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Consumer Sector

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

By | Consumer Sector, Daily Briefs

In this briefing:

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

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

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

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Wanda Sports (万达体育) IPO Review – Shareholders Selling in the IPO
  2. NTT DoCoMo: Slow Take-Up for New Pricing Plans
  3. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)
  4. Blockchain Delusion: Overstock
  5. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float

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. NTT DoCoMo: Slow Take-Up for New Pricing Plans

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NTT Docomo Inc (9437 JP) says that initial take up for its new pricing plans has been slower than expectations, driven by the end of handset bundling and anticipation of Rakuten Mobile market entry later this year.  After a little more than a month, around 3mn subscribers had opted in, which is less than then 5mn that switched in the month following DoCoMo’s last major pricing change in 2014.  No early guidance changes are expected but this issue likely will attract a lot of attention at Q1 results later this month. 

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

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

We split the stocks eligible for the Hong Kong Connect trade into three groups: 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. Blockchain Delusion: Overstock

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Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

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.

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

By | Consumer Sector, 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
  4. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

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

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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)

4. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

Cambodia nagaworld chen lip keong casino facebook e1550838928366

  • Cambodia’s VIP gaming sector is showing vitality while slowing in other markets.
  • Buoyed by the success of Nagaworld2, the company has launched a Naga3 project plan to be financed 50% by its principal owner and internal funding.
  • Nagacorp is also betting on the Russian Far East with a project while Lawrence Ho has moved on concerned about higher gaming taxes there.

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Brief Consumer: NTT DoCoMo: Slow Take-Up for New Pricing Plans and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. NTT DoCoMo: Slow Take-Up for New Pricing Plans
  2. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)
  3. Blockchain Delusion: Overstock
  4. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float
  5. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect

1. NTT DoCoMo: Slow Take-Up for New Pricing Plans

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NTT Docomo Inc (9437 JP) says that initial take up for its new pricing plans has been slower than expectations, driven by the end of handset bundling and anticipation of Rakuten Mobile market entry later this year.  After a little more than a month, around 3mn subscribers had opted in, which is less than then 5mn that switched in the month following DoCoMo’s last major pricing change in 2014.  No early guidance changes are expected but this issue likely will attract a lot of attention at Q1 results later this month. 

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

Future land development holdings limited %281030 hk%29 daily southbound inflow2019 07 15%2010 27 27

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. Blockchain Delusion: Overstock

Screen%20shot%202019 07 12%20at%202.57.37%20pm

Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

4. 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.

5. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect

Screen%20shot%202019 07 13%20at%201.50.43%20pm

The announcement of the cancellation of the IPO, will impact some of the listed names across Asia-Pac, apart from the more obvious impact on the parent, Anheuser Busch Inbev Sa/Nv (ABI BB). Not to mention, souring of sentiment for some of the bigger deals in the pipeline.

I’ve covered the IPO over the past few months and taken a quick look at some of the M&A prospects across Asia. In this insight, I’ll talk about some of the follow-on effects from the IPO cancellation, starting with the not so obvious and ending with the obvious.


Links to my earlier insights:

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

By | Consumer Sector, Daily Briefs

In this briefing:

  1. HK Connect Ideas: Nine Weeks of Inflows, Sino Biopharm, Yadea, Anta, Aoyuan (2019-07-12)
  2. Blockchain Delusion: Overstock
  3. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float
  4. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect
  5. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIA Engineering

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. Blockchain Delusion: Overstock

Screen%20shot%202019 07 11%20at%2011.06.18%20am

Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

3. 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.

4. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect

Japan

The announcement of the cancellation of the IPO, will impact some of the listed names across Asia-Pac, apart from the more obvious impact on the parent, Anheuser Busch Inbev Sa/Nv (ABI BB). Not to mention, souring of sentiment for some of the bigger deals in the pipeline.

I’ve covered the IPO over the past few months and taken a quick look at some of the M&A prospects across Asia. In this insight, I’ll talk about some of the follow-on effects from the IPO cancellation, starting with the not so obvious and ending with the obvious.


Links to my earlier insights:

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

13%20jul%202019

Last Week in Event SPACE …

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

EVENTS

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

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

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

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


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

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

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

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


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

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

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

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


R* Shares CPSE ETF (CPSEBE IN) 

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

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

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

M&A – ASIA-PAC

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

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

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

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


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

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

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

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


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

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

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

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


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

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

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

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


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

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

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

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


Briefly …

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

M&A – UK

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

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

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

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

M&A – US

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

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

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

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

STUBBS/HOLDCOS

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

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

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

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

SHARE CLASSIFICATIONS

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

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

OTHER M&A UPDATES

CCASS

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

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

Name

% chg

Into

Out of

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

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

By | Consumer Sector, 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
  3. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap
  4. The RealReal IPO Preview: The Devil Wears Prada, Chanel, Louis Vuitton, Gucci, & Secondhand Too!

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)

3. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

Cambodia nagaworld chen lip keong casino facebook e1550838928366

  • Cambodia’s VIP gaming sector is showing vitality while slowing in other markets.
  • Buoyed by the success of Nagaworld2, the company has launched a Naga3 project plan to be financed 50% by its principal owner and internal funding.
  • Nagacorp is also betting on the Russian Far East with a project while Lawrence Ho has moved on concerned about higher gaming taxes there.

4. The RealReal IPO Preview: The Devil Wears Prada, Chanel, Louis Vuitton, Gucci, & Secondhand Too!

Realreal 2

The RealReal (REAL US), the largest online marketplace for authenticated, consigned luxury goods in the world, is getting ready for an IPO in the next few weeks. 

The consumers that own luxury goods such as a Prada bag but want to sell it can mail it to the company or drop it off at The RealReal stores. The RealReal would then authenticate the Prada bag and resell it. 

The company generated revenue of $207.4 million (up 54.9% YoY), gross profit of $136.9 million (up 56.2% YoY), and operating loss of $73.9 million in 2018 (from operating loss of $51.8 million in 2017). 

The RealReal is doing a very good job in generating repeat buyers. The RealReal repeat buyers as a percentage of GMV improved from 78% in 2015 to 80.7% in 2017 and 82.2% in 2018.

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

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech
  2. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap
  3. The RealReal IPO Preview: The Devil Wears Prada, Chanel, Louis Vuitton, Gucci, & Secondhand Too!
  4. 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. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

Cambodia nagaworld chen lip keong casino facebook e1550838928366

  • Cambodia’s VIP gaming sector is showing vitality while slowing in other markets.
  • Buoyed by the success of Nagaworld2, the company has launched a Naga3 project plan to be financed 50% by its principal owner and internal funding.
  • Nagacorp is also betting on the Russian Far East with a project while Lawrence Ho has moved on concerned about higher gaming taxes there.

3. The RealReal IPO Preview: The Devil Wears Prada, Chanel, Louis Vuitton, Gucci, & Secondhand Too!

Realreal 2

The RealReal (REAL US), the largest online marketplace for authenticated, consigned luxury goods in the world, is getting ready for an IPO in the next few weeks. 

The consumers that own luxury goods such as a Prada bag but want to sell it can mail it to the company or drop it off at The RealReal stores. The RealReal would then authenticate the Prada bag and resell it. 

The company generated revenue of $207.4 million (up 54.9% YoY), gross profit of $136.9 million (up 56.2% YoY), and operating loss of $73.9 million in 2018 (from operating loss of $51.8 million in 2017). 

The RealReal is doing a very good job in generating repeat buyers. The RealReal repeat buyers as a percentage of GMV improved from 78% in 2015 to 80.7% in 2017 and 82.2% in 2018.

4. 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 Consumer: Blockchain Delusion: Overstock and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Blockchain Delusion: Overstock
  2. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float
  3. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect
  4. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIE Engineering
  5. ECM Weekly (13 Jul 2019) – Budweiser APAC IPO Cancelled, Douyu Listing Next Week

1. Blockchain Delusion: Overstock

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Blockchain delusion may have peaked, but it hasn’t gone away. Online US retailer Overstock, led by outspoken and controversial founder Patrick Byrne, continues to promote, actually evangelize, his company’s blockchain initiatives. Under his “Governement as a Service” moniker, Byrne vows to transform key pillars of society, from voting to land title management, from capital markets to currencies. Even more spectacularly, Byrne claims to have found “cold fusion on the blockchain side”. Is he correct? We think not and here’s why. 

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

Price

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.

3. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect

Japan

The announcement of the cancellation of the IPO, will impact some of the listed names across Asia-Pac, apart from the more obvious impact on the parent, Anheuser Busch Inbev Sa/Nv (ABI BB). Not to mention, souring of sentiment for some of the bigger deals in the pipeline.

I’ve covered the IPO over the past few months and taken a quick look at some of the M&A prospects across Asia. In this insight, I’ll talk about some of the follow-on effects from the IPO cancellation, starting with the not so obvious and ending with the obvious.


Links to my earlier insights:

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

Lennon

Last Week in Event SPACE …

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

EVENTS

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

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

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

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


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

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

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

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


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

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

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

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


R* Shares CPSE ETF (CPSEBE IN) 

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

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

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

M&A – ASIA-PAC

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

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

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

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


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

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

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

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


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

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

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

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


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

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

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

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


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

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

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

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


Briefly …

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

M&A – UK

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

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

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

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

M&A – US

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

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

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

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

STUBBS/HOLDCOS

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

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

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

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

SHARE CLASSIFICATIONS

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

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

OTHER M&A UPDATES

CCASS

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

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

Name

% chg

Into

Out of

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

5. ECM Weekly (13 Jul 2019) – Budweiser APAC IPO Cancelled, Douyu Listing Next Week

Total deals since inception accuracy rate since inception  chartbuilder%20%281%29

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.

It’s an unfortunate week for Asia’s ECM market as Budweiser Brewing Company APAC (1876 HK) was not able to price its IPO on Friday and, as of this morning, AB InBev announced that the IPO has been called off. Perhaps the massive deal size without cornerstone investors and the tight valuation discount were too much for investors to digest. In any case, it will likely affect the sentiment of any upcoming mega IPOs in Hong Kong.

Beyond that, next week will be filled with trading debuts. In Hong Kong, there are Zhongliang Holdings (2772 HK), Edvantage Group (382 HK), and Jinshang Bank Co Ltd (2558 HK) listing on Tuesday and Thursday. Zhongliang priced close to the bottom of its price range while Edvantage and Jinshang priced at and slightly above their mid-point respectively.

In Singapore, Prime Us Reit (PRIME SP) is listing on Friday while Douyu International Holdings (DOYU US) is listing on Wednesday. We heard that Douyu’s books have already been covered.

Beyond that, this week’s IPO performance in Hong Kong had been lacklustre. CIMC Vehicle Group Co Ltd (1839 HK) closed below its IPO price on the first day while IVD Medical (1931 HK) struggled and closed right at its IPO price.

Accuracy Rate:

Our overall accuracy rate is 72.5% for IPOs and 64% for Placements 

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

New IPO filings this week

  • SinoMab Bioscience (Hong Kong, ~US$200m)

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
Alibaba

Alibaba IPO/Secondary Listing – The Real IPO Only Begins on the 11th Day Post Listing ​

AscentageAscentage Pharma (亚盛医药) IPO: Too Early for an IPO
Ascentage

Ascentage Pharma (亚盛医药) IPO: Updates and Thoughts on HQP1351 (3rd Gen Bcr-Abl TKI) ​

Ant FinancialAnt Financial IPO Early Thought: Understand Fintech Empire, Growth & Risk Factors
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)

Clarity

Clarity Medical (清晰医疗) IPO: Proxy to HK SMILE Surgery Demand

China Feihe

China Feihe (中国飞鹤) IPO: New Numbers, New Red Flag, and Demographic Risk 

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

JS Global

JS Global Lifestyle (JS 环球生活) Early Thoughts – Declaring US$470m Dividend Before IPO 

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

Renrui Human Resources (人瑞人才) Pre-IPO Review – Riding on China’s Unicorns 

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

Topsports Topsports International Holdings Pre-IPO – Performing Well but All Proceeds Will Likely Go to Belle 
Topsports Topsports Pre-IPO – Quick Take – Nike & Adidas Data Throws up Some Interesting Nuggets 
TOT Bio TOT Biopharm (东曜药业) IPO: An Unimpressive Pipeline 
TubatuTubatu Group Pre-IPO – Performing Better than Qeeka but Growing Much Slower, US$1bn a Stretch
TubatuTubatu Group Pre-IPO – Online -> Online + Offline -> Online -> ?
India
ASK ASK Investment Managers Pre-IPO – Riding on a Wave of Wealth 
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
Emami Cem Emami Cement Pre-IPO – Still in Ramp Up Phase but Emami Shares Pledge Might Lead to an Early IPO 
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
PNB MetPNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
Sterling Sterling and Wilson Solar Pre-IPO – Potentially India’s Largest IPO This Year – Ain’t No Sunshine 
Malaysia
QSRQSR Brands Pre-IPO – As Healthy as Fast Food
The U.S
AMTDI AMTD International (尚乘国际) Pre-IPO – Avoid at All Costs 
DouyuDouyu (斗鱼直播) IPO: Leader At a Cost
DouyuDouyu (斗鱼直播) IPO: Comparison with Huya (Part 2)
Douyu Douyu (斗鱼直播) IPO: Latest Numbers Bode Well for Listing (Part 3) 
Douyu Douyu (斗鱼直播) IPO: Detailed E-Sports Broadcasting Comparison with Huya 
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
Wanda Sports Wanda Sports (万达体育) Pre-IPO – Closer Look at the Business Segments ​

Get Straight to the Source on Smartkarma

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Brief Consumer: IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. IVD Medical (華檢醫療) Trading Update – Concentrated Shareholding, Tiny Adjusted Free-Float
  2. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect
  3. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIE Engineering
  4. ECM Weekly (13 Jul 2019) – Budweiser APAC IPO Cancelled, Douyu Listing Next Week
  5. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)

1. 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.

2. Budweiser Brewing Company APAC IPO (Cancelled) – Quick Trades on the Not so Subtle Butterfly Effect

China

The announcement of the cancellation of the IPO, will impact some of the listed names across Asia-Pac, apart from the more obvious impact on the parent, Anheuser Busch Inbev Sa/Nv (ABI BB). Not to mention, souring of sentiment for some of the bigger deals in the pipeline.

I’ve covered the IPO over the past few months and taken a quick look at some of the M&A prospects across Asia. In this insight, I’ll talk about some of the follow-on effects from the IPO cancellation, starting with the not so obvious and ending with the obvious.


Links to my earlier insights:

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

Spin2

Last Week in Event SPACE …

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

EVENTS

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

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

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

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


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

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

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

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


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

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

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

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


R* Shares CPSE ETF (CPSEBE IN) 

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

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

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

M&A – ASIA-PAC

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

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

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

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


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

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

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

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


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

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

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

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


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

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

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

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


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

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

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

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


Briefly …

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

M&A – UK

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

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

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

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

M&A – US

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

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

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

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

STUBBS/HOLDCOS

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

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

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

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

SHARE CLASSIFICATIONS

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

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

OTHER M&A UPDATES

CCASS

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

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

Name

% chg

Into

Out of

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

4. ECM Weekly (13 Jul 2019) – Budweiser APAC IPO Cancelled, Douyu Listing Next Week

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.

It’s an unfortunate week for Asia’s ECM market as Budweiser Brewing Company APAC (1876 HK) was not able to price its IPO on Friday and, as of this morning, AB InBev announced that the IPO has been called off. Perhaps the massive deal size without cornerstone investors and the tight valuation discount were too much for investors to digest. In any case, it will likely affect the sentiment of any upcoming mega IPOs in Hong Kong.

Beyond that, next week will be filled with trading debuts. In Hong Kong, there are Zhongliang Holdings (2772 HK), Edvantage Group (382 HK), and Jinshang Bank Co Ltd (2558 HK) listing on Tuesday and Thursday. Zhongliang priced close to the bottom of its price range while Edvantage and Jinshang priced at and slightly above their mid-point respectively.

In Singapore, Prime Us Reit (PRIME SP) is listing on Friday while Douyu International Holdings (DOYU US) is listing on Wednesday. We heard that Douyu’s books have already been covered.

Beyond that, this week’s IPO performance in Hong Kong had been lacklustre. CIMC Vehicle Group Co Ltd (1839 HK) closed below its IPO price on the first day while IVD Medical (1931 HK) struggled and closed right at its IPO price.

Accuracy Rate:

Our overall accuracy rate is 72.5% for IPOs and 64% for Placements 

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

New IPO filings this week

  • SinoMab Bioscience (Hong Kong, ~US$200m)

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
Alibaba

Alibaba IPO/Secondary Listing – The Real IPO Only Begins on the 11th Day Post Listing ​

AscentageAscentage Pharma (亚盛医药) IPO: Too Early for an IPO
Ascentage

Ascentage Pharma (亚盛医药) IPO: Updates and Thoughts on HQP1351 (3rd Gen Bcr-Abl TKI) ​

Ant FinancialAnt Financial IPO Early Thought: Understand Fintech Empire, Growth & Risk Factors
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)

Clarity

Clarity Medical (清晰医疗) IPO: Proxy to HK SMILE Surgery Demand

China Feihe

China Feihe (中国飞鹤) IPO: New Numbers, New Red Flag, and Demographic Risk 

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

JS Global

JS Global Lifestyle (JS 环球生活) Early Thoughts – Declaring US$470m Dividend Before IPO 

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

Renrui Human Resources (人瑞人才) Pre-IPO Review – Riding on China’s Unicorns 

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

Topsports Topsports International Holdings Pre-IPO – Performing Well but All Proceeds Will Likely Go to Belle 
Topsports Topsports Pre-IPO – Quick Take – Nike & Adidas Data Throws up Some Interesting Nuggets 
TOT Bio TOT Biopharm (东曜药业) IPO: An Unimpressive Pipeline 
TubatuTubatu Group Pre-IPO – Performing Better than Qeeka but Growing Much Slower, US$1bn a Stretch
TubatuTubatu Group Pre-IPO – Online -> Online + Offline -> Online -> ?
India
ASK ASK Investment Managers Pre-IPO – Riding on a Wave of Wealth 
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
Emami Cem Emami Cement Pre-IPO – Still in Ramp Up Phase but Emami Shares Pledge Might Lead to an Early IPO 
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
PNB MetPNB Metlife Pre-IPO Quick Take – Doesn’t Stack up Well Versus Its Larger Peers
Sterling Sterling and Wilson Solar Pre-IPO – Potentially India’s Largest IPO This Year – Ain’t No Sunshine 
Malaysia
QSRQSR Brands Pre-IPO – As Healthy as Fast Food
The U.S
AMTDI AMTD International (尚乘国际) Pre-IPO – Avoid at All Costs 
DouyuDouyu (斗鱼直播) IPO: Leader At a Cost
DouyuDouyu (斗鱼直播) IPO: Comparison with Huya (Part 2)
Douyu Douyu (斗鱼直播) IPO: Latest Numbers Bode Well for Listing (Part 3) 
Douyu Douyu (斗鱼直播) IPO: Detailed E-Sports Broadcasting Comparison with Huya 
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
Wanda Sports Wanda Sports (万达体育) Pre-IPO – Closer Look at the Business Segments ​

5. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)

Joseonwhite

It has been more than 20 years that I’ve been covering the Korean markets and never has the political climate between Japan and South Korea been this terrible to the extent that the Japanese government has imposed the first round of significant economic sanctions on South Korea. 

In our view, there will likely be no major positive news next week that could dramatically result in the reconciliation between Japan and South Korea. Rather, we believe this heated political battle between Japan and South Korea appears to be just starting and that the Japanese government could impose the SECOND ROUND of economic sanctions on South Korea some time in August/September. 

While all these economic sanctions and restrictions of key chemical/semiconductor materials are occurring, the story of theJoseon white porcelains” came to my mind. All in all, the current restrictions of key chemical materials from Japan such as fluorine-containing polyimide, resists, and etching gas are reminiscent of the trade restrictions on imported items such as cobalt during the Joseon dynasty hundreds of years ago.  They are also a keen reminder that in order for Korea to have a vibrant, flourishing economy, excellent political relationships with its close, powerful neighbors including China and Japan is a must. 

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Brief Consumer: Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap and more

By | Consumer Sector, Daily Briefs

In this briefing:

  1. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap
  2. The RealReal IPO Preview: The Devil Wears Prada, Chanel, Louis Vuitton, Gucci, & Secondhand Too!
  3. ECM Weekly (15 Jun 2019) – Budweiser Brewing Co, Jinxin Fertility, Wanda Sports, Hansoh Pharma

1. Revisiting Nagacorp: The News Is Good and Apt to Get Better, yet the Stock Is Still Cheap

Cambodia nagaworld chen lip keong casino facebook e1550838928366

  • Cambodia’s VIP gaming sector is showing vitality while slowing in other markets.
  • Buoyed by the success of Nagaworld2, the company has launched a Naga3 project plan to be financed 50% by its principal owner and internal funding.
  • Nagacorp is also betting on the Russian Far East with a project while Lawrence Ho has moved on concerned about higher gaming taxes there.

2. The RealReal IPO Preview: The Devil Wears Prada, Chanel, Louis Vuitton, Gucci, & Secondhand Too!

Realreal 2

The RealReal (REAL US), the largest online marketplace for authenticated, consigned luxury goods in the world, is getting ready for an IPO in the next few weeks. 

The consumers that own luxury goods such as a Prada bag but want to sell it can mail it to the company or drop it off at The RealReal stores. The RealReal would then authenticate the Prada bag and resell it. 

The company generated revenue of $207.4 million (up 54.9% YoY), gross profit of $136.9 million (up 56.2% YoY), and operating loss of $73.9 million in 2018 (from operating loss of $51.8 million in 2017). 

The RealReal is doing a very good job in generating repeat buyers. The RealReal repeat buyers as a percentage of GMV improved from 78% in 2015 to 80.7% in 2017 and 82.2% in 2018.

3. 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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