Australia

In this briefing:

1. Last Week in Event SPACE: Danamon, Kidman, Melco, Naspers, Anadarko, Scout24, Doosan
2. Wesfarmers Gets Hooked On Kidman’s Lithium
3. Vietnam’s Big Investment Secret: Foreign Inflows Surge

1. Last Week in Event SPACE: Danamon, Kidman, Melco, Naspers, Anadarko, Scout24, Doosan

Last Week in Event SPACE …

• There was a potential for a short-term fall in Bank Danamon Indonesia (BDMN IJ) based on a sell-down of part of the original MSCI EM tracking position after it was deleted from the index and partly because MUFG needs to sell 1.6% to get to 7.5% float sooner rather than later. The share price fell. Then it fell some more, and MSCI sprung a surprise on us.
• Perhaps viewed independently, yet Wesfarmers Ltd (WES AU)‘s tilt for Kidman Resources (KDR AU) does appear a replacement for Lynas Corp Ltd (LYC AU).
• Melco Resorts & Entertainment (MLCO US)‘s buyback program may (but should not) account for Melco International Development (200 HK)‘s multi-year low implied stub.

• Naspers Ltd (NPN SJ)‘s discount to NAV appears to be priced appropriately in response to the proposed Euronext listing.

• Anadarko Petroleum (APC US)‘s board needs to extract an improved offer from Chevron Corp (CVX US) to counter the higher competing offer from Occidental Petroleum (OXY US).

• The Offer for Scout24 AG (G24 GR) will probably still get up as Pulver digs its heels in and refuses to bump.

• A detailed overview of Doosan Corp (000150 KS)‘s demerger which is scheduled to complete in October.

• Plus other events, CCASS movements and Mood Spins.

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

Bank Danamon Indonesia (BDMN IJ) (Mkt Cap: $4.8bn; Liquidity: $2mn)

After a multi-month Merger/Takeover Process which was the culmination of an 18-month three step process for Mitsubishi Ufj Financial (8306 JP) to get to 40% in Danamon then OJK approval to go higher, the legal merger is now (May 1) complete. The completion of the merger triggers three new events in the very-near to medium-term of which investors should be aware.

• There was (or at the time was expected to be) a MSCI sell-down Friday May 3 of indeterminate size – it is not clear how much of the MSCI EM tracker community sold into the deal.
  • HOWEVER .. The NEW News is that MSCI is going to implement the results of its Corporate Events Methodology Consultation. The treatment now looks at limit up/down moves/breaches which suspend trading. If a stock is suspended at limit up/down on Event Day at noon (12:00pm) local time, MSCI will issue a message postponing the event. Do read Travis’s insight – the second link below – which delves into what gaming may occur with respect to Danamon.
• There is an Exchange rule sell-down of 1.6+% of shares outstanding sometime in the next two years. Normally it would be expected relatively sooner but because the reduction in float was due to a Mandatory Take Over purchase, the grace period is 2 years by statute.
• There is a National Rule on Mandatory Takeover Residuals to stay listed which means a sell-down to get to 20% float within two years – or perhaps 5 years as one SK contributor mused (but the 5 years is unconfirmed by Travis). This will be like a new IPO or a placement will have to be made to partners.
• Lack of reliable liquidity in any direction, and likely lack of institutional interest to own the shares prior to the future required sell-down by MUFG may make this an unattractive trading bet. It is more of a fundamental bet that you wear because it is cheap.

link to Travis Lundy‘s insights:
Danamon Deal Done: Index Selling and MUFG Selldown To Come
Danamon Even Downer: MSCI Rule Change Makes For Interestinger Times

Kidman Resources (KDR AU) (Mkt Cap: $529mn; Liquidity: $2mn)

Wesfarmers Ltd (WES AU) has lobbed an indicative non-binding proposal to acquire 100% of Kidman for A$1.90/share (cash) by way of a Scheme of Arrangement. The price represents a 47.3% premium to last close and 44.4% over the 60-day VWAP. Kidman’s board supports the proposal, as do 17% of shareholders and SQM. Wesfarmers will undertake exclusive due diligence – until 29 May – during which, the two parties will negotiate a Scheme Implementation Agreement.

• This is the second large-scale acquisition of a lithium project in Western Australia in the past six months following Albemarle Corp (ALB US) signing a US$1.15bn 50:50 JV with Mineral Resources (MIN AU) to own and operate the Wodgina lithium mine in the Pilbara. This should also place the spotlight firmly on other lithium project developers such as Pilbara Minerals (PLS AU).
• This appears a pretty clean deal. The premium is substantial, key parties (Kidman’s board and SQM) are supportive, as are an initial percentage of shareholders. Certainly, Kidman is an easier transaction than Lynas and it is understandable if viewed as a replacement deal to Lynas.
• Nevertheless, a gross/annualised spread of 1.9%/6.2%, assuming late August completion, is punchy. Unless taking the view this fleshes out another suitor for Kidman, I’d be reluctant to chase this through terms. There appears no shortage of potential investments in this space.  Lithium is abundant and there is a general lack of restrictions on production. 
• Interestingly, Lynas Corp Ltd (LYC AU) has fallen as this deal has been announced, perhaps because it is seen as not imperative. So far the shares are down 7.4% from the first Lynas close after the Wesfarmers Ltd (WES AU) proposal in late March.

(link to my insight: Wesfarmers Gets Hooked On Kidman’s Lithium)

Lafarge Malaysia (LMC MK) (Mkt Cap: $764mn; Liquidity: $1mn)

LafargeHolcim Ltd (LHN SW) announced that it had come to an agreement to sell its 51% stake in Lafarge Malaysia Berhad to YTL Cement Berhad and its 91% stake in unlisted Holcim Singapore to YTL Cement Singapore PTE. This triggers a Mandatory Tender Offer for the rest of the shares of Lafarge Malaysia Berhad at RM3.75, which is a 13.64% premium to last trade, a 32% premium to 1-month VWAP, and a 47% premium to 3-month VWAP up to the last trading day. 

• As this is an unconditional offer, settlement is 10 days from acceptance, meaning you can likely get your cash a month from now. If you are an arbitrageur, at time of writing, Travis would have been a bidder on the May 3rd at RM3.72 and RM3.71 and indeed someone sold heavily at bid side at RM3.75 on Friday which means some arbitrageur got a good deal.
• If you are a Long-Only Investor, unless you are far more bullish than consensus, Travis would look to tender into this event. If you are bearish the market, wait. Don’t do anything. You are earning 10+% a year for the next month at the (then) bid side and 8% at offer side.
• Long-only investors selling the shares at RM 3.71 were likely giving up an annualized 15.7% for the next month or so. In a case like this, that is only a good idea for a long-only investor if you are extraordinarily bullish. 

(link to Travis’ insight: Lafarge Malaysia Sold to YTL – Mandatory Offer Ensues)

Ying Li International Real Estate Ltd (YINGLI SP) (Mkt Cap: $270mn; Liquidity: <$1mn)

In early April China Everbright (165 HK) announced that it had purchased the 30% stake in Ying Li International Real Estate Ltd (YINGLI SP) from founder, chairman and CEO Mr. Fang Ming at S$0.14/share. Because that got them to 58.91%, that triggered a Mandatory General Offer. It was unconditional. It is also effectively final as regards price and closing date. When Travis Lundy wrote about the situation at the time, he said there was every chance the Independent Financial Advisor would deem the Offer to be “not fair and not reasonable.”

• This week saw the dispatch of the Circular, and indeed the IFA found the deal to be not fair and not reasonable and advised the independent board members to recommend shareholders REJECT the deal. Board members followed that advice and recommended shareholders REJECT.
• The IFA said the Offer Price implied
  • a 7.1x PER
  • a Price/NAV of 0.33x and adjusted Price/NAV (adjusted for revaluation surplus on the properties) of 0.316x, so the Offer Price implied a 68.4% discount to fair, which was larger than the discount to NAV of any of the 14 comparable companies.
  • The Price/NAV was even further below the Price/NAV of the recent 8 transactions chosen as similar types of transactions.
• There isn’t much to defend the price.
• Travis remains bullish as an arb because of the payout comes in seven days after Acceptance.
• He also remains bullish the stock because it would behoove Everbright to try to clean out minorities at a later date at a narrower discount. If done at 0.6x NAV in three years, that implies a 23.5% p.a. return (compounded, excluding dividend). P/NAV of 0.65x would give a 27.2% return annually. P/NAV of 0.7x would deliver a 30.4% return per annum. And even that would be good for Everbright.

(link to Travis’ insight: )

Melco International Development (200 HK)  / Melco Resorts & Entertainment (MLCO US)

I estimated Melco’s discount to NAV at 43%, its widest in a year against a 12-month average of 31.8%. Taking a longer-term view, the implied stub is at its widest in the past seven years. News, liquidity, and momentum are with MLCO, with little to no catalyst at the Melco stub level. The stub operations are loss-making, albeit on a declining scale in recent years, but are not envisaged to turn a profit in the medium term. 

• For all intents and purposes, Melco is largely a single-stock, passive holding company. This is a structurally wide discount where the listed holding accounts for >90% of GAV. The current implied stub is extreme on a long-term basis and previously rebounded off these levels.
• The bifurcation may be due to MCLO’s new US$500mn share repurchase announced on the 8 November 2018, which followed the US$500mn program in March last year. Based on the buying under the new program discussed in the circular dispatched on the 25 April 2019, I estimated there was ~US$180mn still remaining of this latest repurchase program.
• A potential risk to the trade is that a new repurchase program is assembled in short order after this one completes; but given the daily buy-in, I don’t believe this should be so disruptive, or should justify the NAV discount at (or beyond) the current level.

(link to my insight: StubWorld: Melco’s Implied Stub At Multi-Year Low)

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

Curtis Lehnert discussed Naspers’ proposed Euronext listing and considered the current discount to NAV to be priced appropriately. He also addressed the attraction of Euronext’s dual class listing and that dividend WHT is 15% for resident corporations and only 5% for South African non-resident corporations – it is not yet known if the “NewCo” will be registered as a resident corporation or a South African non-resident corporation.

• A Dutch listed “NewCo” can help Naspers avoid paying capital gains tax on future Tencent stake sales. When Naspers sold the 2% stake of Tencent last year the company said they expect potential capital gains tax to be minimal because the shares were sold mostly to international investors. South Africa requires a 22% CGT to be paid on Tencent shares sold to SA investors.

(link to Curtis’ insight: Naspers (NPN SJ) Restructuring: You Never Lose with Koos)

Doosan Corp (000150 KS) (Mkt Cap: $1.2bn; Liquidity: $7mn)

As per a 15 April announcement, Doosan Group’s de facto holding company Doosan Corp is scheduled to undergo a 3-way demerger. Doosan Corp will be the surviving entity and will continue to act as an operating holding company. There are two new entities (opcos): Doosan Solus and Doosan Fuelcell. The split ratio is 90.60% for Doosan Corp and 3.34% and 6.06% for Doosan Solus and Doosan Fuelcell, respectively. The EGM is scheduled for Aug 13. Two requirements have to be met: two thirds of attending votes and one third of all voting votes. Upon shareholder approval, Doosan Corp shares will be suspended from Sep 27 to Oct 17. All of the three entities will be re-listed separately on the Oct 18. 

(link to Sanghyun Park‘s insight: Doosan Corp Demerger Summary)

Hansol Technics (004710 KS) (Mkt Cap: $117mn; Liquidity: $1mn)

Hansol has offered 10mn new shares to its stockholders. At a preliminary offer price of ₩5,180, the issuer raises ₩51.8bn. Forfeited shares will be offered to the public. There is no cancellation risk. Hansol’s capital increases by 45.23%. 20% is allocated to the firm’s ESOP with the remaining 80% going to the stockholders at a 0.37353 to 1 ratio. The first round pricing is scheduled for May 8. The ex-rights date is May 10. Subscription rights will be traded on May 29~June 5. Pricing will be finalised on June 10 and the listing of new shares is scheduled for July 5.

(link to Sanghyun’s insight: Hansol Technics Rights Offer Summary)

Anadarko Petroleum (APC US) (Mkt Cap: $36bn; Liquidity: $564mn)

While the combination of Anadarko with Chevron provides the better strategic rationale, according to Massimo Bellino, Anadarko’s shareholders will likely not be satisfied if the Board of Anadarko is not able to negotiate an improved offer from Chevron, in light of the much higher competing offer put on the table by Occidental Petroleum.

• The implied EV to EBITDA multiple of Chevron’s offer is at the lower end of the range of the multiples from the most recent comparable transactions. The offered premium to the target price one week prior to announcement date close of 40% does not look so generous if taking into consideration the oil price trend over the first quarter of 2019.
• If looking at the trend of the EV/Cash Flow multiples (debt adjusted) as traded by the oil majors and the US E&Ps over the last ten years, it becomes apparent that Chevron has chosen an opportune time to acquire a independent US E&P competitor.
• The bidding war for Anadarko could be signalling that while the mid-cap E&Ps will refrain from pursuing further M&A to focus on shareholder return and spending within the cash-flow, upcoming M&A activity in upstream oil and gas will involve more US large-cap E&Ps that have been significantly absent from high profile acquisitions during the oil price downturn.

(link to Massimo’s insight: Competing Bids for Anadarko Finally Break the Calm in the Upstream Oil & Gas M&A Market)

Scout24 AG (G24 GR) (Mkt Cap: $5.4bn; Liquidity: $21mn)

So there. Pulver BidCo produced an update on the Offer saying that since the publication of the Offer, Scout24 AG shareholders have approached Pulver to request an increase in the Offer price. Pulver confirmed that it will not increase the Offer price. Travis thought the price was slightly light – 17x EV/EBITDA on 2019 expected EBITDA for a company with double digit revenue growth and 50+% EBITDA margins is not an overwhelming price. He said back in March he would be a buyer at €46.01/share for the optionality. There isn’t much optionality left.

• Travis expects the deal to go through. If you disagree, you should sell now to someone who thinks it will. If you agree, there are a couple of choices.
• If you sell into the Offer, your money isn’t coming for a while. 
  • If you are bearish the market overall, you can hold and you have something which won’t go down in price for a bit because there would be an Additional Acceptance Period which would allow you to “be invested” but have a cash-equivalent in the portfolio.
  • If you are a long-only investor and bullish the market overall, he’d sell and reallocate funds elsewhere.
• If you are an arbitrageur, you still have a free short-term put option if you think it is going through, but Travis is not sure the effective call option (of stock plus a put) is worth anything.

(link to Travis’ insight: Scout24 Offer Final: Time To Unwind)

Independent News and Media Plc (INM LN) (Mkt Cap: $160mn; Liquidity: $1mm)

The Board of INM have unanimously recommended a €0.105/share cash offer, by way of a Scheme, from Mediahuis NV. The Offer price is a 44% premium to the undisturbed price of €0.0728 and 63% premium to the 30-day VWAP. The Offer values INM at ~€145.6m. Mediahuis received irrevocable undertakings from Denis O’Brien (29.88%) and Dermot Desmond (15%). Then subsequently bought 26% from these two shareholders, effectively blocking a rival offer. Mediahuis has the option of switching to a takeover offer which would require just 5% of shares out to secure majority control.  

• INM had cash reserves of €81.7mn as at FY18, therefore Mediahuis is paying ~€64mn (net) to acquire INM or a trailing PER of 7x – well below its peer group average. Still, INM has recorded three consecutive years of negative growth, with 2018 net income down 28% yoy and 87% from FY15.
• INM’s share price has also taken a beating in response to a government scandal and investigation, which has entangled its major shareholder (O’Brien). That negative overhang persists as court-appointed inspectors continue to investigate a 2014 data breach. Even with the removal of the investigation, there is no assurance of a turnaround in INM’s financial fortunes, nor any obvious catalyst for expecting one.
• O’Brien will take home €43.5mn from the sale of his stake. It is estimated he paid ~€500mn accumulating his stake over a 13-year period. That’s a non-negligible loss on investment, all but suggesting minorities should similarly cut their losses. INM’s share price has tracked its earnings demise. Rightly, shareholders should have exited earlier. Now they should take the cash.

(link to my insight: Independent News & Media And The Survival Of Ink)

Sanghyun discussed Korea’s actively trading ADRs, and specifically highlighted the LGD DR discount. It hit a new yearly low at -4.05% the previous Wednesday, Apr 24, which was more than a 4ppt drop from the 3-month mean. LGD shares are highly susceptible to currency fluctuation and he expects a high level of fluctuation in USD:KRW ER. This may pave the way for an even wider divergence in the short-term. 

(link to Sanghyun’s insight: Korea ADR List & Current Status Check: LG Display DR Situation Is Interesting)

For the month of April, 10 new deals were discussed on Smartkarma with an overall announced deal size of ~US$46bn. The does not include: Wynn Resorts (WYNN US)‘s on/off again bid for Crown Resorts (CWN AU) which had an indicative offer size of US$7bn; and IPH Ltd (IPH AU)‘s ~US$100mn offer for Xenith Ip (XIP AU) as it is an ongoing deal.

The average premium to last close for the new deals announced in April was 20% – bolstered by Anadarko and Ki Holdings (6747 JP) – while the average for the four months of 2019 is ~30%.

(link to my insight: Asia M&A: April 2019 Roundup)

• ISS is understood to have recommended shareholders vote for Harbin Electric Co Ltd H (1133 HK)‘s scheme. 8.35% of shares out have now tendered. The H share meeting is to be held on the 7 May.

• According to The Australian newspaper, Aveo Group (AOG AU) was in talks with a bidder who may be prepared to make an offer valuing the company at A$2.50-A$2.70/share.

• Healthscope Ltd (HSO AU) announced that Australian Super, the holder of approximately
  15.86% of issued shares, said it intends to vote in favour of the Scheme, subject to there being no proposal that it considers superior before the vote.

• Acceptances into the acceptance facility (22.5%) plus Ap Eagers Ltd (APE AU)‘s 28.85% holding indicates more than 50% of Automotive Holdings (AHG AU) shares support AP Eagers’ Offer for AHG.

• The MGO for Hong Kong International Construction Investment Management Group Co., (687 HK) has closed with Blackstone holding 86.28%. Shares are suspended and Blackstone will take the necessary steps to restore the float.
• The scheme doc for China Power New Energy Development Co (735 HK) is now expected to be dispatched on or before the 21 June, out from 2 May previously.
• Earthport plc (EPO LN)‘s Offer by VISA goes unconditional. Offer remains open until further notice.
• Superloop Ltd (SLC AU) receives a non-binding indicative proposal of $1.95/share from QIC.

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.   

2. Wesfarmers Gets Hooked On Kidman’s Lithium

Wesfarmers Ltd (WES AU) has entered into a Process and Exclusivity (P&E) Deed with Kidman Resources (KDR AU) to acquire 100% of Kidman for A$1.90/share (cash) by way of a Scheme of Arrangement. The price represents a 47.3% premium to last close and 44.4% over the 60-day VWAP.

Kidman’s board supports the proposal. Under the P&E, Wesfarmers will undertake exclusive due diligence – until no later than 29 May – during which, the two parties will negotiate a Scheme Implementation Agreement.

Shareholders with ~17% of Kidman shares, including EDM Trading and Western Areas (WSA AU),  have indicated their support for the proposal and have entered into voting agreements with Wesfarmers.

Kidman’s key asset is a 50% interest in the Mt. Holland lithium mine in Western Australia, which is jointly owned with Sociedad Quimica y Minera de Chile (SQM). SQM has indicated it supports Wesfarmers’ proposal.

Wesfarmers’ CEO Rob Scott said the acquisition (of Kidman oxide) “provides opportunity to invest in and develop a large-scale, long-life and high-grade lithium hydroxide project in WA“, to capitalise on the demand for lithium from makers of electric vehicles. Kidman announced last year a lithium hydroxide off-take agreement with Tesla Motors (TSLA US), and has signed additional off-take agreements with Mitsui and LG Chem late 2018.

Wesfarmers believes its share of the development costs to be ~A$600mn. This extends to the development of the Mt Holland mine and a 45,000-tonne p.a. lithium hydroxide plant in Kwinana (south of Perth). Subject to approvals, the construction of the plant is expected to begin next year, with production targeted for 2021-22.

This space is heating up – China’s Tianqi Lithium’s 24,000 tonne/year refinery at Kwinana is in commissioning; while its 49% partner in the Greenbushes’ lithium mine, Albemarle Corp (ALB US) is to develop its own plant at Kemerton near Bunbury (south of Perth), which is expected to produce up to 100,000 tonnes/year of lithium hydroxide monohydrate from five 20,000 tonnes/year process trains.

How does this affect (or tie-in with) Wesfarmers’ Lynas Corp Ltd (LYC AU) bid? Scott added that Wesfarmers sees Kidman and Lynas as independent opportunities and “we will consider each separately“. Certainly Kidman is an easier transaction than Lynas and it is understandable if viewed as a replacement deal to Lynas.

This is an indicative non-binding proposal, however, the support from 17% of shareholders and backing from SQM and Kidman’s board indicate advanced discussions.

Nevertheless, a gross/annualised spread of 1.6%/5.2%, assuming late August completion, is punchy. Unless taking the view this fleshes out another suitor for Kidman. I’d be reluctant to chase this through terms.

3. Vietnam’s Big Investment Secret: Foreign Inflows Surge

• March saw another strong month of cross-border capital inflows into Vietnam financial assets
• Underlying flow index shows strong momentum hits value 76.9 (range 0-100)
• Vietnam flows are moving with similar cross-border flow cycle as China and Asian EM

In this briefing:

1. Last Week in Event SPACE: Danamon, Kidman, Melco, Naspers, Anadarko, Scout24, Doosan
2. Wesfarmers Gets Hooked On Kidman’s Lithium
3. Vietnam’s Big Investment Secret: Foreign Inflows Surge
4. Quality Counts: A Screen of ASX 200 Earnings Quality

1. Last Week in Event SPACE: Danamon, Kidman, Melco, Naspers, Anadarko, Scout24, Doosan

Last Week in Event SPACE …

• There was a potential for a short-term fall in Bank Danamon Indonesia (BDMN IJ) based on a sell-down of part of the original MSCI EM tracking position after it was deleted from the index and partly because MUFG needs to sell 1.6% to get to 7.5% float sooner rather than later. The share price fell. Then it fell some more, and MSCI sprung a surprise on us.
• Perhaps viewed independently, yet Wesfarmers Ltd (WES AU)‘s tilt for Kidman Resources (KDR AU) does appear a replacement for Lynas Corp Ltd (LYC AU).
• Melco Resorts & Entertainment (MLCO US)‘s buyback program may (but should not) account for Melco International Development (200 HK)‘s multi-year low implied stub.

• Naspers Ltd (NPN SJ)‘s discount to NAV appears to be priced appropriately in response to the proposed Euronext listing.

• Anadarko Petroleum (APC US)‘s board needs to extract an improved offer from Chevron Corp (CVX US) to counter the higher competing offer from Occidental Petroleum (OXY US).

• The Offer for Scout24 AG (G24 GR) will probably still get up as Pulver digs its heels in and refuses to bump.

• A detailed overview of Doosan Corp (000150 KS)‘s demerger which is scheduled to complete in October.

• Plus other events, CCASS movements and Mood Spins.

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

Bank Danamon Indonesia (BDMN IJ) (Mkt Cap: $4.8bn; Liquidity: $2mn)

After a multi-month Merger/Takeover Process which was the culmination of an 18-month three step process for Mitsubishi Ufj Financial (8306 JP) to get to 40% in Danamon then OJK approval to go higher, the legal merger is now (May 1) complete. The completion of the merger triggers three new events in the very-near to medium-term of which investors should be aware.

• There was (or at the time was expected to be) a MSCI sell-down Friday May 3 of indeterminate size – it is not clear how much of the MSCI EM tracker community sold into the deal.
  • HOWEVER .. The NEW News is that MSCI is going to implement the results of its Corporate Events Methodology Consultation. The treatment now looks at limit up/down moves/breaches which suspend trading. If a stock is suspended at limit up/down on Event Day at noon (12:00pm) local time, MSCI will issue a message postponing the event. Do read Travis’s insight – the second link below – which delves into what gaming may occur with respect to Danamon.
• There is an Exchange rule sell-down of 1.6+% of shares outstanding sometime in the next two years. Normally it would be expected relatively sooner but because the reduction in float was due to a Mandatory Take Over purchase, the grace period is 2 years by statute.
• There is a National Rule on Mandatory Takeover Residuals to stay listed which means a sell-down to get to 20% float within two years – or perhaps 5 years as one SK contributor mused (but the 5 years is unconfirmed by Travis). This will be like a new IPO or a placement will have to be made to partners.
• Lack of reliable liquidity in any direction, and likely lack of institutional interest to own the shares prior to the future required sell-down by MUFG may make this an unattractive trading bet. It is more of a fundamental bet that you wear because it is cheap.

link to Travis Lundy‘s insights:
Danamon Deal Done: Index Selling and MUFG Selldown To Come
Danamon Even Downer: MSCI Rule Change Makes For Interestinger Times

Kidman Resources (KDR AU) (Mkt Cap: $529mn; Liquidity: $2mn)

Wesfarmers Ltd (WES AU) has lobbed an indicative non-binding proposal to acquire 100% of Kidman for A$1.90/share (cash) by way of a Scheme of Arrangement. The price represents a 47.3% premium to last close and 44.4% over the 60-day VWAP. Kidman’s board supports the proposal, as do 17% of shareholders and SQM. Wesfarmers will undertake exclusive due diligence – until 29 May – during which, the two parties will negotiate a Scheme Implementation Agreement.

• This is the second large-scale acquisition of a lithium project in Western Australia in the past six months following Albemarle Corp (ALB US) signing a US$1.15bn 50:50 JV with Mineral Resources (MIN AU) to own and operate the Wodgina lithium mine in the Pilbara. This should also place the spotlight firmly on other lithium project developers such as Pilbara Minerals (PLS AU).
• This appears a pretty clean deal. The premium is substantial, key parties (Kidman’s board and SQM) are supportive, as are an initial percentage of shareholders. Certainly, Kidman is an easier transaction than Lynas and it is understandable if viewed as a replacement deal to Lynas.
• Nevertheless, a gross/annualised spread of 1.9%/6.2%, assuming late August completion, is punchy. Unless taking the view this fleshes out another suitor for Kidman, I’d be reluctant to chase this through terms. There appears no shortage of potential investments in this space.  Lithium is abundant and there is a general lack of restrictions on production. 
• Interestingly, Lynas Corp Ltd (LYC AU) has fallen as this deal has been announced, perhaps because it is seen as not imperative. So far the shares are down 7.4% from the first Lynas close after the Wesfarmers Ltd (WES AU) proposal in late March.

(link to my insight: Wesfarmers Gets Hooked On Kidman’s Lithium)

Lafarge Malaysia (LMC MK) (Mkt Cap: $764mn; Liquidity: $1mn)

LafargeHolcim Ltd (LHN SW) announced that it had come to an agreement to sell its 51% stake in Lafarge Malaysia Berhad to YTL Cement Berhad and its 91% stake in unlisted Holcim Singapore to YTL Cement Singapore PTE. This triggers a Mandatory Tender Offer for the rest of the shares of Lafarge Malaysia Berhad at RM3.75, which is a 13.64% premium to last trade, a 32% premium to 1-month VWAP, and a 47% premium to 3-month VWAP up to the last trading day. 

• As this is an unconditional offer, settlement is 10 days from acceptance, meaning you can likely get your cash a month from now. If you are an arbitrageur, at time of writing, Travis would have been a bidder on the May 3rd at RM3.72 and RM3.71 and indeed someone sold heavily at bid side at RM3.75 on Friday which means some arbitrageur got a good deal.
• If you are a Long-Only Investor, unless you are far more bullish than consensus, Travis would look to tender into this event. If you are bearish the market, wait. Don’t do anything. You are earning 10+% a year for the next month at the (then) bid side and 8% at offer side.
• Long-only investors selling the shares at RM 3.71 were likely giving up an annualized 15.7% for the next month or so. In a case like this, that is only a good idea for a long-only investor if you are extraordinarily bullish. 

(link to Travis’ insight: Lafarge Malaysia Sold to YTL – Mandatory Offer Ensues)

Ying Li International Real Estate Ltd (YINGLI SP) (Mkt Cap: $270mn; Liquidity: <$1mn)

In early April China Everbright (165 HK) announced that it had purchased the 30% stake in Ying Li International Real Estate Ltd (YINGLI SP) from founder, chairman and CEO Mr. Fang Ming at S$0.14/share. Because that got them to 58.91%, that triggered a Mandatory General Offer. It was unconditional. It is also effectively final as regards price and closing date. When Travis Lundy wrote about the situation at the time, he said there was every chance the Independent Financial Advisor would deem the Offer to be “not fair and not reasonable.”

• This week saw the dispatch of the Circular, and indeed the IFA found the deal to be not fair and not reasonable and advised the independent board members to recommend shareholders REJECT the deal. Board members followed that advice and recommended shareholders REJECT.
• The IFA said the Offer Price implied
  • a 7.1x PER
  • a Price/NAV of 0.33x and adjusted Price/NAV (adjusted for revaluation surplus on the properties) of 0.316x, so the Offer Price implied a 68.4% discount to fair, which was larger than the discount to NAV of any of the 14 comparable companies.
  • The Price/NAV was even further below the Price/NAV of the recent 8 transactions chosen as similar types of transactions.
• There isn’t much to defend the price.
• Travis remains bullish as an arb because of the payout comes in seven days after Acceptance.
• He also remains bullish the stock because it would behoove Everbright to try to clean out minorities at a later date at a narrower discount. If done at 0.6x NAV in three years, that implies a 23.5% p.a. return (compounded, excluding dividend). P/NAV of 0.65x would give a 27.2% return annually. P/NAV of 0.7x would deliver a 30.4% return per annum. And even that would be good for Everbright.

(link to Travis’ insight: )

Melco International Development (200 HK)  / Melco Resorts & Entertainment (MLCO US)

I estimated Melco’s discount to NAV at 43%, its widest in a year against a 12-month average of 31.8%. Taking a longer-term view, the implied stub is at its widest in the past seven years. News, liquidity, and momentum are with MLCO, with little to no catalyst at the Melco stub level. The stub operations are loss-making, albeit on a declining scale in recent years, but are not envisaged to turn a profit in the medium term. 

• For all intents and purposes, Melco is largely a single-stock, passive holding company. This is a structurally wide discount where the listed holding accounts for >90% of GAV. The current implied stub is extreme on a long-term basis and previously rebounded off these levels.
• The bifurcation may be due to MCLO’s new US$500mn share repurchase announced on the 8 November 2018, which followed the US$500mn program in March last year. Based on the buying under the new program discussed in the circular dispatched on the 25 April 2019, I estimated there was ~US$180mn still remaining of this latest repurchase program.
• A potential risk to the trade is that a new repurchase program is assembled in short order after this one completes; but given the daily buy-in, I don’t believe this should be so disruptive, or should justify the NAV discount at (or beyond) the current level.

(link to my insight: StubWorld: Melco’s Implied Stub At Multi-Year Low)

Naspers Ltd (NPN SJ) / Tencent Holdings (700 HK)

Curtis Lehnert discussed Naspers’ proposed Euronext listing and considered the current discount to NAV to be priced appropriately. He also addressed the attraction of Euronext’s dual class listing and that dividend WHT is 15% for resident corporations and only 5% for South African non-resident corporations – it is not yet known if the “NewCo” will be registered as a resident corporation or a South African non-resident corporation.

• A Dutch listed “NewCo” can help Naspers avoid paying capital gains tax on future Tencent stake sales. When Naspers sold the 2% stake of Tencent last year the company said they expect potential capital gains tax to be minimal because the shares were sold mostly to international investors. South Africa requires a 22% CGT to be paid on Tencent shares sold to SA investors.

(link to Curtis’ insight: Naspers (NPN SJ) Restructuring: You Never Lose with Koos)

Doosan Corp (000150 KS) (Mkt Cap: $1.2bn; Liquidity: $7mn)

As per a 15 April announcement, Doosan Group’s de facto holding company Doosan Corp is scheduled to undergo a 3-way demerger. Doosan Corp will be the surviving entity and will continue to act as an operating holding company. There are two new entities (opcos): Doosan Solus and Doosan Fuelcell. The split ratio is 90.60% for Doosan Corp and 3.34% and 6.06% for Doosan Solus and Doosan Fuelcell, respectively. The EGM is scheduled for Aug 13. Two requirements have to be met: two thirds of attending votes and one third of all voting votes. Upon shareholder approval, Doosan Corp shares will be suspended from Sep 27 to Oct 17. All of the three entities will be re-listed separately on the Oct 18. 

(link to Sanghyun Park‘s insight: Doosan Corp Demerger Summary)

Hansol Technics (004710 KS) (Mkt Cap: $117mn; Liquidity: $1mn)

Hansol has offered 10mn new shares to its stockholders. At a preliminary offer price of ₩5,180, the issuer raises ₩51.8bn. Forfeited shares will be offered to the public. There is no cancellation risk. Hansol’s capital increases by 45.23%. 20% is allocated to the firm’s ESOP with the remaining 80% going to the stockholders at a 0.37353 to 1 ratio. The first round pricing is scheduled for May 8. The ex-rights date is May 10. Subscription rights will be traded on May 29~June 5. Pricing will be finalised on June 10 and the listing of new shares is scheduled for July 5.

(link to Sanghyun’s insight: Hansol Technics Rights Offer Summary)

Anadarko Petroleum (APC US) (Mkt Cap: $36bn; Liquidity: $564mn)

While the combination of Anadarko with Chevron provides the better strategic rationale, according to Massimo Bellino, Anadarko’s shareholders will likely not be satisfied if the Board of Anadarko is not able to negotiate an improved offer from Chevron, in light of the much higher competing offer put on the table by Occidental Petroleum.

• The implied EV to EBITDA multiple of Chevron’s offer is at the lower end of the range of the multiples from the most recent comparable transactions. The offered premium to the target price one week prior to announcement date close of 40% does not look so generous if taking into consideration the oil price trend over the first quarter of 2019.
• If looking at the trend of the EV/Cash Flow multiples (debt adjusted) as traded by the oil majors and the US E&Ps over the last ten years, it becomes apparent that Chevron has chosen an opportune time to acquire a independent US E&P competitor.
• The bidding war for Anadarko could be signalling that while the mid-cap E&Ps will refrain from pursuing further M&A to focus on shareholder return and spending within the cash-flow, upcoming M&A activity in upstream oil and gas will involve more US large-cap E&Ps that have been significantly absent from high profile acquisitions during the oil price downturn.

(link to Massimo’s insight: Competing Bids for Anadarko Finally Break the Calm in the Upstream Oil & Gas M&A Market)

Scout24 AG (G24 GR) (Mkt Cap: $5.4bn; Liquidity: $21mn)

So there. Pulver BidCo produced an update on the Offer saying that since the publication of the Offer, Scout24 AG shareholders have approached Pulver to request an increase in the Offer price. Pulver confirmed that it will not increase the Offer price. Travis thought the price was slightly light – 17x EV/EBITDA on 2019 expected EBITDA for a company with double digit revenue growth and 50+% EBITDA margins is not an overwhelming price. He said back in March he would be a buyer at €46.01/share for the optionality. There isn’t much optionality left.

• Travis expects the deal to go through. If you disagree, you should sell now to someone who thinks it will. If you agree, there are a couple of choices.
• If you sell into the Offer, your money isn’t coming for a while. 
  • If you are bearish the market overall, you can hold and you have something which won’t go down in price for a bit because there would be an Additional Acceptance Period which would allow you to “be invested” but have a cash-equivalent in the portfolio.
  • If you are a long-only investor and bullish the market overall, he’d sell and reallocate funds elsewhere.
• If you are an arbitrageur, you still have a free short-term put option if you think it is going through, but Travis is not sure the effective call option (of stock plus a put) is worth anything.

(link to Travis’ insight: Scout24 Offer Final: Time To Unwind)

Independent News and Media Plc (INM LN) (Mkt Cap: $160mn; Liquidity: $1mm)

The Board of INM have unanimously recommended a €0.105/share cash offer, by way of a Scheme, from Mediahuis NV. The Offer price is a 44% premium to the undisturbed price of €0.0728 and 63% premium to the 30-day VWAP. The Offer values INM at ~€145.6m. Mediahuis received irrevocable undertakings from Denis O’Brien (29.88%) and Dermot Desmond (15%). Then subsequently bought 26% from these two shareholders, effectively blocking a rival offer. Mediahuis has the option of switching to a takeover offer which would require just 5% of shares out to secure majority control.  

• INM had cash reserves of €81.7mn as at FY18, therefore Mediahuis is paying ~€64mn (net) to acquire INM or a trailing PER of 7x – well below its peer group average. Still, INM has recorded three consecutive years of negative growth, with 2018 net income down 28% yoy and 87% from FY15.
• INM’s share price has also taken a beating in response to a government scandal and investigation, which has entangled its major shareholder (O’Brien). That negative overhang persists as court-appointed inspectors continue to investigate a 2014 data breach. Even with the removal of the investigation, there is no assurance of a turnaround in INM’s financial fortunes, nor any obvious catalyst for expecting one.
• O’Brien will take home €43.5mn from the sale of his stake. It is estimated he paid ~€500mn accumulating his stake over a 13-year period. That’s a non-negligible loss on investment, all but suggesting minorities should similarly cut their losses. INM’s share price has tracked its earnings demise. Rightly, shareholders should have exited earlier. Now they should take the cash.

(link to my insight: Independent News & Media And The Survival Of Ink)

Sanghyun discussed Korea’s actively trading ADRs, and specifically highlighted the LGD DR discount. It hit a new yearly low at -4.05% the previous Wednesday, Apr 24, which was more than a 4ppt drop from the 3-month mean. LGD shares are highly susceptible to currency fluctuation and he expects a high level of fluctuation in USD:KRW ER. This may pave the way for an even wider divergence in the short-term. 

(link to Sanghyun’s insight: Korea ADR List & Current Status Check: LG Display DR Situation Is Interesting)

For the month of April, 10 new deals were discussed on Smartkarma with an overall announced deal size of ~US$46bn. The does not include: Wynn Resorts (WYNN US)‘s on/off again bid for Crown Resorts (CWN AU) which had an indicative offer size of US$7bn; and IPH Ltd (IPH AU)‘s ~US$100mn offer for Xenith Ip (XIP AU) as it is an ongoing deal.

The average premium to last close for the new deals announced in April was 20% – bolstered by Anadarko and Ki Holdings (6747 JP) – while the average for the four months of 2019 is ~30%.

(link to my insight: Asia M&A: April 2019 Roundup)

• ISS is understood to have recommended shareholders vote for Harbin Electric Co Ltd H (1133 HK)‘s scheme. 8.35% of shares out have now tendered. The H share meeting is to be held on the 7 May.

• According to The Australian newspaper, Aveo Group (AOG AU) was in talks with a bidder who may be prepared to make an offer valuing the company at A$2.50-A$2.70/share.

• Healthscope Ltd (HSO AU) announced that Australian Super, the holder of approximately
  15.86% of issued shares, said it intends to vote in favour of the Scheme, subject to there being no proposal that it considers superior before the vote.

• Acceptances into the acceptance facility (22.5%) plus Ap Eagers Ltd (APE AU)‘s 28.85% holding indicates more than 50% of Automotive Holdings (AHG AU) shares support AP Eagers’ Offer for AHG.

• The MGO for Hong Kong International Construction Investment Management Group Co., (687 HK) has closed with Blackstone holding 86.28%. Shares are suspended and Blackstone will take the necessary steps to restore the float.
• The scheme doc for China Power New Energy Development Co (735 HK) is now expected to be dispatched on or before the 21 June, out from 2 May previously.
• Earthport plc (EPO LN)‘s Offer by VISA goes unconditional. Offer remains open until further notice.
• Superloop Ltd (SLC AU) receives a non-binding indicative proposal of $1.95/share from QIC.

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.   

2. Wesfarmers Gets Hooked On Kidman’s Lithium

Wesfarmers Ltd (WES AU) has entered into a Process and Exclusivity (P&E) Deed with Kidman Resources (KDR AU) to acquire 100% of Kidman for A$1.90/share (cash) by way of a Scheme of Arrangement. The price represents a 47.3% premium to last close and 44.4% over the 60-day VWAP.

Kidman’s board supports the proposal. Under the P&E, Wesfarmers will undertake exclusive due diligence – until no later than 29 May – during which, the two parties will negotiate a Scheme Implementation Agreement.

Shareholders with ~17% of Kidman shares, including EDM Trading and Western Areas (WSA AU),  have indicated their support for the proposal and have entered into voting agreements with Wesfarmers.

Kidman’s key asset is a 50% interest in the Mt. Holland lithium mine in Western Australia, which is jointly owned with Sociedad Quimica y Minera de Chile (SQM). SQM has indicated it supports Wesfarmers’ proposal.

Wesfarmers’ CEO Rob Scott said the acquisition (of Kidman oxide) “provides opportunity to invest in and develop a large-scale, long-life and high-grade lithium hydroxide project in WA“, to capitalise on the demand for lithium from makers of electric vehicles. Kidman announced last year a lithium hydroxide off-take agreement with Tesla Motors (TSLA US), and has signed additional off-take agreements with Mitsui and LG Chem late 2018.

Wesfarmers believes its share of the development costs to be ~A$600mn. This extends to the development of the Mt Holland mine and a 45,000-tonne p.a. lithium hydroxide plant in Kwinana (south of Perth). Subject to approvals, the construction of the plant is expected to begin next year, with production targeted for 2021-22.

This space is heating up – China’s Tianqi Lithium’s 24,000 tonne/year refinery at Kwinana is in commissioning; while its 49% partner in the Greenbushes’ lithium mine, Albemarle Corp (ALB US) is to develop its own plant at Kemerton near Bunbury (south of Perth), which is expected to produce up to 100,000 tonnes/year of lithium hydroxide monohydrate from five 20,000 tonnes/year process trains.

How does this affect (or tie-in with) Wesfarmers’ Lynas Corp Ltd (LYC AU) bid? Scott added that Wesfarmers sees Kidman and Lynas as independent opportunities and “we will consider each separately“. Certainly Kidman is an easier transaction than Lynas and it is understandable if viewed as a replacement deal to Lynas.

This is an indicative non-binding proposal, however, the support from 17% of shareholders and backing from SQM and Kidman’s board indicate advanced discussions.

Nevertheless, a gross/annualised spread of 1.6%/5.2%, assuming late August completion, is punchy. Unless taking the view this fleshes out another suitor for Kidman. I’d be reluctant to chase this through terms.

3. Vietnam’s Big Investment Secret: Foreign Inflows Surge

• March saw another strong month of cross-border capital inflows into Vietnam financial assets
• Underlying flow index shows strong momentum hits value 76.9 (range 0-100)
• Vietnam flows are moving with similar cross-border flow cycle as China and Asian EM

4. Quality Counts: A Screen of ASX 200 Earnings Quality

• Despite relatively sluggish price performance, the ASX 200 has provided global investors with strong returns that have seen it outperform both Japan and Europe over the past few years. The market also performs well late in the global cycle when global volatility is rising because a relatively large component of returns are generated by dividends and many stocks in the ASX 200 are dominant players in their markets or they operate in small markets making earnings more defendable under late cycle cost pressures. 
• When looking at Australia as a late-cycle opportunity, earnings quality is an important screen to consider. Stocks with good earnings quality attract the highest PE multiples and the strongest Buy recommendations.  However, in this note, we screen the ASX 200 universe for both longer-term and short-term movements in earnings quality and analyse how these movements translate into returns. 
• FMG, WTC, XRO, WHC, LYC, MQG, S32, NHC, SAR, WEB have the distinction of making the top 50 stocks with the strongest earnings quality improvement and the list of top 50 stocks with the largest outperformance during the past 3 years. In contrast, TAH, SDA, NCM, and NHF have all seen large declines in earnings quality and have underperformed during this period. 
• During the most recent half-year results period, NHC, SOL, BXB, VOC, SAR, BVS, IRE, IPH, and QBE made the list of stocks with the largest improvement in earnings quality and the list of top 50 stocks with the best performance. AGL, BSL, and ASL saw the largest decline in earnings quality and this coupled with underperformance.  In contrast, STO performed well, despite having declining earnings quality suggesting some underperformance could be expected. 
• QBE is unique in that it has seen not only a strong lift in earnings quality during the half, but it has also seen its EPS growth upgraded. LNK saw a large decline in earnings quality but saw a large number of upgrades that put it in the list of top 50 most upgraded stocks during the period. 
• WTC and S32 are in our model portfolio in our recent shift to realign it towards Resources and Growth stocks after the Q4 18 sell-off. Our work quality shows they have been good earnings quality stocks and this supports our decision to include these stocks in our portfolio.

In this briefing:

1. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?

1. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?

• MimbleWimble is a powerful, positive technological development in the crypto space. There is an increasing possibility that MimbleWimble protocol may become a sidechain to Bitcoin in the future. The launch of Beam and Grin cryptocurrencies in January 2019 is likely to be just the start of many more MimbleWimble protocol based cryptos that may gain greater market acceptance. From a fundamental perspective, as an increasing number of people realize the benefits of using MimbleWimble alongside Bitcoin, this could be one of the reasons helping to drive Bitcoin price higher this year. 

• MimbleWimble is a privacy-oriented blockchain protocol which attempts to make transactions very anonymous, while still allowing for external verification on a highly scalable basis and maintaining quick verification.  

• MimbleWimble has its share of weaknesses including potential government crackdown, slow adoption of MimbleWimble based cryptos by major exchanges, and lack of scripting language.
• However, the clear superiority in anonymity, scalability, and fungibility of MimbleWimble may outweigh its negatives. All in all, MimbleWimble is one the key technological trends that will impact the cryptocurrencies/blockchain sector this year and it is worthwhile paying close attention on this technology. 

In this briefing:

1. Trump Trade Means Lynas Capex Easier
2. The Global Recovery Narrative Crumbles
3. Bitcoin, Revisited
4. Five Property Acquisitions Expected to Boost REIT Yields
5. ESR Cayman Pre-IPO – Updated Valuation and Key Risks

1. Trump Trade Means Lynas Capex Easier

The last two days have been pretty spectacular for the shares of Lynas Corp Ltd (LYC AU). While it is not clear what has changed OTHER than a heightening of tensions in the trade war, several factors may be to ‘blame.’

With the blocking of all US hardware and software sales to Huawei after a White House Executive Order on Information Security late last week (temporarily mitigated two days ago by a 90-day temporary general license aimed at easing the transition), the question on everyone’s lips was how China would respond. The first response was that China would cease doing business with anyone who ceased doing business with Huawei. That seemed a countermeasure designed to be reciprocal. 

While Huawei founder Ren Zhengei has made several public statements in Chinese social and state media (many of which appear to be abbreviated for maximum effect – read the details folks!) in recent days, the perception is that Chinese leaders have been quiet. One exception to that was a visit by China President Xi Jinping to rare earth company JL Mag Rare-Earth Co Ltd (300748 CH), in Jiangxi province on Monday. That led to rampant speculation on the share prices of Chinese rare earth companies, and the idea that it was symbolic of what China might do to the US (block rare earth exports). 

Monday the 20th May saw a pre-market release of a notification of an MOU of a JV between Lynas and US company Blue Line to create a rare earths separation facility in the US. The JV would be majority-owned by Lynas, and would initially concentrate on heavy rare earth (Dysprosium and Terbium) separation but could also include light rare earth (Neodymium, Praseodymium, Lanthanum) separation facilities at a facility on a site currently owned by Blue Line. This strikes me as an obvious thing for which a miner would issue a press release. The two companies already work together, and it promises nothing. It is, however, a project to work on working on a project, and is more designed to elicit interest from other parties to fund it.

The 21st May saw Investor Day in Sydney and the stock popped 14.4%, following that by a 7+% move on the 22nd (yesterday) temporarily clearing the highest 3mo moving average seen in the last five years.

2. The Global Recovery Narrative Crumbles

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

3. Bitcoin, Revisited

Bitcoin and the block chain were created just over ten years ago, as a means to create peer to peer transactions without the need to use financial institutions to process the payments. 

However, frequent hacks of Bitcoin exchanges, in addition to the significant past fluctuations of Bitcoin prices, have put mainstream usage off and slowed the adoption of the cryptocurrency.

Is this about to change now?

4. Five Property Acquisitions Expected to Boost REIT Yields

• Singapore’s REITs are characterised by comparatively high and stable distribution yields, in addition to potential for portfolio growth. While REIT managers are known to be cautious with balance sheets, acquisitions and secondary fund raisings continue to advance in 2019.
• In the month of May, five REITs have either announced or completed property acquisitions for their portfolios & include Frasers Centrepoint Trust, AIMS APAC REIT, Sasseur REIT, Manulife US REIT and EC World REIT. The acquisitions span Singapore, Australia, China and the US.
• In all five acquisitions, Managers have highlighted that the acquisitions would be yield accretive, i.e. boost the overall distribution yield of their respective portfolios. Currently the 34 REITs and six stapled trusts average a 6.5% distribution yield.

5. ESR Cayman Pre-IPO – Updated Valuation and Key Risks

ESR Cayman (ESR HK) aims to raise up to US$1.5bn in its planned Hong Kong listing, as per media reports. The company is backed by Warburg Pincus and counts APG as one of its main investors.

In my earlier insights:

• I touched upon the company’s business model and provided an overview of its operations, ESR Cayman Pre-IPO – A Giant in the Making; 
• Talk about the financials and the drivers for each of the three segments, ESR Cayman Pre-IPO – Earnings and Segment Analysis.
• Derived valuation for each of the segments: ESR Cayman Pre-IPO- First Stab at Valuation
• Provided Updates from the PHIP: ESR Cayman Pre-IPO – Updates from PHIP – Growth Remains on Track

In this insight, I’ll provide updated valuations based on the updates from the PHIP and talk about key risks.

In this briefing:

1. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?
2. Low Inflation May Force the RBA’s Hand in May

1. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?

• MimbleWimble is a powerful, positive technological development in the crypto space. There is an increasing possibility that MimbleWimble protocol may become a sidechain to Bitcoin in the future. The launch of Beam and Grin cryptocurrencies in January 2019 is likely to be just the start of many more MimbleWimble protocol based cryptos that may gain greater market acceptance. From a fundamental perspective, as an increasing number of people realize the benefits of using MimbleWimble alongside Bitcoin, this could be one of the reasons helping to drive Bitcoin price higher this year. 

• MimbleWimble is a privacy-oriented blockchain protocol which attempts to make transactions very anonymous, while still allowing for external verification on a highly scalable basis and maintaining quick verification.  

• MimbleWimble has its share of weaknesses including potential government crackdown, slow adoption of MimbleWimble based cryptos by major exchanges, and lack of scripting language.
• However, the clear superiority in anonymity, scalability, and fungibility of MimbleWimble may outweigh its negatives. All in all, MimbleWimble is one the key technological trends that will impact the cryptocurrencies/blockchain sector this year and it is worthwhile paying close attention on this technology. 

2. Low Inflation May Force the RBA’s Hand in May

The downside miss on inflation in Australia probably forces the RBA’s hand to cut rates.  The RBA generally doesn’t fuss too much with appearances once it changes its mind, so a cut at its next policy meeting as soon as 7 May is likely, even though it would come only weeks before the Federal election on 18 May.

One cut is unlikely to be viewed as significant enough to make a material difference on the inflation outlook, so a second cut is likely before the dust has had time to settle on the first, so within the next Month (4 June) or two (2 July).

The risk is high that a rate cut watch in Australia dominates near term AUD price action and triggers a further significant fall in the currency.

In this briefing:

1. Low Inflation May Force the RBA’s Hand in May
2. Semiconductor Revenues Collapsing, As Anticipated

1. Low Inflation May Force the RBA’s Hand in May

The downside miss on inflation in Australia probably forces the RBA’s hand to cut rates.  The RBA generally doesn’t fuss too much with appearances once it changes its mind, so a cut at its next policy meeting as soon as 7 May is likely, even though it would come only weeks before the Federal election on 18 May.

One cut is unlikely to be viewed as significant enough to make a material difference on the inflation outlook, so a second cut is likely before the dust has had time to settle on the first, so within the next Month (4 June) or two (2 July).

The risk is high that a rate cut watch in Australia dominates near term AUD price action and triggers a further significant fall in the currency.

2. Semiconductor Revenues Collapsing, As Anticipated

On April 1 the World Semiconductor Trade Statistics were released illustrating, as we anticipated, that a full-blown collapse is underway.  This Insight shows how consistently the current situation follows past trends.

In this briefing:

1. The Global Recovery Narrative Crumbles
2. Bitcoin, Revisited
3. Five Property Acquisitions Expected to Boost REIT Yields
4. ESR Cayman Pre-IPO – Updated Valuation and Key Risks
5. New J Hutton – Exploration Report (Weeks Ending 17/05/19)

1. The Global Recovery Narrative Crumbles

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

2. Bitcoin, Revisited

Bitcoin and the block chain were created just over ten years ago, as a means to create peer to peer transactions without the need to use financial institutions to process the payments. 

However, frequent hacks of Bitcoin exchanges, in addition to the significant past fluctuations of Bitcoin prices, have put mainstream usage off and slowed the adoption of the cryptocurrency.

Is this about to change now?

3. Five Property Acquisitions Expected to Boost REIT Yields

• Singapore’s REITs are characterised by comparatively high and stable distribution yields, in addition to potential for portfolio growth. While REIT managers are known to be cautious with balance sheets, acquisitions and secondary fund raisings continue to advance in 2019.
• In the month of May, five REITs have either announced or completed property acquisitions for their portfolios & include Frasers Centrepoint Trust, AIMS APAC REIT, Sasseur REIT, Manulife US REIT and EC World REIT. The acquisitions span Singapore, Australia, China and the US.
• In all five acquisitions, Managers have highlighted that the acquisitions would be yield accretive, i.e. boost the overall distribution yield of their respective portfolios. Currently the 34 REITs and six stapled trusts average a 6.5% distribution yield.

4. ESR Cayman Pre-IPO – Updated Valuation and Key Risks

ESR Cayman (ESR HK) aims to raise up to US$1.5bn in its planned Hong Kong listing, as per media reports. The company is backed by Warburg Pincus and counts APG as one of its main investors.

In my earlier insights:

• I touched upon the company’s business model and provided an overview of its operations, ESR Cayman Pre-IPO – A Giant in the Making; 
• Talk about the financials and the drivers for each of the three segments, ESR Cayman Pre-IPO – Earnings and Segment Analysis.
• Derived valuation for each of the segments: ESR Cayman Pre-IPO- First Stab at Valuation
• Provided Updates from the PHIP: ESR Cayman Pre-IPO – Updates from PHIP – Growth Remains on Track

In this insight, I’ll provide updated valuations based on the updates from the PHIP and talk about key risks.

5. New J Hutton – Exploration Report (Weeks Ending 17/05/19)

• Vale SA (VALE US) woes continue, facing another dam collapse
• Forecast seaborne iron ore market deficit >100Mt CY19
• Chinese house prices up 10% y-o-y
• Chinese Government readying substantial investment stimulus
• Continue to positively trade large IO miners
• 5-year gold price continues to be flat
• Global Zinc inventories declining rapidly
• Vale SA (VALE US), Bhp Billiton Ltd (Adr) (BHP US), Rio Tinto Ltd (RIO AU),Fortescue Metals (FMG AU), Azumah Resources (AZM AU), Peel Mining Ltd (PEX AU), Breaker Resources Nl (BRB AU), Pensana Metals (ASX: PM8), Axion (ASX: AZQ), Alkane Resources (ALK AU), Chesser Resources (CHZ AU), Hawkstone Mining (HWK AU), Liontown Resources (LTR AU), Genesis Minerals (GMD AU), Tietto Minerals Ltd (TIE AU), Hot Chili Ltd (HCH AU), Newfield Resources (NWF AU), Lucapa Diamond (LOM AU), Theta Gold Mines (TGM AU), Emperor Range (ERX AU)  

In this briefing:

1. Semiconductor Revenues Collapsing, As Anticipated

1. Semiconductor Revenues Collapsing, As Anticipated

On April 1 the World Semiconductor Trade Statistics were released illustrating, as we anticipated, that a full-blown collapse is underway.  This Insight shows how consistently the current situation follows past trends.

In this briefing:

1. Bitcoin, Revisited
2. Five Property Acquisitions Expected to Boost REIT Yields
3. ESR Cayman Pre-IPO – Updated Valuation and Key Risks
4. New J Hutton – Exploration Report (Weeks Ending 17/05/19)
5. High Stakes Huawei Gamble a Weight on US and Global Equities

1. Bitcoin, Revisited

Bitcoin and the block chain were created just over ten years ago, as a means to create peer to peer transactions without the need to use financial institutions to process the payments. 

However, frequent hacks of Bitcoin exchanges, in addition to the significant past fluctuations of Bitcoin prices, have put mainstream usage off and slowed the adoption of the cryptocurrency.

Is this about to change now?

2. Five Property Acquisitions Expected to Boost REIT Yields

• Singapore’s REITs are characterised by comparatively high and stable distribution yields, in addition to potential for portfolio growth. While REIT managers are known to be cautious with balance sheets, acquisitions and secondary fund raisings continue to advance in 2019.
• In the month of May, five REITs have either announced or completed property acquisitions for their portfolios & include Frasers Centrepoint Trust, AIMS APAC REIT, Sasseur REIT, Manulife US REIT and EC World REIT. The acquisitions span Singapore, Australia, China and the US.
• In all five acquisitions, Managers have highlighted that the acquisitions would be yield accretive, i.e. boost the overall distribution yield of their respective portfolios. Currently the 34 REITs and six stapled trusts average a 6.5% distribution yield.

3. ESR Cayman Pre-IPO – Updated Valuation and Key Risks

ESR Cayman (ESR HK) aims to raise up to US$1.5bn in its planned Hong Kong listing, as per media reports. The company is backed by Warburg Pincus and counts APG as one of its main investors.

In my earlier insights:

• I touched upon the company’s business model and provided an overview of its operations, ESR Cayman Pre-IPO – A Giant in the Making; 
• Talk about the financials and the drivers for each of the three segments, ESR Cayman Pre-IPO – Earnings and Segment Analysis.
• Derived valuation for each of the segments: ESR Cayman Pre-IPO- First Stab at Valuation
• Provided Updates from the PHIP: ESR Cayman Pre-IPO – Updates from PHIP – Growth Remains on Track

In this insight, I’ll provide updated valuations based on the updates from the PHIP and talk about key risks.

4. New J Hutton – Exploration Report (Weeks Ending 17/05/19)

• Vale SA (VALE US) woes continue, facing another dam collapse
• Forecast seaborne iron ore market deficit >100Mt CY19
• Chinese house prices up 10% y-o-y
• Chinese Government readying substantial investment stimulus
• Continue to positively trade large IO miners
• 5-year gold price continues to be flat
• Global Zinc inventories declining rapidly
• Vale SA (VALE US), Bhp Billiton Ltd (Adr) (BHP US), Rio Tinto Ltd (RIO AU),Fortescue Metals (FMG AU), Azumah Resources (AZM AU), Peel Mining Ltd (PEX AU), Breaker Resources Nl (BRB AU), Pensana Metals (ASX: PM8), Axion (ASX: AZQ), Alkane Resources (ALK AU), Chesser Resources (CHZ AU), Hawkstone Mining (HWK AU), Liontown Resources (LTR AU), Genesis Minerals (GMD AU), Tietto Minerals Ltd (TIE AU), Hot Chili Ltd (HCH AU), Newfield Resources (NWF AU), Lucapa Diamond (LOM AU), Theta Gold Mines (TGM AU), Emperor Range (ERX AU)  

5. High Stakes Huawei Gamble a Weight on US and Global Equities

The Huawei Entity Listing appears to be a high stakes gamble by the US administration to counter the rise in Chinese economic power in an industry that is critical to the global economy.  It is evidence that the broader economic and trade dispute will be hard to resolve, and makes it harder for China and the US to resume trade negotiations.  This suggests that punitive tariffs may remain in place for much longer than expected and indeed may be expanded further.  Global trade and manufacturing activity appears to have been undermined by the trade dispute, and hopes of a recovery later in the year may continue to fade.  China is likely to retaliate; weakening the outlook for US companies.  It may also weaponise its exchange rate, allowing it to weaken further, adding to strength in the USD, dampening US equities. The market might assume that the Fed will cut rates to support the equity market, but this is unlikely until US financial conditions deteriorate further.  As such, we see a high risk of a weaker global equity market, and under-performance in EM and commodity currencies against safe havens, gold and JPY.

In this briefing:

1. Bitcoin Is Back on Its Feet

1. Bitcoin Is Back on Its Feet

Bitcoin has been getting back on its feet since March, after a year-long bear market that saw the currency going from an almost $20,000 peak in December 2017 to a bottom of $3,200 in December of 2018.

Yet since March, the Fed has performed a complete U-turn in monetary policy, going from signalling three more rate hikes this year back in December, to none expected now.

Is this just a coincidence?