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Brief China: Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech and more

By | China, Daily Briefs

In this briefing:

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

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

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Last Week in Event SPACE …

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

EVENTS

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

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

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

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

STUBS & HOLDCOS

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

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

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

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

M&A – ASIA-PAC

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

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

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

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


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

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

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

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


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

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

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

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

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


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

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

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

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


Briefly …

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

M&A – US

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

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

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

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

M&A – EUROPE

Italian Banks

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

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

OTHER M&A UPDATES

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

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

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

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

CCASS

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

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

Name

% chg

Into

Out of

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

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

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

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

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Brief China: Wanda Sports (万达体育) IPO Review – Shareholders Selling in the IPO and more

By | China, Daily Briefs

In this briefing:

  1. Wanda Sports (万达体育) IPO Review – Shareholders Selling in the IPO
  2. DouYu IPO: Bull/​​​​Bear DCF Scenarios
  3. Tencent (700 HK): Decides to Pay Less to Outside Game Distributors
  4. CloudMinds IPO Initiation: Computer Says No
  5. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)

1. Wanda Sports (万达体育) IPO Review – Shareholders Selling in the IPO

Selling%20shareholders

Wanda Sports Group (WSG US) is looking to raise up to US$500m in its US IPO. We have previously covered the company in:

In this insight, we will go through our assumptions, valuation forecast, run the deal through our ECM framework.

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

Dcf

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

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

3. Tencent (700 HK): Decides to Pay Less to Outside Game Distributors

Pic%202

  • Tencent gave game distributors a new offer which reduces Tencent’s payment from 50% to 30%.
  • We believe most distributors will have to accept the offer because Tencent is the largest game developer.
  • We believe Tencent made the right decision as the Company needs to improve its margins.
  • We also believe it is the right time as distributors do not have many new game sources after one year’s new game suspension.

4. CloudMinds IPO Initiation: Computer Says No

Cloud%20robot

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

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

5. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)

Sunac china holdings limited %281918 hk%29 daily southbound inflow2019 07 15%2010 27 28

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

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

In this insight, we would like to highlight the nine consecutive weeks of inflows from mainland China to Hong Kong stocks. We highlight the inflows into China Vanke Co Ltd (H) (2202 HK), Tencent Holdings (700 HK)Sino Biopharmaceutical (1177 HK), and outflows from Future Land Development Holdings (1030 HK), Sunac China Holdings (1918 HK), and WH Group (288 HK). In addition, we would highlight the trading opportunities on Meituan Dianping (3690 HK) and Xiaomi Corp (1810 HK)‘s likely inclusion into Hong Kong Connect this month. In the mid cap space, we highlighted Kingdee International Software (268 HK), China Aoyuan Property (3883 HK), Yadea Group Holdings (1585 HK) and Anta Sports Products (2020 HK).

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

By | China, Daily Briefs

In this briefing:

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

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

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

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

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

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

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

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

This is, once again, quite simply…

The Most Interesting Arb In The World. 

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

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

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

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

Volume

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

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

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

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Last Week in Event SPACE …

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

EVENTS

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

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

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

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

STUBS & HOLDCOS

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

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

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

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

M&A – ASIA-PAC

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

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

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

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


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

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

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

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


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

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

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

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

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


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

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

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

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


Briefly …

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

M&A – US

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

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

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

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

M&A – EUROPE

Italian Banks

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

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

OTHER M&A UPDATES

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

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

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

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

CCASS

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

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

Name

% chg

Into

Out of

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

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

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

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

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Brief China: Tencent (700 HK): Decides to Pay Less to Outside Game Distributors and more

By | China, Daily Briefs

In this briefing:

  1. Tencent (700 HK): Decides to Pay Less to Outside Game Distributors
  2. CloudMinds IPO Initiation: Computer Says No
  3. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)
  4. CloudMinds Inc Early Thoughts – Still Nascent
  5. Nexon Sale: MBK Behind Scene Stories

1. Tencent (700 HK): Decides to Pay Less to Outside Game Distributors

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  • Tencent gave game distributors a new offer which reduces Tencent’s payment from 50% to 30%.
  • We believe most distributors will have to accept the offer because Tencent is the largest game developer.
  • We believe Tencent made the right decision as the Company needs to improve its margins.
  • We also believe it is the right time as distributors do not have many new game sources after one year’s new game suspension.

2. CloudMinds IPO Initiation: Computer Says No

Overview

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

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

3. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)

Southbound weekly inflow %28usd m%292019 07 13%2016 16 59

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

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

In this insight, we would like to highlight the nine consecutive weeks of inflows from mainland China to Hong Kong stocks. We highlight the inflows into China Vanke Co Ltd (H) (2202 HK), Tencent Holdings (700 HK)Sino Biopharmaceutical (1177 HK), and outflows from Future Land Development Holdings (1030 HK), Sunac China Holdings (1918 HK), and WH Group (288 HK). In addition, we would highlight the trading opportunities on Meituan Dianping (3690 HK) and Xiaomi Corp (1810 HK)‘s likely inclusion into Hong Kong Connect this month. In the mid cap space, we highlighted Kingdee International Software (268 HK), China Aoyuan Property (3883 HK), Yadea Group Holdings (1585 HK) and Anta Sports Products (2020 HK).

4. CloudMinds Inc Early Thoughts – Still Nascent

But 3m 2019 revenue declined significantly total revenue usdm  chartbuilder

CloudMinds (CMDS UA) is looking to raise US$500m in its upcoming IPO in the US.

The idea of replacing day to day mundane tasks through robots and being able to leverage AI and cloud computing to improve their performance sounds incredible. FY2018 revenue growth has also been spectacular.

But, under the fold, the company is less like a cloud robotics company since it derives majority of revenue from smart devices with cloud computing capabilities. The lack of data disclosure is frustrating, as it has made revenue visibility poor since there is no way of telling which products (smart devices or robots) are selling well. 

5. Nexon Sale: MBK Behind Scene Stories

MBK was one of the three leading horses in the Nexon sale race. It was the only FI in this group. You know this is MBK, the king of deals. It’s hard to believe, but even this MBK didn’t know KJJ’s cancellation until the last minute. One local news outlet “Chosun” put out a report that gives us a rare detailed picture of what had been going at MBK until the last minute regarding this deal. I found what’s contained in this report very informative and interesting for Nexon investors even after the deal got wrapped up in an unexpected way.

In this post, I summarize some of the key happenings at MBK regarding the Nexon deal. I need to make this very clear that this post is mainly based on this Chosun report, but it also includes what I heard and found from other sources, mainly local stock investment online communities.

Here is the link of the Chosun report if you want to read the original.

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Brief China: Nexon Sale: Kakao Is Emerging as the Leading Horse and more

By | China, Daily Briefs

In this briefing:

  1. Nexon Sale: Kakao Is Emerging as the Leading Horse
  2. Budweiser Brewing Company APAC IPO: A Solid PHIP Update
  3. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

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

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

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

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

Volume

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

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

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

Cl

Last Week in Event SPACE …

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

EVENTS

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

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

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

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

STUBS & HOLDCOS

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

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

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

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

M&A – ASIA-PAC

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

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

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

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


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

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

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

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


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

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

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

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

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


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

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

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

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


Briefly …

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

M&A – US

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

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

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

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

M&A – EUROPE

Italian Banks

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

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

OTHER M&A UPDATES

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

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

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

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

CCASS

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

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

Name

% chg

Into

Out of

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

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

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

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

Get Straight to the Source on Smartkarma

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Brief China: CloudMinds IPO Initiation: Computer Says No and more

By | China, Daily Briefs

In this briefing:

  1. CloudMinds IPO Initiation: Computer Says No
  2. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)
  3. CloudMinds Inc Early Thoughts – Still Nascent
  4. Nexon Sale: MBK Behind Scene Stories
  5. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float

1. CloudMinds IPO Initiation: Computer Says No

Rev%20visibility

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

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

2. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)

Huatai securities co., ltd. %286886 hk%29 daily southbound inflow2019 07 15%2010 37 25

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

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

In this insight, we would like to highlight the nine consecutive weeks of inflows from mainland China to Hong Kong stocks. We highlight the inflows into China Vanke Co Ltd (H) (2202 HK), Tencent Holdings (700 HK)Sino Biopharmaceutical (1177 HK), and outflows from Future Land Development Holdings (1030 HK), Sunac China Holdings (1918 HK), and WH Group (288 HK). In addition, we would highlight the trading opportunities on Meituan Dianping (3690 HK) and Xiaomi Corp (1810 HK)‘s likely inclusion into Hong Kong Connect this month. In the mid cap space, we highlighted Kingdee International Software (268 HK), China Aoyuan Property (3883 HK), Yadea Group Holdings (1585 HK) and Anta Sports Products (2020 HK).

3. CloudMinds Inc Early Thoughts – Still Nascent

Cloud ai solutions and smart devices have been the main revenue drive usdm cloud robot cloud ai solution smart devices others related parties chartbuilder

CloudMinds (CMDS UA) is looking to raise US$500m in its upcoming IPO in the US.

The idea of replacing day to day mundane tasks through robots and being able to leverage AI and cloud computing to improve their performance sounds incredible. FY2018 revenue growth has also been spectacular.

But, under the fold, the company is less like a cloud robotics company since it derives majority of revenue from smart devices with cloud computing capabilities. The lack of data disclosure is frustrating, as it has made revenue visibility poor since there is no way of telling which products (smart devices or robots) are selling well. 

4. Nexon Sale: MBK Behind Scene Stories

MBK was one of the three leading horses in the Nexon sale race. It was the only FI in this group. You know this is MBK, the king of deals. It’s hard to believe, but even this MBK didn’t know KJJ’s cancellation until the last minute. One local news outlet “Chosun” put out a report that gives us a rare detailed picture of what had been going at MBK until the last minute regarding this deal. I found what’s contained in this report very informative and interesting for Nexon investors even after the deal got wrapped up in an unexpected way.

In this post, I summarize some of the key happenings at MBK regarding the Nexon deal. I need to make this very clear that this post is mainly based on this Chosun report, but it also includes what I heard and found from other sources, mainly local stock investment online communities.

Here is the link of the Chosun report if you want to read the original.

5. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float

Srtuggled

IVD Medical (1931 HK) raised US$131m at HK$3.07 per share, the bottom end of its IPO price range. We have previously covered the IPO in our note:

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

Get Straight to the Source on Smartkarma

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Brief China: Budweiser Brewing Company APAC IPO: A Solid PHIP Update and more

By | China, Daily Briefs

In this briefing:

  1. Budweiser Brewing Company APAC IPO: A Solid PHIP Update
  2. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

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

Volume

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

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

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

Cl

Last Week in Event SPACE …

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

EVENTS

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

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

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

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

STUBS & HOLDCOS

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

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

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

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

M&A – ASIA-PAC

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

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

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

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


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

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

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

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


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

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

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

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

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


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

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

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

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


Briefly …

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

M&A – US

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

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

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

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

M&A – EUROPE

Italian Banks

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

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

OTHER M&A UPDATES

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

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

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

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

CCASS

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

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

Name

% chg

Into

Out of

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

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

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

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

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Brief China: HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12) and more

By | China, Daily Briefs

In this briefing:

  1. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)
  2. CloudMinds Inc Early Thoughts – Still Nascent
  3. Nexon Sale: MBK Behind Scene Stories
  4. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float
  5. Are Risky Assets Overvalued?

1. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)

China vanke co., ltd. %282202 hk%29 daily southbound inflow2019 07 15%2010 27 23

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

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

In this insight, we would like to highlight the nine consecutive weeks of inflows from mainland China to Hong Kong stocks. We highlight the inflows into China Vanke Co Ltd (H) (2202 HK), Tencent Holdings (700 HK)Sino Biopharmaceutical (1177 HK), and outflows from Future Land Development Holdings (1030 HK), Sunac China Holdings (1918 HK), and WH Group (288 HK). In addition, we would highlight the trading opportunities on Meituan Dianping (3690 HK) and Xiaomi Corp (1810 HK)‘s likely inclusion into Hong Kong Connect this month. In the mid cap space, we highlighted Kingdee International Software (268 HK), China Aoyuan Property (3883 HK), Yadea Group Holdings (1585 HK) and Anta Sports Products (2020 HK).

2. CloudMinds Inc Early Thoughts – Still Nascent

Cloud%20application

CloudMinds (CMDS UA) is looking to raise US$500m in its upcoming IPO in the US.

The idea of replacing day to day mundane tasks through robots and being able to leverage AI and cloud computing to improve their performance sounds incredible. FY2018 revenue growth has also been spectacular.

But, under the fold, the company is less like a cloud robotics company since it derives majority of revenue from smart devices with cloud computing capabilities. The lack of data disclosure is frustrating, as it has made revenue visibility poor since there is no way of telling which products (smart devices or robots) are selling well. 

3. Nexon Sale: MBK Behind Scene Stories

MBK was one of the three leading horses in the Nexon sale race. It was the only FI in this group. You know this is MBK, the king of deals. It’s hard to believe, but even this MBK didn’t know KJJ’s cancellation until the last minute. One local news outlet “Chosun” put out a report that gives us a rare detailed picture of what had been going at MBK until the last minute regarding this deal. I found what’s contained in this report very informative and interesting for Nexon investors even after the deal got wrapped up in an unexpected way.

In this post, I summarize some of the key happenings at MBK regarding the Nexon deal. I need to make this very clear that this post is mainly based on this Chosun report, but it also includes what I heard and found from other sources, mainly local stock investment online communities.

Here is the link of the Chosun report if you want to read the original.

4. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float

Top%20ten%20sharheoders

IVD Medical (1931 HK) raised US$131m at HK$3.07 per share, the bottom end of its IPO price range. We have previously covered the IPO in our note:

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

5. Are Risky Assets Overvalued?

Cape to long term average log cape to average chartbuilder 2

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

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

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

Get Straight to the Source on Smartkarma

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Brief China: Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech and more

By | China, Daily Briefs

In this briefing:

  1. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech
  2. ECM Weekly (15 Jun 2019) – Budweiser Brewing Co, Jinxin Fertility, Wanda Sports, Hansoh Pharma

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

Cl

Last Week in Event SPACE …

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

EVENTS

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

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

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

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

STUBS & HOLDCOS

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

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

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

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

M&A – ASIA-PAC

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

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

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

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


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

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

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

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


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

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

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

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

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


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

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

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

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


Briefly …

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

M&A – US

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

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

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

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

M&A – EUROPE

Italian Banks

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

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

OTHER M&A UPDATES

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

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

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

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

CCASS

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

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

Name

% chg

Into

Out of

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

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

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

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

2. ECM Weekly (15 Jun 2019) – Budweiser Brewing Co, Jinxin Fertility, Wanda Sports, Hansoh Pharma

Upcoming

Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.

This week’s Hong Kong IPO listings breathed life into the exchange as China Tobacco International (HK) (6055 HK) and Hansoh Pharmaceutical (3692 HK)‘s performed exceptionally well on debut, closing 40% and 36% above their respective IPO price for the week.

That said, not all IPOs had a good debut. China East Education (667 HK)‘s IPO flopped despite being the biggest education IPO in Hong Kong this year and was reported earlier that its books were covered on the second day of bookbuild.

Tai Hing (6811 HK)‘s IPO also took a hit, opening 17% below its IPO price. As per our valuation note, we thought that the IPO would only have been attractive from a valuation perspective at the bottom end of its IPO price range, hence, Wednesday’s low debut price presented a good opportunity to accumulate a position for near-term recovery.

Jinxin Fertility Co Ltd (1951 HK) is looking to close its books early. The IPO boasts Orbimed, Hillhouse, and Ally Bridge among its cornerstone investors. The three investors had also participated in Hansoh Pharma’s IPO which performed exceptionally well. Another potential IPO that is moving fast is Alibaba Group Holding (BABA US) which is said to have filed for Hong Kong listing which could raise up to US$20bn. 

On the other hand, ESR Cayman (ESR HK) pulled its Hong Kong IPO citing market condition as the reason. This was not totally unexpected as Sumeet Singh pointed out in his valuation note, ESR Cayman IPO – Richly Valued, that while it is a good company, implied valuation looks a tad too expensive and deal dynamics did not inspire confidence. Hopefully, the IPO will relaunch at a more sensible valuation.

In other countries, Thailand seems to be the most active of all. Asset World Corporation, owned by Charoen Sirivadhanabhakdi, will be looking to IPO in the second half of the year while Index Living Mall, a furniture and home-decoration retailer, is looking to list in the third quarter of 2019.

Accuracy Rate:

Our overall accuracy rate is 72.3% for IPOs and 63.8% for Placements 

(Performance measurement criteria is explained at the end of the note)

New IPO filings this week

  • Shenzhen Leoking (Hong Kong, US$100m)

Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.

Source: Aequitas Research, Smartkarma

News on Upcoming IPOs

Analysis on Upcoming IPOs

NameInsight
Hong Kong
AB InbevAb InBev Asia Pre-IPO – A Brief History of the Asia Pacific Operations – Eeking Out Growth in China
AB InbevAb InBev Asia Pre-IPO – Quick Note – More like CR Beer Rather than Tsingtao
AB InbevAb InBev Asia Pre-IPO – On Its Way to Potentially Being the Biggest HK IPO This Year
AB Inbev

Budweiser Brewing APAC Pre-IPO – It Will Be a US$5bn+ Raise Owing to Its Clean Balance Sheet

AB Inbev

Budweiser Brewing Company APAC Pre-IPO – Country Performance and Updated Peer Comparison

AB Inbev

Budweiser Brewing Company APAC Pre-IPO – Refining Valuation for the Diverging Growth Prospects

AscentageAscentage Pharma (亚盛医药) IPO: Too Early for an IPO
Ant FinancialAnt Financial IPO Early Thought: Understand Fintech Empire, Growth & Risk Factors
CIMC VehCIMC Vehicle (中集车辆): Market Leader of Semi-Trailers but Little Growth Ahead
ClarityClarity Medical (清晰医疗) IPO: Proxy to HK SMILE Surgery Demand
ByteDance

ByteDance (字节跳动) IPO: How Jinri Toutiao Paves The Way for a Bigger Empire (Part 1)

ByteDance

ByteDance (字节跳动) IPO: Tiktok the No.1 Short Video App for a Good Reason (Part 2)

Helenbergh

Helenbergh (海伦堡) Early Thoughts – The Usual Red Flag – Related Party Transactions

Hut Chi-Med

Hutchison-China Med (和黄医药) H-Share Listing: MNC Partnerships Endorsed Its R&D Capabilities

Jinxin

Jinxin Fertility (锦欣生殖) Pre-IPO: Strong Foothold in Sichuan but Weak Sentiment for Sector

MicuRxMicuRx Pharma (盟科医药) IPO: Betting on Single Drug in the Not so Attractive Antibiotic Segment
SH Henlius

Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio 

SH Henlius

Shanghai Henlius (复宏汉霖) IPO: Valuation of Four Biosimilars

TubatuTubatu Group Pre-IPO – Performing Better than Qeeka but Growing Much Slower, US$1bn a Stretch
TubatuTubatu Group Pre-IPO – Online -> Online + Offline -> Online -> ?
South Korea
KMH ShillaKMH Shilla Leisure IPO Preview (Part 1) – Highly Profitable Operator of Public Golf Courses in Korea
KMH ShillaKMH Shilla Leisure IPO Preview (Part 2) – Valuation Analysis
Plakor

Plakor IPO Preview (Part 1)

ZinusZinus IPO Preview (Part 1) – An Amazing Comeback Story (#1 Mattress Brand on Amazon)
India
Aakash EduAakash Education Pre-IPO – Fast Growth in an Attractive Sector
Anmol IndAnmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
Bharat Hotels

Bharat Hotels Pre-IPO – Catching up with Peers 

CMS InfoCMS Info Systems Pre-IPO – When a PE Sells to Another PE… Only One Gets the Timing Right
Crystal CropCrystal Crop Protection Pre-IPO – DRHP Raises More Questions than in Answers
Flemingo Flemingo Travel Retail Pre-IPO – Its a Different Business in Every Country
NSENSE IPO Preview- Not Only Fast..its Risky and Expensive
NSENational Stock Exchange Pre-IPO Review – Bigger, Better, Stronger but a Little Too Fast for Some
MazagonMazagon Dock IPO Preview: A Monopoly Submarine Yard in India with Captive Navy Spending
Mrs. BectorMrs. Bectors Food Specialities Pre-IPO Quick Take – Sales for Its Main Segment Have Been Sta

Lodha

Lodha Developers Pre-IPO – Second Time Lucky but Not Really that Much Affordable
LodhaLodha Developers IPO: Presence in Affordable Segment Saves Lodha the Blushes in a Sluggish Mkt
IndiaMartIndiaMART Pre-IPO – Getting and Retaining Subscribers Seems to Be Difficult
PNB MetPNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
Malaysia
QSRQSR Brands Pre-IPO – As Healthy as Fast Food
The U.S
DouyuDouyu (斗鱼直播) IPO: Leader At a Cost
DouyuDouyu (斗鱼直播) IPO: Comparison with Huya (Part 2)
MetenMeten International Edu (美联国际教育) Early Thoughts – Unclear Strategies
Wanda SportsWanda Sports (万达体育) Early Thoughts – Convoluted by Contracts and Cyclicality

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Brief China: CloudMinds Inc Early Thoughts – Still Nascent and more

By | China, Daily Briefs

In this briefing:

  1. CloudMinds Inc Early Thoughts – Still Nascent
  2. Nexon Sale: MBK Behind Scene Stories
  3. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float
  4. Are Risky Assets Overvalued?
  5. Trade War/Hong Kong/Shipbuilding/Rubbish

1. CloudMinds Inc Early Thoughts – Still Nascent

Total revenue jumped by 6x usdm  chartbuilder

CloudMinds (CMDS UA) is looking to raise US$500m in its upcoming IPO in the US.

The idea of replacing day to day mundane tasks through robots and being able to leverage AI and cloud computing to improve their performance sounds incredible. FY2018 revenue growth has also been spectacular.

But, under the fold, the company is less like a cloud robotics company since it derives majority of revenue from smart devices with cloud computing capabilities. The lack of data disclosure is frustrating, as it has made revenue visibility poor since there is no way of telling which products (smart devices or robots) are selling well. 

2. Nexon Sale: MBK Behind Scene Stories

MBK was one of the three leading horses in the Nexon sale race. It was the only FI in this group. You know this is MBK, the king of deals. It’s hard to believe, but even this MBK didn’t know KJJ’s cancellation until the last minute. One local news outlet “Chosun” put out a report that gives us a rare detailed picture of what had been going at MBK until the last minute regarding this deal. I found what’s contained in this report very informative and interesting for Nexon investors even after the deal got wrapped up in an unexpected way.

In this post, I summarize some of the key happenings at MBK regarding the Nexon deal. I need to make this very clear that this post is mainly based on this Chosun report, but it also includes what I heard and found from other sources, mainly local stock investment online communities.

Here is the link of the Chosun report if you want to read the original.

3. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float

Srtuggled

IVD Medical (1931 HK) raised US$131m at HK$3.07 per share, the bottom end of its IPO price range. We have previously covered the IPO in our note:

In this insight, we will update on the deal dynamics, implied valuation, and include a valuation sensitivity table.

4. Are Risky Assets Overvalued?

Cape to long term average log cape to average chartbuilder 2

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

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

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

5. Trade War/Hong Kong/Shipbuilding/Rubbish

China News That Matters

  • Trump complains about Chinese shopping
  • Hong Kong crisis – deal “dead”, but not withdrawn
  • When we could be diving for pearls
  • Where there’s muck, there’s brass

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

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