron ore prices ticked upward. Even though GDP beat expectations, the fact that China is still pushing the support the domestic economy feels a little bit like the Wizard of Oz, as in don’t look behind the curtain. Today we are looking at iron ore from a few different angles in order to give a good look at what Beijing is looking to support and ultimately maintain.

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Brief M&A: Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko and more

By | Daily Briefs, Mergers and Acquisitions

In this briefing:

  1. Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko
  2. Renault/Nissan:  Mangalore Alert!

1. Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko

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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

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Despite his initial conciliatory stance prior to his appointment to the board and as the new chairman of Renault, Jean-Dominique Senard said the Alliance needed to be re-balanced “in spirit” to counter fears among its Japanese partners that Renault wants to dominate the partnership. Subsequent to his ascension to the board, Renault has made a new proposal for integration. Indications are that proposal was rebuffed by Nissan. This was followed by Nissan’s CEO Hiroto Saikawa saying “What’s most important is Nissan’s future. The question is how we should use the alliance for our future, not how we should be used by the alliance.

A Yomiuri article said that Renault told Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. This is a serious escalation in tensions.

  • Renault is pushing at a time when they should not, and lobbing threats like flaming barrels of oil over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings of scale. Renault is acting now while Nissan is weak from the governance scandal and after Nissan has lowered its forecast for a second time this year. Yet Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises.
  • Nissan could sell new shares in itself to dilute Renault below 40%. Or buy more shares in Renault to own more than 25%. Or commence constructive disengagement. Renault could go hostile on Nissan, which would break the Alliance Agreement and start a war. All told, the possibilities for the Alliance look bleaker.
  • If Nissan engages in defense, the “attack to defend” trade is to own more Renault. If Nissan defends itself with good governance, the trade is to own more Nissan. It’s not an easy trade, but Travis Lundy tilts to Renault, for now. That could change quickly.

(link to Travis’ insight: Renault/Nissan: Mangalore Alert!)

STUBS & HOLDCOS

NTT (Nippon Telegraph & Telephone) (9432 JP) / NTT Docomo Inc (9437 JP)

Travis recommended a NTT/Docmo set up last October NTT Stub Vs MktCap Near 10yr Lows, Stub Earnings Vs Total Near 10yr High around the time of the “Docomo Shock” of lower pricing come April 2019. The stub – if you measure it that way – doubled from less than ¥600/share to ¥1200/share as of the close earlier this week. Since the initial recommendation, NTT Docomo has executed a large buyback and NTT has executed a smaller buyback and the market expectation is for another NTT buyback from the government sometime after earnings.

  • NTT Docomo has now released its new lower-priced and simpler pricing plans which start in June this year. The Nikkei released an article over the past weekend saying that OP would fall 20% this year. This was a full 11.5% below the consensus forecast. Shares ended up on both sets of news, but once again the stock ended up. That left NTT at a higher price vs Docomo than before but the ratio is almost 5% below recent highs despite worse than-expected forecasts for NTT Docomo’s OP and a promised four-year soft spot.
  • NTT Docomo trades at 12x its highest EPS for the next several years. NTT trades at sub 10x on a consolidated basis and well less than that on a parent-implied basis (leverage helps).
  • Travis was a buyer of the NTT/Docomo “dip”. He expected a 20% drop in OP at NTT Docomo would be absorbed in stride, but not really. However, ongoing cost-cutting, lower depreciation and writedowns of fixed line assets, and better profitability on a mature cash-cow business means NTT parent-only (i.e. NTT less Docomo and Data) earnings should continue to progress higher, and NTT should continue to distribute that capital to shareholders. 
  • A priori, there has been shorting of Docomo vs NTT for the past several months and that has now reached a point of “sell the news” where those short are buying back their Docomo. And near-term may favour Docomo vs NTT in regards to buyback flows as Travis expected a Docomo market buyback of ¥300-400bn.
  • After the close on Friday, Docomo released earnings forecasts – OP down 18% and NP down a little less. Docomo also announced a buyback of ¥300bn to be conducted in the market over the next year.

(link to Travis’ insight: NTT Vs Docomo: Where To From Here?)


Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

AC’s 8% decline (at the time of my note) since the beginning of the month, compared to ALI’s 5% gain, has resulted in the discount to NAV widening to ~13% against a one-year average of 4%. Although ALI’s exchangeable bond was cited as a possible cause for the recent bifurcation – the last day for conversion was the 22 April and was fully converted – the chief suspect is the unlocking of a recent placement by Mitsubishi Corp (8058 JP) and the possibility of a new placement.

  • On 20 March 2018, Mitsubishi placed 8.5mn shares of AC at ₱934/shares (~7.5% discount to last close). The placement reduced Mitsubishi’s stake to 8.75% from a little over 10% and was the first time it has sold since securing its stake in early 2007 when AC traded around ₱55.
  • On 15 January 2019, Mitsubishi placed 13mn Ayala shares at ₱900 per share (~7.3% discount). Allegedly Mitsubishi initially offered 9mn shares.  As with the shares sold in March, this shares placement had a 90-day lock-up on further sales, which expired last week.
  • Mitsubishi is a seller of AC – that is evident – and still holds 41.57mn or 6.58% of shares out. However, the urgency to sell more is not apparent – the most recent placements occurred ahead of their year-end. Stub earnings are tonking along, propped up by the energy division. All things considered, AC looks interesting here.

(link to my insight: StubWorld: Ai Ya! – Ayala Corp Tanking On Possible “Portfolio Rebalancing”)


First Pacific Co (142 HK)

Curtis Lehnert revisits this holdco, having first propositioned a set-up trade back in early December. The trade is moving in the right direction and recent developments indicate there is room for a further narrowing in the discount.

  • In March, First Pac  announced it is exiting its 50% stake in the Goodman Fielder JV (GF) for US$300mn. First Pac will incur a US$280mn non-cash loss on the sale. Not an ideal return on a five-year investment. But this is a significant step towards narrowing the discount to NAV as GF was the second largest component of the stub (~18% of NAV). 
  • Proceeds from the sale would be used to pay down debt and for share repurchases. The company also mentioned they have identified further assets for sale outside of emerging Asia. Curtis’ take on this statement is that the Pacific Light project that operates a LNG-fired power plant in Singapore may be the next to be sold as it is the only other significant asset that is not in “emerging” Asia.
  • There is also Indofood Sukses Makmur Tbk P (INDF IJ)‘s voluntary offer for Indofood Agri Resources (IFAR SP), which I discussed in PT Indofoods’ Voluntary Offer for 74% Held Sub IFAR.
    The impact on First Pac is minor, but it is a wider sign that the group is in the midst of restructuring and streamlining its shareholdings.

(link to Curtis’ insight: TRADE IDEA – First Pacific (142 HK) Stub: Assets Sales Pave the Way to a Narrower Discount to NAV)

M&A – ASIA-PAC

Kosaido Co Ltd (7868 JP) (Mkt Cap: $172mn; Liquidity: $2mn)

Kosaido came out with lower “forecasts” for the year to this past 31 March, which consisted of (possibly kitchen-sinking) writedowns in relations to the funeral parlor business and writedowns and weakness in the info business. The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share. 

So… Kosaido directors WERE able to recommend minorities sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) a few months ago, but now cannot recommend to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

  • The Murakami bid is ¥750. It is not supported by Kosaido, is still well below BVPS (which is now lower than at the start of the Tender) and the Murakami bid is not designed to squeeze out minorities. If you do not tender, even if it DOES succeed, there is zero guarantee that the backend will trade higher than the current price or the Tender Offer Price. 
  • The Bull Case here is that Minami Aoyama Real Estate gets 51%, then replaces all the directors at both Kosaido and Tokyo Hakuzen, and then embarks on an asset-lightening exercise to fund rehabilitation, then sells off the parts to deliver book value to investors. 
  • The Bear Case is that there is no successful tender, and the shares fall back to some level lower than here as punters bail and then the Murakami group scoops up more stock lower. The Worse Bear Case is that the company simply cannot rescue itself. It has had years to fix an obviously weak “info” business and it has not done so. 
  • The Base Case could be seen that the tender goes through, Murakami gets 51%, then it takes a while for anything to happen, things come out less than optimal, and because Murakami-san gets to consolidate, he doesn’t care about his mark-to-market. But you will.

(link to Travis’ insight: Kosaido: The Bull Case, The Bear Case, and the Base Case)


Automotive Holdings (AHG AU) (Mkt Cap: $560mn; Liquidity: $2mn)

Ap Eagers Ltd (APE AU) has now dispatched the Bidder’s Statement for its all-scrip (1 APE share for every 3.8 AHG shares) offer for AHG. The Offer is conditional on ACCC approval and no MACs. There is no minimum acceptance (shares tendered are irrevocable, which hasn’t stopped what appears to be Perpetual tendering in its 9.2% stake to the IAF) threshold nor finance condition or due diligence. AHG recommends shareholders take no action as it considers the proposal to be highly conditional and that AHG trades through terms.

  • The merged AHG/APE is expected to exact pre-tax cost synergies (according to APE) of $13.5mn annually.  Although he agrees the merger rationale to have merit, AHG’s CEO John McConnell argues synergies “may be a bit light by the way we’re looking at it”. APE’s CEO Martin Ward countered estimates may potentially increase with the benefit of a full operational review.
  • With AHG’s share price languishing, there is a hint of opportunism to APE’s Offer. But not a lot – the scrip ratio is not unreasonable when viewed from a 1M, 3M and 6M viewpoint. Only when the timeframe extends further out to one-year (3.52x) and beyond does the ratio appear to take advantage.
  • With car dealerships under the hammer amidst declining new vehicle sales, the benefits from a merger are apparent. This Offer may just require a small kiss to terms to get all parties on board. The premium to terms has come in since Perpetual tendered.

(link to my insight: AHG & AP Eagers – Smart Carma)


Yungtay Engineering (1507 TT) (Mkt Cap: $800mn; Liquidity: $1mn)

The tender results gets Hitachi ~39.7% of shares out. Hitachi got about 28% of the non-Hitachi and non-Hsu Cho-Li shares in the tender. 70+% of what was possible did not tender. This cannot be seen as a big victory for Hitachi and they know it. They do not have the “control” to consolidate as evidenced by the EGM spat. Travis expects this has now turned into a waiting game for them. 

  • At the EGM on the 18th April, the Hitachi/Yungtay side got three directors, the “Market Faction” led by the The Baojia Group and dissident cousin to the former chairman (Hsu Tso-Li) Hsu Tso-Ming (who is now General Manager of Yungtay China) and including the representative entities of Schindler Holding Ag (SCHN SW) and United Technologies (UTX US)‘s Otis Elevators business – which combined have 11+% between them – obtained three seats, and then three independent director slots were filled with one coming from the management slate, and two coming from the Market Faction. The “opposition” had in some way “won” management rights.
  • Baojia Group and Hsu Tso-Ming plus Otis and Schindler will find it difficult to win enough to oust Hitachi. They can’t force capital decisions because Hitachi has negative control. They can only hope to greenmail Hitachi, or grow the company out from under them. A second tender offer by Hitachi was rumoured apparently, but Hitachi stomped on that rumour immediately.
  • Minority shareholders are left with a much less liquid instrument than before, which is expensive and has a kind of takeover premium built in when Travis expects there are few chances of a near-term takeover.

(link to Travis’ insight: Hitachi Deal for Yungtay Completes But Control Is Elusive)


SK Hynix Inc (000660 KS) (Mkt Cap: $47bn; Liquidity: $221mn)

On April 22nd, it was reported that SK Hynix is interested in acquiring MagnaChip Semiconductor Corp (MX US)‘s foundry business. Magnachip (market cap of US$316mn) employs about 2,500 people in the Cheongju and Gumi fab facilities and R&D centers in Korea. The foundry business currently represents about 45% of Magnachip’s sales.

  • In 2017, SK Hynix launched the SK Hynix System IC which focuses on the foundry business.  There have been numerous speculations about a potential M&A of various foundry businesses by either Samsung Electronics and SK Hynix in the past year. Recently, Global Foundries, the world’s third largest foundry player, has been looking for a buyer of its 300 mm fab (Fab 7) in Woodland, Singapore. Neither Samsung or SK Hynix have expressed interest.
  • It has been noted that the final bidders for the Magnachip foundry business may also include China’s Jian Guang Asset Management, and SMIC (China). Although this is a small scale deal, Douglas Kim believes SK Hynix would be the best fit as it would accelerate the company’s ambitions in the foundry business, which would be negative for the industry leaders Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) and Samsung. 

(link to Douglas’ insight: Korea M&A Spotlight: SK Hynix to Acquire Magnachip’s Foundry Business?)


Ki Holdings (6747 JP) (Mkt Cap: $169mn; Liquidity: $0.3mn)

Koito Manufacturing (7276 JP)  announced a Tender Offer to take out the minority shareholders in Ki Holdings. This has been long-awaited and long-needed. However, the modalities of how this is getting done are symptomatic of a shocking lack of good governance process. This deal effectively requires zero independent-thinking, economically-motivated investors to tender to make it a success and force minority squeezeout and delisting. This deal can almost certainly be accomplished with every single one of them refusing to participate.

  • The company needs 66.7% to get this over the hump and the combination of the parent and existing financial and corporate cross-holders would put this over 67% quite easily. This tender offer effectively requires zero non-crossholder shareholders to tender to make it a success.
  • Is the Tender Offer Price at least in the middle of the DCF range? No. Did either the Target or the Buyer obtain Fairness Opinions? No. Does the forward forecast for this year look like it is low-balled? Yes.

  • This is a done deal, and there is not much you can do about it unless you take the appraisal rights route.

(link to Travis’ insight: Koito Mfg (7276) Finally Announces TOB for KI Holdings (6747) Subsidiary)


Hanergy Thin Film Power (566 HK) (Mkt Cap: N/A; Liquidity: N/A)

The Scheme Document has been dispatched with a court meeting tabled for the 18 May 2018. The terms remain unchanged from the initial announcement on the 26 February – the proposal is one SPV share for each Scheme share. The ultimate objective of the proposal is to list the company on a stock exchange in the PRC; however, it is not certain whether the A-share listing can be achieved.

  • We now know the SPV is incorporated in the BVI. Interestingly, “independent” shareholders now comprise 40.51% of shares out, up from 32.49% in the February announcement, after the Offeror’s stake (in concert with subsidiaries) has fallen to 40.14% (16.9bn shares) from 20.3bn, apparently after the enforcement of a share mortgage.  As a result of this adjustment, the 10% blocking stake at the court meeting has increased to 4.05% from 3.25%.
  • Questions remain as to the ease in which independent shareholders can sell unlisted shares, should the Scheme fail, under Bermuda Company Law and the Articles (a delisting procedure will commence if Hanergy does not resume trading before the end of July) or sell SPV shares should the Scheme pass, under BVI rules and the SPV constitution.
  • For shareholders angling for the A-share exposure, the SPV route appears preferable, or at least fast-tracks proceedings – there is no guarantee – as it silos independent shareholders into a separate entity which, according to PRC law, facilitates the A-share application. On account of this perceived accelerated A-share application submission under the SPV, I recommend shareholders vote for the Scheme.

(link to my insight: The Hanergy Dilemma: Vote For The Scheme)

M&A – US

Anadarko Petroleum (APC US) (Mkt Cap: $32bn; Liquidity: $400mn)

Occidental Petroleum (OXY US) announced a proposal to acquire Anadarko, potentially upsetting the Chevron Corp (CVX US) definitive merger agreement to acquire Anadarko. OXY proposed a 50/50 cash/stock deal comprised of $38 cash plus 0.6094 OXY shares per APC share, or a headline value of $76 per share, a nearly 20% premium to the implied $63.46 value of Chevron’s deal based on Chevron’s closing price of $122.02 on April 23rd.

  • OXY would need to issue about 309mn shares to fund the stock portion of its proposal, which is about 41% of its current share count, and would leave the combined company owned 71% by current OXY shareholders and 29% by current APC shareholders. Such a large share issuance will require the approval of OXY shareholders, which might present a challenge.
  • OXY’s CEO Vicki Hollub justified the pursuit of APC by claiming OXY is best equipped to exploit APC’s Permian Basin and DJ basin assets, stating that Oxy is “the right acquirer for Anadarko Petroleum because we can get the most out of shale.”
  • If the Board of APC determines that the OXY proposal is a Superior Proposal, CVX will have four business days to revise (improve) terms. If OXY then improves its proposal so it is a Superior Proposal, CVX will have a further three business days to further improve its terms.
  • CVX must now decide how badly it wants this deal. John DeMasi thinks there’s a decent chance they step up. With some upside to the OXY proposal and the possibility of CVX topping OXY’s terms by enough of a margin to put it firmly ahead, he thought APC was an attractive speculative merger arbitrage situation here.

(link to John’s insight: Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath)


Briefly …

On May 31, 2018,  Spirit Realty Capital (SRC US) spun-off its lower quality and debt encumbered assets into a vehicle Spirit MTA REIT (SMTA US), leaving SRC as a triple net lease REIT that is primarily focused on single tenant retail real estate in the US. Investors have yet to buy into the transformed SRC as the value gap between it and its closest peers has actually widened. Robert Sassoon delves into why this should reverse. (link to Robert’s insight: SpinTalk:Spirit Realty Capital (SRC US)- A Rising Spirit)

OTHER M&A UPDATES

  • First Steamship (286.05mn) and Kuo Jen Hao (83.9mn) – collectively holding 24.66% in Summit Ascent Holdings (102 HK) – have sold their stakes to Suncity Group (1383 HK) @$1.94/share. After the transaction, Suncity holds 27.94% in Summit. This is still below the 30% MGO threshold. But outgoing ED John Wang also has 5% of shares out.

  • “‘Big bully’ Lynas Corp Ltd (LYC AU) must send waste home” is the headline in the AFR article (paywalled). This is quoting Malaysian government deputy minister and Kuantan MP Fuziah Salleh, who has been Lynas’ most outspoken critic.  She acknowledged Malaysia’s Cabinet is divided on the issue.

  • Indofood Agri Resources (IFAR SP)‘s Offer doc has been dispatched. The offer is now open and the first closing date is the 24 May. The Offer is conditional on PT Indofood holding 90% of shares out at the close of the offer. There is no other condition.

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

19.90%
Yue Xiu
Outside CCASS
22.00%
Prime
Outside CCASS
23.09%
Hang Seng
Outside CCASS
Dragon Mining (1712 HK)
15.15%
SHK
Outside CCASS
12.01%
HSBC
Outside CCASS
14.04%
Founder Sec
ABCI
DLC Asia (8210 HK)
11.00%
BEA
Outside CCASS
Source: HKEx

2. Renault/Nissan:  Mangalore Alert!

Screenshot%202019 04 26%20at%201.13.34%20pm

Jean-Dominique Senard, new chairman of Renault, was recruited from Michelin Group (ML FP) to replace beleaguered Renault SA (RNO FP) CEO and Chairman Carlos Ghosn after it became clear Ghosn’s position at the top of the French carmaker was untenable following his arrest and detention in Japan on a variety of corporate charges, the most serious being “breach of trust.” He took the role of chairman in January 2019. By all accounts he was quite conciliatory in meeting with Nissan Motor (7201 JP) CEO Hiroto Saikawa a few months ago, and the proposal in February was that he take the spot of former Nissan chairman Carlos Ghosn on Nissan’s board at an early April EGM.  In a March press conference in Yokohama, Senard acknowledged Nissan’s desire to maintain its independence from Renault and said “I will respect the new governance of Nissan.”

The EGM took place three weeks ago, and indeed Senard took Ghosn’s spot on the board which is for now reduced to 8 members. At the EGM, there were many upset shareholders and some calls for the whole board to resign. As discussed in Nissan Governance Outlook – Foggy Now, Sunny Later and then Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter? the board will see substantial turnover in June anyway because of a replacement of Greg Kelly and two natural replacements. The governance report suggests perhaps a slight enlargement of the board might be necessary as well to get enough independent members to staff all the various committees. At the EGM, Saikawa apologized profusely for the lapse in executive and board oversight but resisted calls to step down saying he would stay on until Nissan was fixed and the relationship with Renault was righted. 

Despite Senard’s conciliatory stance prior to his appointment to the board, the week after the EGM gave him his board seat, at or around the time of the first meeting of the new Alliance structure in Paris, Renault apparently again proposed to Nissan an integration of the two companies, possibly through a holding company which would own Renault and Nissan as subsidiaries (no word on whether the new effort has anything to do with Daimler reportedly looking to cut ties with the Alliance). Outside that meeting, Senard said that the Alliance needed to be rebalanced “in sprit” to counter fears among its Japanese partners that Renault wants to dominate the partnership.

This proposal was confirmed by Nissan executives in various media reports earlier this week, with the strong underlying suggestion that Nissan had rebuffed the proposal. One Asahi newspaper article saw an interesting quote: 

“I was not surprised,” a Nissan executive said of Senard’s plan. “Previously, he was taking a quiet stance. But now, he has bared his fangs.”

The confirmation of Renault’s proposal was near-explicit in a press conference after the first major board meeting since Senard’s appointment. The board meeting apparently saw Saikawa put aside any talk of capital relationship and Senard “agree” to that, and other matters were discussed. Another article suggested the existing capital tie-up should be rebalanced before being strengthened. At a press conference the next day, Saikawa was asked about the Alliance and the approach, and the same Asahi newspaper article had a really juicy morsel of a quote:

“What’s most important is Nissan’s future,” Saikawa told reporters on the morning of April 23. “The question is how we should use the alliance for our future, not how we should be used by the alliance.”

Oops.

The response by Nissan and Saikawa was apparently not well-received by Renault.

This morning’s Yomiuri had an article which says that Renault told Nissan CEO Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. 

Saikawa is, as I and other insight providers on Smartkarma have said since the first hints of the Ghosn scandal, on thin ice. His reappointment in 2017 did not gain the broad shareholder support he might have wanted, then the Ghosn/governance scandal unfolded and the EGM earlier this month saw a lot of questions about why he had not resigned to take responsibility. Furthermore, given he is not far from traditional mandatory retirement age, his future as CEO is likely not long-dated.

However, there are no two ways about it…

Renault’s threat is a clear breach of the spirit of the terms of the Revised Alliance Master Agreement signed in 2015 which, based on a variety of sources (as discussed in Nissan/Renault: French State Intervention Continues in January) effectively states that Renault may not vote against the rest of the Nissan board’s recommendation and may not propose an agenda item to a Nissan General Meeting without the rest of the board’s approval. And given the newfound board-level emphasis on good governance process, having one party to an Alliance Agreement interfere in the management of Nissan by not voting for the continuation of the CEO because that party does not agree with the shareholder’s desire to take over the company would be seen as something which would interfere with Nissan governance.

It should be, and I expect will be seen by Nissan’s board and executive committee as simply unacceptable. This is not the course of action taken by a shareholder and partner who respects agreements and wants to show that it does not want to dominate future relations. 

Nissan has clearly stated that it wants to get its management and governance house in order before dealing with a change in capital tie-ups. Saikawa-san said as much quite clearly most recently on the evening of the 22nd after the board meeting. 

While Saikawa may need to go for a variety of reasons, if not supporting Renault’s capital alliance is the litmus test for being Nissan CEO, this is clearly interference in Nissan’s governance and as such will likely generate a reaction. 


War?

Maybe. 

After the conciliatory statements in January and February by Jean-Dominique Senard, I had expected both sides to dial down the tension. Mio Kato, CFA was less sanguine, seeing little hope for the Alliance longer-term. I continue to see the importance of the Alliance as a production alliance which just happens to have a capital alliance on the side. To most everyone involved – customers, workers, creditors – the production alliance matters far more than the capital alliance. For shareholders, it is clear that a well-designed capital alliance would “free up” currently “locked up” capital. The cross-holdings make Nissan and Renault together less capital efficient than if they did not have them. 

However, despite the fact Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises, AND clearly knows that Nissan is not ready to agree on next step capital ties when production and platform are already well-integrated and Nissan has its own issues to solve in the US, in electric cars, AND the new Nissan board/governance structure is not in place, Renault pushed by the French state has tried to get Nissan to agree to integration twice so far this calendar year.

The problem for Nissan may not be the end result. The bigger problem is that Renault is pushing it at a time when they should not, and lobbing threats over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if the treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings benefits of scale.

It is difficult to see why Renault/French state is pushing this so hard when it is so obviously not the near-term path desired by its partner. 

While this news should generate a reaction from Nissan, there are timing issues. And investors should realize that in the near-term, Nissan has better tools to bring the fight to Renault than vice versa. 

A discussion ensues.

Get Straight to the Source on Smartkarma

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Brief Multi-Strategy: Iron Ore and the Inventory Mystery and more

By | Daily Briefs, Multi Strategy

In this briefing:

  1. Iron Ore and the Inventory Mystery

1. Iron Ore and the Inventory Mystery

Slide1

Just days after China makes a big push to keep supporting the economy, iron ore prices ticked upward. Even though GDP beat expectations, the fact that China is still pushing the support the domestic economy feels a little bit like the Wizard of Oz, as in don’t look behind the curtain. Today we are looking at iron ore from a few different angles in order to give a good look at what Beijing is looking to support and ultimately maintain.

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Brief Growth Ideas: Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge and more

By | Daily Briefs, Growth Ideas

In this briefing:

  1. Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge
  2. Advantest: FY03/19 Full-Year Results Beat Consensus, 4QFY03/19 Declines Due to Memory Downturn

1. Michinoku Bank  (8350 JP):  Clipped by a Synthetic Hedge

8350 michinoku 2019 0424%20peer%20valuations

With just three weeks to go before the formal announcement of their FY3/2019 results, it is high time that some of the smaller Japanese regional banks started owning up to the fact that they have no hope of making their full-year earnings guidance.  First in the line for confession is Michinoku Bank (8350 JP) which on Wednesday of this week slashed its full-year earnings guidance after losing some ¥1.25 billion (US$11.2 million) on the burgeoning costs of maintaining a synthetic hedge against its Japanese government portfolio.  These hedging losses come on top of rapidly rising credit costs.  Luckily, few foreign investors own the stock of this small, struggling bank, although there are some.  We expect further announcements of full-year earnings downgrades from other Japanese regional banks over the next fortnight or so; market reaction to such announcements may be severe.  Caveat emptor!  (May the buyer beware!)

2. Advantest: FY03/19 Full-Year Results Beat Consensus, 4QFY03/19 Declines Due to Memory Downturn

Advantest%20earnings

  • Advantest (6857 JP) reported its 4QFY03/19 and Full-year FY03/19 results yesterday (25th of April). The company reported 36.3% YoY growth in revenue for the full-year while its operating profit more than doubled to JPY64.7bn during the year mainly due to strong performance witnessed during the first three quarters of the year.
  • On a quarterly basis, the 4QFY03/19 numbers were below our expectations. Both the revenue and the operating profit witnessed YoY declines during the quarter, with revenue declining by 5.7% YoY while operating profit declined by a significant 26.6% YoY driven by the slowdown in the global semiconductor market.
  • Furthermore, the management expects a decline in revenue and operating profit for full-year FY03/20 due to contraction in the global semiconductor tester market. That being said, the company is expecting the market to return to its growth trajectory again during CY2020 driven by the expansion of commercial 5G communication services.
  • We believe Advantest is still overvalued at its current price of JPY3,445 per share. As the memory market downturn has just started impacting Advantest, we feel the company share price will decline further with the earnings outlook deteriorating.

Get Straight to the Source on Smartkarma

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Brief Event-Driven: Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko and more

By | Daily Briefs, Event-Driven

In this briefing:

  1. Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko
  2. Renault/Nissan:  Mangalore Alert!

1. Last Week in Event SPACE: Nissan/Renault, NTT/Doco, Ayala, Yungtay, AHG, Kosaido, SK Hynix, Anadarko

Spin2

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

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Despite his initial conciliatory stance prior to his appointment to the board and as the new chairman of Renault, Jean-Dominique Senard said the Alliance needed to be re-balanced “in spirit” to counter fears among its Japanese partners that Renault wants to dominate the partnership. Subsequent to his ascension to the board, Renault has made a new proposal for integration. Indications are that proposal was rebuffed by Nissan. This was followed by Nissan’s CEO Hiroto Saikawa saying “What’s most important is Nissan’s future. The question is how we should use the alliance for our future, not how we should be used by the alliance.

A Yomiuri article said that Renault told Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. This is a serious escalation in tensions.

  • Renault is pushing at a time when they should not, and lobbing threats like flaming barrels of oil over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings of scale. Renault is acting now while Nissan is weak from the governance scandal and after Nissan has lowered its forecast for a second time this year. Yet Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises.
  • Nissan could sell new shares in itself to dilute Renault below 40%. Or buy more shares in Renault to own more than 25%. Or commence constructive disengagement. Renault could go hostile on Nissan, which would break the Alliance Agreement and start a war. All told, the possibilities for the Alliance look bleaker.
  • If Nissan engages in defense, the “attack to defend” trade is to own more Renault. If Nissan defends itself with good governance, the trade is to own more Nissan. It’s not an easy trade, but Travis Lundy tilts to Renault, for now. That could change quickly.

(link to Travis’ insight: Renault/Nissan: Mangalore Alert!)

STUBS & HOLDCOS

NTT (Nippon Telegraph & Telephone) (9432 JP) / NTT Docomo Inc (9437 JP)

Travis recommended a NTT/Docmo set up last October NTT Stub Vs MktCap Near 10yr Lows, Stub Earnings Vs Total Near 10yr High around the time of the “Docomo Shock” of lower pricing come April 2019. The stub – if you measure it that way – doubled from less than ¥600/share to ¥1200/share as of the close earlier this week. Since the initial recommendation, NTT Docomo has executed a large buyback and NTT has executed a smaller buyback and the market expectation is for another NTT buyback from the government sometime after earnings.

  • NTT Docomo has now released its new lower-priced and simpler pricing plans which start in June this year. The Nikkei released an article over the past weekend saying that OP would fall 20% this year. This was a full 11.5% below the consensus forecast. Shares ended up on both sets of news, but once again the stock ended up. That left NTT at a higher price vs Docomo than before but the ratio is almost 5% below recent highs despite worse than-expected forecasts for NTT Docomo’s OP and a promised four-year soft spot.
  • NTT Docomo trades at 12x its highest EPS for the next several years. NTT trades at sub 10x on a consolidated basis and well less than that on a parent-implied basis (leverage helps).
  • Travis was a buyer of the NTT/Docomo “dip”. He expected a 20% drop in OP at NTT Docomo would be absorbed in stride, but not really. However, ongoing cost-cutting, lower depreciation and writedowns of fixed line assets, and better profitability on a mature cash-cow business means NTT parent-only (i.e. NTT less Docomo and Data) earnings should continue to progress higher, and NTT should continue to distribute that capital to shareholders. 
  • A priori, there has been shorting of Docomo vs NTT for the past several months and that has now reached a point of “sell the news” where those short are buying back their Docomo. And near-term may favour Docomo vs NTT in regards to buyback flows as Travis expected a Docomo market buyback of ¥300-400bn.
  • After the close on Friday, Docomo released earnings forecasts – OP down 18% and NP down a little less. Docomo also announced a buyback of ¥300bn to be conducted in the market over the next year.

(link to Travis’ insight: NTT Vs Docomo: Where To From Here?)


Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

AC’s 8% decline (at the time of my note) since the beginning of the month, compared to ALI’s 5% gain, has resulted in the discount to NAV widening to ~13% against a one-year average of 4%. Although ALI’s exchangeable bond was cited as a possible cause for the recent bifurcation – the last day for conversion was the 22 April and was fully converted – the chief suspect is the unlocking of a recent placement by Mitsubishi Corp (8058 JP) and the possibility of a new placement.

  • On 20 March 2018, Mitsubishi placed 8.5mn shares of AC at ₱934/shares (~7.5% discount to last close). The placement reduced Mitsubishi’s stake to 8.75% from a little over 10% and was the first time it has sold since securing its stake in early 2007 when AC traded around ₱55.
  • On 15 January 2019, Mitsubishi placed 13mn Ayala shares at ₱900 per share (~7.3% discount). Allegedly Mitsubishi initially offered 9mn shares.  As with the shares sold in March, this shares placement had a 90-day lock-up on further sales, which expired last week.
  • Mitsubishi is a seller of AC – that is evident – and still holds 41.57mn or 6.58% of shares out. However, the urgency to sell more is not apparent – the most recent placements occurred ahead of their year-end. Stub earnings are tonking along, propped up by the energy division. All things considered, AC looks interesting here.

(link to my insight: StubWorld: Ai Ya! – Ayala Corp Tanking On Possible “Portfolio Rebalancing”)


First Pacific Co (142 HK)

Curtis Lehnert revisits this holdco, having first propositioned a set-up trade back in early December. The trade is moving in the right direction and recent developments indicate there is room for a further narrowing in the discount.

  • In March, First Pac  announced it is exiting its 50% stake in the Goodman Fielder JV (GF) for US$300mn. First Pac will incur a US$280mn non-cash loss on the sale. Not an ideal return on a five-year investment. But this is a significant step towards narrowing the discount to NAV as GF was the second largest component of the stub (~18% of NAV). 
  • Proceeds from the sale would be used to pay down debt and for share repurchases. The company also mentioned they have identified further assets for sale outside of emerging Asia. Curtis’ take on this statement is that the Pacific Light project that operates a LNG-fired power plant in Singapore may be the next to be sold as it is the only other significant asset that is not in “emerging” Asia.
  • There is also Indofood Sukses Makmur Tbk P (INDF IJ)‘s voluntary offer for Indofood Agri Resources (IFAR SP), which I discussed in PT Indofoods’ Voluntary Offer for 74% Held Sub IFAR.
    The impact on First Pac is minor, but it is a wider sign that the group is in the midst of restructuring and streamlining its shareholdings.

(link to Curtis’ insight: TRADE IDEA – First Pacific (142 HK) Stub: Assets Sales Pave the Way to a Narrower Discount to NAV)

M&A – ASIA-PAC

Kosaido Co Ltd (7868 JP) (Mkt Cap: $172mn; Liquidity: $2mn)

Kosaido came out with lower “forecasts” for the year to this past 31 March, which consisted of (possibly kitchen-sinking) writedowns in relations to the funeral parlor business and writedowns and weakness in the info business. The OTHER news is that Kosaido’s independent directors came out “neutral” on the Murakami Tender Offer at ¥750/share. 

So… Kosaido directors WERE able to recommend minorities sell their shares into a ¥610/share Offer (against a ¥1100/share book value and positive earnings) a few months ago, but now cannot recommend to shareholders that they take ¥750/share against a lower book value per share, when the company is making a loss – part of which is almost certainly due to bad management.

  • The Murakami bid is ¥750. It is not supported by Kosaido, is still well below BVPS (which is now lower than at the start of the Tender) and the Murakami bid is not designed to squeeze out minorities. If you do not tender, even if it DOES succeed, there is zero guarantee that the backend will trade higher than the current price or the Tender Offer Price. 
  • The Bull Case here is that Minami Aoyama Real Estate gets 51%, then replaces all the directors at both Kosaido and Tokyo Hakuzen, and then embarks on an asset-lightening exercise to fund rehabilitation, then sells off the parts to deliver book value to investors. 
  • The Bear Case is that there is no successful tender, and the shares fall back to some level lower than here as punters bail and then the Murakami group scoops up more stock lower. The Worse Bear Case is that the company simply cannot rescue itself. It has had years to fix an obviously weak “info” business and it has not done so. 
  • The Base Case could be seen that the tender goes through, Murakami gets 51%, then it takes a while for anything to happen, things come out less than optimal, and because Murakami-san gets to consolidate, he doesn’t care about his mark-to-market. But you will.

(link to Travis’ insight: Kosaido: The Bull Case, The Bear Case, and the Base Case)


Automotive Holdings (AHG AU) (Mkt Cap: $560mn; Liquidity: $2mn)

Ap Eagers Ltd (APE AU) has now dispatched the Bidder’s Statement for its all-scrip (1 APE share for every 3.8 AHG shares) offer for AHG. The Offer is conditional on ACCC approval and no MACs. There is no minimum acceptance (shares tendered are irrevocable, which hasn’t stopped what appears to be Perpetual tendering in its 9.2% stake to the IAF) threshold nor finance condition or due diligence. AHG recommends shareholders take no action as it considers the proposal to be highly conditional and that AHG trades through terms.

  • The merged AHG/APE is expected to exact pre-tax cost synergies (according to APE) of $13.5mn annually.  Although he agrees the merger rationale to have merit, AHG’s CEO John McConnell argues synergies “may be a bit light by the way we’re looking at it”. APE’s CEO Martin Ward countered estimates may potentially increase with the benefit of a full operational review.
  • With AHG’s share price languishing, there is a hint of opportunism to APE’s Offer. But not a lot – the scrip ratio is not unreasonable when viewed from a 1M, 3M and 6M viewpoint. Only when the timeframe extends further out to one-year (3.52x) and beyond does the ratio appear to take advantage.
  • With car dealerships under the hammer amidst declining new vehicle sales, the benefits from a merger are apparent. This Offer may just require a small kiss to terms to get all parties on board. The premium to terms has come in since Perpetual tendered.

(link to my insight: AHG & AP Eagers – Smart Carma)


Yungtay Engineering (1507 TT) (Mkt Cap: $800mn; Liquidity: $1mn)

The tender results gets Hitachi ~39.7% of shares out. Hitachi got about 28% of the non-Hitachi and non-Hsu Cho-Li shares in the tender. 70+% of what was possible did not tender. This cannot be seen as a big victory for Hitachi and they know it. They do not have the “control” to consolidate as evidenced by the EGM spat. Travis expects this has now turned into a waiting game for them. 

  • At the EGM on the 18th April, the Hitachi/Yungtay side got three directors, the “Market Faction” led by the The Baojia Group and dissident cousin to the former chairman (Hsu Tso-Li) Hsu Tso-Ming (who is now General Manager of Yungtay China) and including the representative entities of Schindler Holding Ag (SCHN SW) and United Technologies (UTX US)‘s Otis Elevators business – which combined have 11+% between them – obtained three seats, and then three independent director slots were filled with one coming from the management slate, and two coming from the Market Faction. The “opposition” had in some way “won” management rights.
  • Baojia Group and Hsu Tso-Ming plus Otis and Schindler will find it difficult to win enough to oust Hitachi. They can’t force capital decisions because Hitachi has negative control. They can only hope to greenmail Hitachi, or grow the company out from under them. A second tender offer by Hitachi was rumoured apparently, but Hitachi stomped on that rumour immediately.
  • Minority shareholders are left with a much less liquid instrument than before, which is expensive and has a kind of takeover premium built in when Travis expects there are few chances of a near-term takeover.

(link to Travis’ insight: Hitachi Deal for Yungtay Completes But Control Is Elusive)


SK Hynix Inc (000660 KS) (Mkt Cap: $47bn; Liquidity: $221mn)

On April 22nd, it was reported that SK Hynix is interested in acquiring MagnaChip Semiconductor Corp (MX US)‘s foundry business. Magnachip (market cap of US$316mn) employs about 2,500 people in the Cheongju and Gumi fab facilities and R&D centers in Korea. The foundry business currently represents about 45% of Magnachip’s sales.

  • In 2017, SK Hynix launched the SK Hynix System IC which focuses on the foundry business.  There have been numerous speculations about a potential M&A of various foundry businesses by either Samsung Electronics and SK Hynix in the past year. Recently, Global Foundries, the world’s third largest foundry player, has been looking for a buyer of its 300 mm fab (Fab 7) in Woodland, Singapore. Neither Samsung or SK Hynix have expressed interest.
  • It has been noted that the final bidders for the Magnachip foundry business may also include China’s Jian Guang Asset Management, and SMIC (China). Although this is a small scale deal, Douglas Kim believes SK Hynix would be the best fit as it would accelerate the company’s ambitions in the foundry business, which would be negative for the industry leaders Taiwan Semiconductor Manufacturing Company (TSMC) (2330 TT) and Samsung. 

(link to Douglas’ insight: Korea M&A Spotlight: SK Hynix to Acquire Magnachip’s Foundry Business?)


Ki Holdings (6747 JP) (Mkt Cap: $169mn; Liquidity: $0.3mn)

Koito Manufacturing (7276 JP)  announced a Tender Offer to take out the minority shareholders in Ki Holdings. This has been long-awaited and long-needed. However, the modalities of how this is getting done are symptomatic of a shocking lack of good governance process. This deal effectively requires zero independent-thinking, economically-motivated investors to tender to make it a success and force minority squeezeout and delisting. This deal can almost certainly be accomplished with every single one of them refusing to participate.

  • The company needs 66.7% to get this over the hump and the combination of the parent and existing financial and corporate cross-holders would put this over 67% quite easily. This tender offer effectively requires zero non-crossholder shareholders to tender to make it a success.
  • Is the Tender Offer Price at least in the middle of the DCF range? No. Did either the Target or the Buyer obtain Fairness Opinions? No. Does the forward forecast for this year look like it is low-balled? Yes.

  • This is a done deal, and there is not much you can do about it unless you take the appraisal rights route.

(link to Travis’ insight: Koito Mfg (7276) Finally Announces TOB for KI Holdings (6747) Subsidiary)


Hanergy Thin Film Power (566 HK) (Mkt Cap: N/A; Liquidity: N/A)

The Scheme Document has been dispatched with a court meeting tabled for the 18 May 2018. The terms remain unchanged from the initial announcement on the 26 February – the proposal is one SPV share for each Scheme share. The ultimate objective of the proposal is to list the company on a stock exchange in the PRC; however, it is not certain whether the A-share listing can be achieved.

  • We now know the SPV is incorporated in the BVI. Interestingly, “independent” shareholders now comprise 40.51% of shares out, up from 32.49% in the February announcement, after the Offeror’s stake (in concert with subsidiaries) has fallen to 40.14% (16.9bn shares) from 20.3bn, apparently after the enforcement of a share mortgage.  As a result of this adjustment, the 10% blocking stake at the court meeting has increased to 4.05% from 3.25%.
  • Questions remain as to the ease in which independent shareholders can sell unlisted shares, should the Scheme fail, under Bermuda Company Law and the Articles (a delisting procedure will commence if Hanergy does not resume trading before the end of July) or sell SPV shares should the Scheme pass, under BVI rules and the SPV constitution.
  • For shareholders angling for the A-share exposure, the SPV route appears preferable, or at least fast-tracks proceedings – there is no guarantee – as it silos independent shareholders into a separate entity which, according to PRC law, facilitates the A-share application. On account of this perceived accelerated A-share application submission under the SPV, I recommend shareholders vote for the Scheme.

(link to my insight: The Hanergy Dilemma: Vote For The Scheme)

M&A – US

Anadarko Petroleum (APC US) (Mkt Cap: $32bn; Liquidity: $400mn)

Occidental Petroleum (OXY US) announced a proposal to acquire Anadarko, potentially upsetting the Chevron Corp (CVX US) definitive merger agreement to acquire Anadarko. OXY proposed a 50/50 cash/stock deal comprised of $38 cash plus 0.6094 OXY shares per APC share, or a headline value of $76 per share, a nearly 20% premium to the implied $63.46 value of Chevron’s deal based on Chevron’s closing price of $122.02 on April 23rd.

  • OXY would need to issue about 309mn shares to fund the stock portion of its proposal, which is about 41% of its current share count, and would leave the combined company owned 71% by current OXY shareholders and 29% by current APC shareholders. Such a large share issuance will require the approval of OXY shareholders, which might present a challenge.
  • OXY’s CEO Vicki Hollub justified the pursuit of APC by claiming OXY is best equipped to exploit APC’s Permian Basin and DJ basin assets, stating that Oxy is “the right acquirer for Anadarko Petroleum because we can get the most out of shale.”
  • If the Board of APC determines that the OXY proposal is a Superior Proposal, CVX will have four business days to revise (improve) terms. If OXY then improves its proposal so it is a Superior Proposal, CVX will have a further three business days to further improve its terms.
  • CVX must now decide how badly it wants this deal. John DeMasi thinks there’s a decent chance they step up. With some upside to the OXY proposal and the possibility of CVX topping OXY’s terms by enough of a margin to put it firmly ahead, he thought APC was an attractive speculative merger arbitrage situation here.

(link to John’s insight: Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath)


Briefly …

On May 31, 2018,  Spirit Realty Capital (SRC US) spun-off its lower quality and debt encumbered assets into a vehicle Spirit MTA REIT (SMTA US), leaving SRC as a triple net lease REIT that is primarily focused on single tenant retail real estate in the US. Investors have yet to buy into the transformed SRC as the value gap between it and its closest peers has actually widened. Robert Sassoon delves into why this should reverse. (link to Robert’s insight: SpinTalk:Spirit Realty Capital (SRC US)- A Rising Spirit)

OTHER M&A UPDATES

  • First Steamship (286.05mn) and Kuo Jen Hao (83.9mn) – collectively holding 24.66% in Summit Ascent Holdings (102 HK) – have sold their stakes to Suncity Group (1383 HK) @$1.94/share. After the transaction, Suncity holds 27.94% in Summit. This is still below the 30% MGO threshold. But outgoing ED John Wang also has 5% of shares out.

  • “‘Big bully’ Lynas Corp Ltd (LYC AU) must send waste home” is the headline in the AFR article (paywalled). This is quoting Malaysian government deputy minister and Kuantan MP Fuziah Salleh, who has been Lynas’ most outspoken critic.  She acknowledged Malaysia’s Cabinet is divided on the issue.

  • Indofood Agri Resources (IFAR SP)‘s Offer doc has been dispatched. The offer is now open and the first closing date is the 24 May. The Offer is conditional on PT Indofood holding 90% of shares out at the close of the offer. There is no other condition.

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

19.90%
Yue Xiu
Outside CCASS
22.00%
Prime
Outside CCASS
23.09%
Hang Seng
Outside CCASS
Dragon Mining (1712 HK)
15.15%
SHK
Outside CCASS
12.01%
HSBC
Outside CCASS
14.04%
Founder Sec
ABCI
DLC Asia (8210 HK)
11.00%
BEA
Outside CCASS
Source: HKEx

2. Renault/Nissan:  Mangalore Alert!

Screenshot%202019 04 26%20at%201.13.34%20pm

Jean-Dominique Senard, new chairman of Renault, was recruited from Michelin Group (ML FP) to replace beleaguered Renault SA (RNO FP) CEO and Chairman Carlos Ghosn after it became clear Ghosn’s position at the top of the French carmaker was untenable following his arrest and detention in Japan on a variety of corporate charges, the most serious being “breach of trust.” He took the role of chairman in January 2019. By all accounts he was quite conciliatory in meeting with Nissan Motor (7201 JP) CEO Hiroto Saikawa a few months ago, and the proposal in February was that he take the spot of former Nissan chairman Carlos Ghosn on Nissan’s board at an early April EGM.  In a March press conference in Yokohama, Senard acknowledged Nissan’s desire to maintain its independence from Renault and said “I will respect the new governance of Nissan.”

The EGM took place three weeks ago, and indeed Senard took Ghosn’s spot on the board which is for now reduced to 8 members. At the EGM, there were many upset shareholders and some calls for the whole board to resign. As discussed in Nissan Governance Outlook – Foggy Now, Sunny Later and then Nissan Governance Structure Report Out: Fog Dissipating Slowly. Sunny in Summer. Storms Next Winter? the board will see substantial turnover in June anyway because of a replacement of Greg Kelly and two natural replacements. The governance report suggests perhaps a slight enlargement of the board might be necessary as well to get enough independent members to staff all the various committees. At the EGM, Saikawa apologized profusely for the lapse in executive and board oversight but resisted calls to step down saying he would stay on until Nissan was fixed and the relationship with Renault was righted. 

Despite Senard’s conciliatory stance prior to his appointment to the board, the week after the EGM gave him his board seat, at or around the time of the first meeting of the new Alliance structure in Paris, Renault apparently again proposed to Nissan an integration of the two companies, possibly through a holding company which would own Renault and Nissan as subsidiaries (no word on whether the new effort has anything to do with Daimler reportedly looking to cut ties with the Alliance). Outside that meeting, Senard said that the Alliance needed to be rebalanced “in sprit” to counter fears among its Japanese partners that Renault wants to dominate the partnership.

This proposal was confirmed by Nissan executives in various media reports earlier this week, with the strong underlying suggestion that Nissan had rebuffed the proposal. One Asahi newspaper article saw an interesting quote: 

“I was not surprised,” a Nissan executive said of Senard’s plan. “Previously, he was taking a quiet stance. But now, he has bared his fangs.”

The confirmation of Renault’s proposal was near-explicit in a press conference after the first major board meeting since Senard’s appointment. The board meeting apparently saw Saikawa put aside any talk of capital relationship and Senard “agree” to that, and other matters were discussed. Another article suggested the existing capital tie-up should be rebalanced before being strengthened. At a press conference the next day, Saikawa was asked about the Alliance and the approach, and the same Asahi newspaper article had a really juicy morsel of a quote:

“What’s most important is Nissan’s future,” Saikawa told reporters on the morning of April 23. “The question is how we should use the alliance for our future, not how we should be used by the alliance.”

Oops.

The response by Nissan and Saikawa was apparently not well-received by Renault.

This morning’s Yomiuri had an article which says that Renault told Nissan CEO Saikawa that if he did not toe the Renault line and agree to support Renault’s plan for management integration, then Renault intended to block his reappointment as CEO at the June AGM. 

Saikawa is, as I and other insight providers on Smartkarma have said since the first hints of the Ghosn scandal, on thin ice. His reappointment in 2017 did not gain the broad shareholder support he might have wanted, then the Ghosn/governance scandal unfolded and the EGM earlier this month saw a lot of questions about why he had not resigned to take responsibility. Furthermore, given he is not far from traditional mandatory retirement age, his future as CEO is likely not long-dated.

However, there are no two ways about it…

Renault’s threat is a clear breach of the spirit of the terms of the Revised Alliance Master Agreement signed in 2015 which, based on a variety of sources (as discussed in Nissan/Renault: French State Intervention Continues in January) effectively states that Renault may not vote against the rest of the Nissan board’s recommendation and may not propose an agenda item to a Nissan General Meeting without the rest of the board’s approval. And given the newfound board-level emphasis on good governance process, having one party to an Alliance Agreement interfere in the management of Nissan by not voting for the continuation of the CEO because that party does not agree with the shareholder’s desire to take over the company would be seen as something which would interfere with Nissan governance.

It should be, and I expect will be seen by Nissan’s board and executive committee as simply unacceptable. This is not the course of action taken by a shareholder and partner who respects agreements and wants to show that it does not want to dominate future relations. 

Nissan has clearly stated that it wants to get its management and governance house in order before dealing with a change in capital tie-ups. Saikawa-san said as much quite clearly most recently on the evening of the 22nd after the board meeting. 

While Saikawa may need to go for a variety of reasons, if not supporting Renault’s capital alliance is the litmus test for being Nissan CEO, this is clearly interference in Nissan’s governance and as such will likely generate a reaction. 


War?

Maybe. 

After the conciliatory statements in January and February by Jean-Dominique Senard, I had expected both sides to dial down the tension. Mio Kato, CFA was less sanguine, seeing little hope for the Alliance longer-term. I continue to see the importance of the Alliance as a production alliance which just happens to have a capital alliance on the side. To most everyone involved – customers, workers, creditors – the production alliance matters far more than the capital alliance. For shareholders, it is clear that a well-designed capital alliance would “free up” currently “locked up” capital. The cross-holdings make Nissan and Renault together less capital efficient than if they did not have them. 

However, despite the fact Renault clearly needs to shoulder some of the blame of Nissan’s Ghosn scandal-induced governance crises, AND clearly knows that Nissan is not ready to agree on next step capital ties when production and platform are already well-integrated and Nissan has its own issues to solve in the US, in electric cars, AND the new Nissan board/governance structure is not in place, Renault pushed by the French state has tried to get Nissan to agree to integration twice so far this calendar year.

The problem for Nissan may not be the end result. The bigger problem is that Renault is pushing it at a time when they should not, and lobbing threats over the castle ramparts. For all intents and purposes, it appears Renault is trying to bully its way forward using dominance in the capital alliance, as if the treating one’s partner right is not enough to guarantee they would want to continue to enjoy the cost-savings benefits of scale.

It is difficult to see why Renault/French state is pushing this so hard when it is so obviously not the near-term path desired by its partner. 

While this news should generate a reaction from Nissan, there are timing issues. And investors should realize that in the near-term, Nissan has better tools to bring the fight to Renault than vice versa. 

A discussion ensues.

Get Straight to the Source on Smartkarma

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Brief IPOs & Placements: Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper and more

By | Daily Briefs, IPOs and Placements

In this briefing:

  1. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper
  2. Shenwan Hongyuan (申万宏源) A+H: A/H Premium and Liquidity Suggest a Quick Trade

1. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper

Growth in indonesia picked up while malaysia and singapore slowed yoy 2016 2017 6m18 10m18 chartbuilder

Leong Hup International (LEHUP MK) plans to raise up to US$250m in its Malaysian IPO. The deal seems to have been downsized from the earlier touted US$400m raising. Although the company has managed to get cornerstone investors to take up 45% of the deal.

I’ve covered the fundamental aspects of the deal in my earlier insight:

In this insight, I’ll talk about the updates since the previous filing, comment on valuations and run the deal through our ECM framework.

2. Shenwan Hongyuan (申万宏源) A+H: A/H Premium and Liquidity Suggest a Quick Trade

First%20day%20trading

Shenwan Hongyuan Group (H) (218 HK) raised USD 1.1 billion at HKD 3.63/share at the low end of price guidance. We have previously covered the IPO in:

In this insight, we will update on the deal dynamics, valuation and provide our thoughts on a post-IPO trade.

Get Straight to the Source on Smartkarma

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Brief Equities Bottom-Up: ZOZO: No More Thank Yous and Less Profit Too and more

By | Bottom-Up Equities, Daily Briefs

In this briefing:

  1. ZOZO: No More Thank Yous and Less Profit Too

1. ZOZO: No More Thank Yous and Less Profit Too

Zozoresults

ZOZO’s (3092 JP) announced its FY18 results today, with operating profit down 21% despite sales increasing by 20.3%.

What was more surprising was a clear sign of retreat and even some humility as the online fashion mall announced it would end its disastrous Zozoarigato campaign.

Merchants are delighted but the damage has already been done and it will take time to repair merchant trust at a time when headwinds are building for Zozotown and the private brand is no longer expected to deliver growth as forecast.

The company is much less optimistic about growth for the current year; it forecasts a 24.7% increase in OP to ¥32 billion but much slower GMV growth of just 13.6% to ¥367 billion. The private brand will shrink by 38.5% to just ¥1.7 billion.

Get Straight to the Source on Smartkarma

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