Consumer

In this briefing:

1. Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst
2. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer
3. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport
4. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st
5. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

1. Maoyan Entertainment (猫眼娱乐) IPO: Lackluster Demand but CNY Blockbusters Could Be a Catalyst

Maoyan Entertainment was priced at HKD 14.8/share and will start trading today. We summarize the latest information with updates on our valuation in this short note, prior to the trading debut. Our recent studies on the movies slotted to launch during the Chinese New Year period suggest that the box office during the CNY period could be a positive catalyst to Maoyan, which lists right before the CNY. 

2. Healthscope (HSO AU): Don’t Count on a Material Bump to Brookfield’s Binding Offer

Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, finally received a firm but marginally lower offer from Brookfield Asset Management (BAM US) through a recommended implementation deed.

3. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport

Last Week in Event SPACE …

• Toppan Printing (7911 JP)‘s management prefers to run a long/short fund rather than support the company’s long-suffering shareholders. 

• Hyundai Heavy Industries Holdings (267250 KS) discount to NAV was all set to narrow after Aramco’s intention to acquire 19.9% in Hyundai Oilbank Co; then 31%-held Hyundai Heavy Industries (009540 KS) announced a multi-step split-off, payment in kind and rights issue.

• Following Itochu Corp (8001 JP)‘s partial offer, Descente Ltd (8114 JP) has the ability to play dirty and investors and traders should be aware of that.

• Brookfield firms up a reduced offer for Healthscope Ltd (HSO AU), however the BGH-consortium is not out of the picture.

• Mcmillan Shakespeare (MMS AU) pushes back on Eclipx (ECX AU)‘s first court date, but MACs have not been triggered.

• Pioneer Corp (6773 JP)‘s shareholders vote to implement a self-imposed (self-inflicted?) equity “cramdown” of sorts. 

• Bidding could still go crazily higher from here as Mastercard Inc Class A (MA US) and Visa Inc Class A Shares (V US) wrestle for Earthport plc (EPO LN).
• Plus CCASS movements and expected upcoming events for key M&A transactions.

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

Toppan Printing (7911 JP) (Mkt Cap: $5.3bn; Liquidity: $14mn)

Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years. 

• Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
• The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP) (its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
• Toppan’s business and investment portfolio should be radically pruned or eliminated.  Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.   

(link to Campbell’s insight: Toppan Printing: Money for Nothing (& Your Clicks for Free)

Hyundai Heavy Industries (009540 KS) (HHIC) (Mkt Cap: $8.1bn; Liquidity: $37mn)

HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.

• Next the Korean Dev Bank will exchange its 55.7% stake in Daewoo Shipbuilding & Marine Engineering (042660 KS) (DSME) for 15.2mn shares in the intermediate holdco (21.5% of shares out) via a payment in kind.
• Following which, the intermediate holdco will do a ₩1.25tn rights offer to its shareholders, including Hyundai Heavy Industries Holdings (267250 KS).
• Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.

links to:
Sanghyun’s insight: Hyundai Heavy/DSME Event – Comprehensive Summary
Douglas Kim‘s insight: Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings.

Nexon Co Ltd (3659 JP) (Mkt Cap: $8.1bn; Liquidity: $37mn)

Netmarble Games (251270 KS) officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:

• To avoid the cultural backlash from Korean gamers.
• Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

(link to Douglas’ insight: Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?) 

Descente Ltd (8114 JP) (Mkt Cap: $1.9bn; Liquidity: $3mn)

Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.

• Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason. 
• Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top. 
• Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience. 

links to:
Travis’ insight: No Détente for Descente: Itochu Launches Partial Tender
Michael Causton‘s insight: Wacoal and Descente Agree Partial Merger to Head Off Itochu

Healthscope Ltd (HSO AU) (Mkt Cap: $3.1bn; Liquidity: $25mn)

Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

• HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
• The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
• Shares are trading  at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.

(link to my insight: BGH Lurks As Brookfield Firms Offer For Healthscope) 

Clarion Co Ltd (6796 JP) (Mkt Cap: $1.3bn; Liquidity: $10mn)

On 26 October Hitachi Ltd (6501 JP) and  Faurecia (EO FP) announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence.  Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days). 

• This deal is quite straightforward. The deal is on schedule and coming through as planned.
• Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
• At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.

(link to Travis’ insight: Faurecia Launches Tender Offer for Clarion) 

Eclipx (ECX AU) (Mkt Cap: $520mn; Liquidity: $3mn)

Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU) announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.

• Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
• But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
• Still, at a 15% gross spread to terms and trading ~5% above  its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.

(link to my insight: McMillan’s Offer For Eclipx Wobbles) 

Pioneer Corp (6773 JP) (Mkt Cap: $228mn; Liquidity: $3.7mn)

The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process. 

• For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.

(link to Travis’ insight: Pioneer Shareholders Approve Deal | What Next?) 

Veriserve Corp (3724 JP) (Mkt Cap: $270mn; Liquidity: $1mn)

SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.

• The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
• Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
• There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)) 

Jiec Co Ltd (4291 JP) (Mkt Cap: $147mn; Liquidity: $.03mn)

Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.

• The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
• But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders. 
• So you suck it up and buy and tender, or tender what you own.  And then you write a public comment to the METI Fair M&A process.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary JIEC)

Earthport plc (EPO LN) (Mkt Cap: $304mn; Liquidity: $2mn)

Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumping Visa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag.  EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected. 

• For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.

• A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
• There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.

(link to my insight: Earthport the Winner as Mastercard/Visa Jostle For Position)  

Ceva Logistics AG (CEVA SW) (Mkt Cap: $1.7bn; Liquidity: $13mn)

CMA CGM SA (144898Z FP) has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.

• CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing. 

(link to my insight: CEVA’s Fair & Reasonable Offer; But Please Don’t Tender)

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.

(link to my insight: M&A: A Round-Up of Deals in January 2019)

Hyundai Heavy Industries Holdings (267250 KS)/Hyundai Heavy Industries (009540 KS)

As widely reported in the press and discussed by Douglas Kim (Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank) and Sanghyun Park (Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal), Aramco announced an intention to acquire a 19.9% equity investment in Hyundai Oilbank Co (HOC) for US$1.6bn. This places an overall value for HOC at ₩8.98tn (the media is reporting that Aramco plans to value HOC at ₩10tn) or ₩8.2tn for HHI’s current 91.13% stake. This is HHI’s largest investment, accounting for 83%/67% of NAV/GAV. 

• HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year. 
• Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
• But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue.  Please refer to this development in the “Events” section above.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted) 

United Co Rusal (486 HK)/Mmc Norilsk Nickel Pjsc (Adr) (MNOD LI)

The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force. 

• Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
  • The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later.  This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)). 
  • As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
• Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted

I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.

The average premium/discount for each set over a one-year period is graphed below.

(link to my insight: Share Classifications: Jan 2019 Month-End Snapshot) 

Briefly …

• Sanghyun recommended a long Common and short 1P, after LG Chem Ltd (051910 KS) Common/1P is touched levels last seen in mid October last year. LG Chem Share Class: Common Discount to 1P Should Be Reverted at This Point.

By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday. 

• Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP) buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
• A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.

(link to Travis’ insight: 31 January TOPIX & JPX Nikkei 400 Major Index Changes)

• The Greencross Ltd (GXL AU)/TPG transaction has now received FIRB approval. The scheme meeting is scheduled for the 6 Feb.

• The Bank Tabungan Pensiunan Nasional (BTPN IJ) deal with Sumitomo Mitsui Financial (8316 JP) went through. SMFG paid IDR 4,282 and almost all BTPN shareholders took them up on it. 
• The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares. 
• Minebea Co Ltd (6479 JP) announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
• The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).

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.   

4. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

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.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 63.8% for Placements 

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

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (Hong Kong, re-filed)

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.

News on Upcoming IPOs

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

5. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

In this briefing:

1. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport
2. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st
3. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
4. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)
5. ZOZO: Earthbound

1. Last Week in Event SPACE: Toppan, Hyundai Heavy, Descente, Healthscope, Eclipx, Pioneer, Earthport

Last Week in Event SPACE …

• Toppan Printing (7911 JP)‘s management prefers to run a long/short fund rather than support the company’s long-suffering shareholders. 

• Hyundai Heavy Industries Holdings (267250 KS) discount to NAV was all set to narrow after Aramco’s intention to acquire 19.9% in Hyundai Oilbank Co; then 31%-held Hyundai Heavy Industries (009540 KS) announced a multi-step split-off, payment in kind and rights issue.

• Following Itochu Corp (8001 JP)‘s partial offer, Descente Ltd (8114 JP) has the ability to play dirty and investors and traders should be aware of that.

• Brookfield firms up a reduced offer for Healthscope Ltd (HSO AU), however the BGH-consortium is not out of the picture.

• Mcmillan Shakespeare (MMS AU) pushes back on Eclipx (ECX AU)‘s first court date, but MACs have not been triggered.

• Pioneer Corp (6773 JP)‘s shareholders vote to implement a self-imposed (self-inflicted?) equity “cramdown” of sorts. 

• Bidding could still go crazily higher from here as Mastercard Inc Class A (MA US) and Visa Inc Class A Shares (V US) wrestle for Earthport plc (EPO LN).
• Plus CCASS movements and expected upcoming events for key M&A transactions.

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

Toppan Printing (7911 JP) (Mkt Cap: $5.3bn; Liquidity: $14mn)

Campbell Gunn tackled Toppan, whose market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years. 

• Toppan’s investment portfolio (341 companies with an aggregate market value as of the last quarter of ¥498bn) has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR). The economic reality for Toppan is that the company’s investment business has far surpassed the core business in terms of ‘margins’ and contribution to Net Assets.
• The company has become more (relatively speaking) proactive in managing equity risk, and recently sold 10.5m shares in Recruit Holdings (6098 JP) (its largest investment holding) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation.
• Toppan’s business and investment portfolio should be radically pruned or eliminated.  Such a transformation probably requires a change of management, the presence of an activist investor, or both. The latter is the more likely outcome.   

(link to Campbell’s insight: Toppan Printing: Money for Nothing (& Your Clicks for Free)

Hyundai Heavy Industries (009540 KS) (HHIC) (Mkt Cap: $8.1bn; Liquidity: $37mn)

HHIC mainly comprises its own shipbuilding/marine plant business (75% of GAV) and 80.54% in Samho Heavy stake (15% of GAV), both unlisted. Samho Heavy owns a 42.40% stake in Hyundai Mipo Dockyard (010620 KS). HHIC announced it will split-off (no new shares issues) with the surviving company an intermediate holdco (same ticker, 009540) and new opco (unlisted) holding Samho Heavy and the in-house shipbuilding/marine plant business.

• Next the Korean Dev Bank will exchange its 55.7% stake in Daewoo Shipbuilding & Marine Engineering (042660 KS) (DSME) for 15.2mn shares in the intermediate holdco (21.5% of shares out) via a payment in kind.
• Following which, the intermediate holdco will do a ₩1.25tn rights offer to its shareholders, including Hyundai Heavy Industries Holdings (267250 KS).
• Next, DSME undertakes its own rights offer (39.9% of DSME’s shares), via a third party allocation to intermediate Holdco with a target value of ₩1.5tn, in an all cash deal. The intermediate holdco will ultimately hold a 68.3% stake in DSME. DSME will remain a listed company therefore no tender offer to the remaining shareholders is expected, according to Sanghyun Park. Details are not finalised and further information is expected on the 8 March.

links to:
Sanghyun’s insight: Hyundai Heavy/DSME Event – Comprehensive Summary
Douglas Kim‘s insight: Korea M&A Spotlight: KDB Is Ready to Sell Its Stake in DSME to Hyundai Heavy Industries Holdings.

Nexon Co Ltd (3659 JP) (Mkt Cap: $8.1bn; Liquidity: $37mn)

Netmarble Games (251270 KS) officially announced it is interested in buying Nexon/NXC Corp. At this point, it appears that a higher probability scenario is for Tencent Holdings (700 HK) to form a consortium with either Netmarble Games or Kakao Corp (035720 KS) in bidding for Nexon/NXC Corp. Douglas’ justification for this are:

• To avoid the cultural backlash from Korean gamers.
• Tencent is a minority investor of both Netmarble Games and Kakao. Tencent’s 17.7% stake in Netmarble Games is worth ₩1.6tn. Tencent’s 6.7% stake in Kakao which is worth ₩0.6tn.
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

(link to Douglas’ insight: Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?) 

Descente Ltd (8114 JP) (Mkt Cap: $1.9bn; Liquidity: $3mn)

Relationship problems started in 2013 when Itochu Corp (8001 JP) was pushed out of the leadership spot in Descente without any warning or even any face-saving honorary role for its outgoing leader. This was hostile and the frictions were laid bare for anyone who cared to see them. They got worse when Itochu bought shares last summer without telling Descente. They got even worse when Descente signed a deal which would effectively end in a merger with Wacoal without telling Itochu. So it should have been less of a surprise than it appeared when Itochu announced this past Thursday it would launch a Partial Tender Offer for 9.56% of the shares outstanding of Descente.

• Itochu’s Partial Tender is interesting, and there is a trade here if enough people are sceptical of Descente’s ability to play hardball. It is, however, not particularly cheap, and the shares were below ¥2,000/share last Wednesday for a reason. 
• Because Itochu is putting itself in a place to not be able to win (i.e. not control the board post-tender, also knowing that Descente could dilute them at will), this is an invitation by Itochu to minority shareholders to make their opinions known, for the media and commentators to do so too, and for someone else to come in over the top. 
• Travis Lundy thinks this goes to close to ¥2800 – and did close at ¥2,771 on Friday – because of expectations that Descente will find a white knight to pay more or that the family could launch an MBO. Anybody who wants Descente doesn’t want it for its Japan business. So paying a higher price than someone who wants to expand aggressively in China to allow entrenched management to not expand aggressively in China requires deeper pockets or a lot more patience. 

links to:
Travis’ insight: No Détente for Descente: Itochu Launches Partial Tender
Michael Causton‘s insight: Wacoal and Descente Agree Partial Merger to Head Off Itochu

Healthscope Ltd (HSO AU) (Mkt Cap: $3.1bn; Liquidity: $25mn)

Healthscope has announced it has entered into an Implementation Deed with Brookfield, under which Brookfield seeks to acquire 100% of Healthscope by way of a scheme at A$2.50/share, and a simultaneous Off-market takeover Offer at $2.40/share, both inclusive of an interim dividend of $.035/share. The considerations under these proposals compare to the earlier indicative considerations of $2.585/share and $2.455/share respectively under the unsolicited conditional proposals announced back in November.

• HSO also announced that the BGH-led consortium, which holds a ~20% stake, said it could improve the terms of its previous offer of $2.36/share, provided it was given access to Healthscope’s data room.
• The 3.3% and 2.2% step down in Consideration under the Scheme and Off-market Offer compared to the earlier proposals underscores the uneasy backdrop to this Offer on account of various operational issues faced by Healthscope. It also underlines the fact that even provided due diligence, there can be no guarantee the BGH-led consortium will bump its initial bid.
• Shares are trading  at a punchy $2.45/share, facing either the Scheme proposal or the possibility the BGH ups its offer, with or without due diligence. This is a mid-single-digits annualized return which assumes that either BGH will up, or will take the Scheme rather than see whether the Off-Market Takeover gets done. This is okay, but not great. I’d look to enter closer to the Off-market consideration level.

(link to my insight: BGH Lurks As Brookfield Firms Offer For Healthscope) 

Clarion Co Ltd (6796 JP) (Mkt Cap: $1.3bn; Liquidity: $10mn)

On 26 October Hitachi Ltd (6501 JP) and  Faurecia (EO FP) announced that Faurecia would take over Hitachi car audio and infotainment equipment subsidiary in Clarion a tender offer to be launched 3+ months hence.  Clarion has now announced a forecast revision for the fiscal year to 31 March 2019 which involves a shortfall in revenue of 9.1%, a 16.7% drop in forecast Operating Profit, and a drop in Net Profit from ¥1.7bn to a loss of ¥500mn (a ¥2.2bn swing); fortunately Faurecia also announced it will go through with the deal with no changes (other than to extend the Tender Offer to 21 business days). 

• This deal is quite straightforward. The deal is on schedule and coming through as planned.
• Travis expects this deal will end up with Faurecia owning over 90% and there will be a Demand For Shares as allowed to Special Controlling Shareholders (under Article 179, Paragraph 1 of the Companies Act) allowing them to force out minorities, potentially by the 3rd week of March 2019.
• At the current close of ¥2,496, it is offering <2% annualized return for slightly more than one-month of cash usage, and negligible risk this deal doesn’t go through. Tight, but to be expected.

(link to Travis’ insight: Faurecia Launches Tender Offer for Clarion) 

Eclipx (ECX AU) (Mkt Cap: $520mn; Liquidity: $3mn)

Thirty minutes after Eclipx guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU) announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.

• Taken purely on the guidance downgrade and the MAC’s described in the SIA, on balance, this deal still looks good to go. I don’t see a MAC being triggered here.
• But this new development could/should also be viewed in conjunction with the large step down in NPATA guidance for FY18 (announced on the 6 August 2018, and resulted in the large decline as seen in the chart below), where FY18 NPATA was guidance was reduced to A$77-$80mn (13-17% growth ) versus prior guidance of 27-30% growth. Perhaps MMS want ECX to come out and say their forecast for annual NPATA is down 10%.
• Still, at a 15% gross spread to terms and trading ~5% above  its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal – while ECX’s peer group is down 17% on average since SGF’s tilt – the negative news surrounding the NPATA guidance and the MACs appears fully priced in.

(link to my insight: McMillan’s Offer For Eclipx Wobbles) 

Pioneer Corp (6773 JP) (Mkt Cap: $228mn; Liquidity: $3.7mn)

The deal is done. Shareholders approved the deal. Given where book value and market prices were on the day before the revised plan was announced on 7 December, Travis expects a spirited appraisal rights process. 

• For those who are now looking at this as an arb situation, the return is quite decent if you buy on the bid and can get multiples of leverage and keep them after the shares have been delisted, while waiting for payment. If you can get multiples of leverage only while the shares are listed, it is still pretty OK. If you are an arb with no leverage, this is still OK for a Japanese deal.

(link to Travis’ insight: Pioneer Shareholders Approve Deal | What Next?) 

Veriserve Corp (3724 JP) (Mkt Cap: $270mn; Liquidity: $1mn)

SCSK announced a Tender Offer to buy out minorities in Veriserve, in which it holds 55.59% of voting rights. The Tender Offer is at ¥6,700/share which is a 43.6% premium to the last traded price. The price does not seem egregiously unfair, but for investors who own it who think it has another double in it this year they might get upset. And the lack of good process here deserves attention.

• The lack of imagining a competing bid is not good governance. The lack of looking for one is not either. The lack of true fairness opinion is also not good governance.
• Still, it is at a 14+year high. It is a small cap. Not that many people will care. It is not cheap on a PER basis and not really inexpensive on an EV/EBITDA basis.
• There IS a chance, theoretically, that this does not go through. SCSK doesn’t have a super-majority, and if it does not get 11.1% of the shares outstanding, it will not be able to automatically squeeze out minorities. But Travis does not think it will be particularly difficult to get there.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary VeriServe (3724 JP)) 

Jiec Co Ltd (4291 JP) (Mkt Cap: $147mn; Liquidity: $.03mn)

Sumitomo Corp (8053 JP) consolidated subsidiary SCSK Corp (9719 JP) announced a Tender Offer to buy out minorities in JIEC at ¥2,750/share, in which it has 69.52% of voting rights. This deal is a worthwhile example of some of the weaknesses in the execution of the current Corporate Governance Code and the “fairness” of M&A in Japan.

• The lack of a competing bid and true fairness opinion are not good governance. The fact that the bid is 1.4% above the bottom of the Target’s own Advisor’s fair value DCF valuation range while the top of the range is 61.3% higher is disappointing.
• But what are you gonna do? SCSK has a super-majority. The stock is super-duper illiquid. The Offer is a 31% premium to the highest price ever paid for the stock. There is no minimum to the tender so it will be “successful” if no one tenders. 
• So you suck it up and buy and tender, or tender what you own.  And then you write a public comment to the METI Fair M&A process.

(link to Travis’ insight: SCSK (9719 JP) Launches Buyout of Subsidiary JIEC)

Earthport plc (EPO LN) (Mkt Cap: $304mn; Liquidity: $2mn)

Mastercard Inc Class A (MA US) has made a £233mn Offer (£0.33/share) to take over cross-border payments firm Earthport, trumping Visa Inc Class A Shares (V US)‘s offer late December by 10%. The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag.  EPO’s shares increased to £0.282 following Visa’s offer, but currently trade at £0.37.50, ~14% above the latest offer, suggesting a higher bid is likely, or at least expected. 

• For EPO shareholders, who watched their shares erase 70% of their value over the last 2 years and trade around £0.05 earlier this month, this is a fantastic result. Mastercard’s bid also comes at a 65% premium to the placement at £0.20/share on 4 October 2017.

• A (significantly) higher offer price is plausible. EPO can be seen as a disruptor to these card giants. Instantaneous bank-to-bank transfers and the increase in mobile payments are a threat to their traditional business models as they eliminate payment cards from the transaction loop. Both Visa and Mastercard have deep pockets and EPO would help both Visa and Mastercard expand their product offering.
• There is no clear or discernible pricing methodology to exact where a bidding war will send the share price. But it could get (unsurprisingly) crazier from here. I think a £0.40/share offer is not unreasonable or out of the question, and is a level where shares often found support for a year and half back in 2014 and 2015.

(link to my insight: Earthport the Winner as Mastercard/Visa Jostle For Position)  

Ceva Logistics AG (CEVA SW) (Mkt Cap: $1.7bn; Liquidity: $13mn)

CMA CGM SA (144898Z FP) has published its prospectus for what is evidently a heavily orchestrated Public Tender Offer for CEVA. Ceva’s Board has concluded that offer is fair & reasonable but does not recommend shareholders tender. CMA CGM added that “the recommendation to shareholders from the CEVA board not to tender shares in exchange for cash is done in perfect agreement with CMA CGM“.

• CMA CGM currently holds 50.6% of CEVA, via a 33% direct stake with the remainder in derivatives. After a 10-trading day cooling off period, the offer will be open for acceptances between February 12 to March 12, unless extended. It is the intention of CMA CGM to maintain CEVA’s listing. 

(link to my insight: CEVA’s Fair & Reasonable Offer; But Please Don’t Tender)

For the month of January, seventeen new deals were discussed on Smartkarma with an overall deal size of US$91bn. This number does not include rumours on Nexon Gt Co Ltd (041140 KS) and Capitaland Ltd (CAPL SP)‘s acquisition of Ascendas-Singbridge. The average transaction premium was 43%, or 26% if ignoring Earthport plc (EPO LN)‘s offer. This insight provides a summary of ongoing M&A situations and a recap of news associated with each event situation in January.

(link to my insight: M&A: A Round-Up of Deals in January 2019)

Hyundai Heavy Industries Holdings (267250 KS)/Hyundai Heavy Industries (009540 KS)

As widely reported in the press and discussed by Douglas Kim (Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank) and Sanghyun Park (Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal), Aramco announced an intention to acquire a 19.9% equity investment in Hyundai Oilbank Co (HOC) for US$1.6bn. This places an overall value for HOC at ₩8.98tn (the media is reporting that Aramco plans to value HOC at ₩10tn) or ₩8.2tn for HHI’s current 91.13% stake. This is HHI’s largest investment, accounting for 83%/67% of NAV/GAV. 

• HOC initially targeted an IPO in 2018 with an expected market cap and an enterprise value of ~₩8tn and ₩10tn respectively, as discussed by Sanghyun in an earlier insight (Hyundai Oilbank IPO Update: Timeline & Valuation). The IPO was postponed after the regulator picked over the balance sheet; and probably just as well, as falling refining margins resulted in HOC’s operating profit declining 42% to ₩661bn last year. The sale to Aramco is expected to push the IPO back to later this year. 
• Prior to Aramco’s involvement, HHI was (and effectively is) a weakish stub with the 31% stake in HHIC accounting for just 32%/26% of NAV/GAV; the unlisted operations and the future earnings of those investments were more critical to understanding HHI’s valuation. This investment by Aramco quantifies the valuation for the majority (~95%) of HHI’s unlisted investments, reinforcing the already somewhat prevalent view that HHI’s discount to NAV was excessively wide.
• But HHI/HHIC weren’t done yet. Just when the NAV was expected to narrow further – especially as additional newsflow filters in on the outcome of the board meetings, the expected timeline to completion, and the possibility of HOC’s IPO later this year – HHIC announced a split-off, a PIK and rights issue.  Please refer to this development in the “Events” section above.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted) 

United Co Rusal (486 HK)/Mmc Norilsk Nickel Pjsc (Adr) (MNOD LI)

The U.S. Treasury (OFAC) has lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo. The key to lifting these sanctions was Oleg Deripaska reducing his direct and indirect shareholding stake in these companies and severing his control. All sanctions on Deripaska continue in force. 

• Rusal announced that En+ had entered into a securities exchange agreement with Glencore, pursuant to which Glencore shall transfer 8.75% of Rusal’s shares to En+ in consideration for En+ issuing new GDRs to Glencore representing approximately 10.55% of the enlarged share capital of En+.
  • The transfer will be done in two stages: 2% to be transferred following the removal of Rusal and EN+ from the SDN list; and 6.75% 12 months later.  This two-stage process appears geared to circumvent a mandatory takeover by En+. Hong Kong employs a “creeper” speed limit, where shareholders (holding between 30-50%) can creep their shareholding upwards by 2% in a 12-month period (Rule 26.1 (c)). 
  • As an aside, after sanctions were lifted, En+ announced seven new directors, including Christopher Bancroft Burnham, who served as Under Secretary-General for Management of the United Nations (alongside John Bolton, Trump’s current national security adviser). Burnham was also on Trump’s Presidential Transition Team
• Rusal’s NAV discount has narrowed to 68.5% from 71% the previous Friday. This compares to the 45-50% discount range prior to the sanctions being imposed. This should narrow further.

(link to my insight: StubWorld: Aramco’s Stake Reaffirms Hyundai Heavy’s NAV; Rusal Gains After Sanctions Lifted

I issued a month-end share class summary, a companion insight to Travis’ H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies. This share class monitor provides a snapshot of the premium/discounts for 215 share classifications (ADRs, Koran prefs, Dual-class, Thai foreign/local Thai) around the region.

The average premium/discount for each set over a one-year period is graphed below.

(link to my insight: Share Classifications: Jan 2019 Month-End Snapshot) 

Briefly …

• Sanghyun recommended a long Common and short 1P, after LG Chem Ltd (051910 KS) Common/1P is touched levels last seen in mid October last year. LG Chem Share Class: Common Discount to 1P Should Be Reverted at This Point.

By Travis’ calcs, there was something on the order of ¥630-650bn of shares of several names to buy on the close this past Wednesday. There was also, therefore, something like ¥630-650bn of TOPIX and JPX Nikkei 400 (almost all TOPIX) to sell on the close of Wednesday. 

• Softbank Corp (9434 JP) was expected to see total buying of ¥340bn or so; and Takeda Pharmaceutical (4502 JP) buying of ¥260-280bn at the close. (Both names did trade a very large amount off-market.) A number of other names see TOPIX inclusions because of them listing on TSE1 in December or because of share count increasing because of merger (like LIFULL (2120 JP)) or because of offerings.
• A VERY significant amount of both names were purchased in “guaranteed close” trades where indexers actually paid close-plus pricing until the very end of the day because of fears that the actual market might not close. This meant that on-market volume for Takeda and Softbank was a fraction of what might be expected. The risk was transferred but to get in the flow you had to trade off-market.

(link to Travis’ insight: 31 January TOPIX & JPX Nikkei 400 Major Index Changes)

• The Greencross Ltd (GXL AU)/TPG transaction has now received FIRB approval. The scheme meeting is scheduled for the 6 Feb.

• The Bank Tabungan Pensiunan Nasional (BTPN IJ) deal with Sumitomo Mitsui Financial (8316 JP) went through. SMFG paid IDR 4,282 and almost all BTPN shareholders took them up on it. 
• The Centuria Capital (CNI AU) resolution has passed. This resolution was not a vote to decide on tendering the shares held by CNI in Propertylink Group (PLG AU) into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) those PLG shares. 
• Minebea Co Ltd (6479 JP) announced that it had received all relevant anti-trust approvals but would not start the Tender Offer for U Shin Ltd (6985 JP) until the start of February (the original announcement had said the Tender would commence at the end of January).
• The interesting path of the Mobius strip of connections that is the HCN continues: China Goldjoy (1282 HK)‘s chairman Yao Jianhui (& others) have pledged 12.14% of China Goldjoy to Huarong Investments (2277HK). Goldjoy is the Offeror for New Sports Group (299 HK).

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

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

2. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

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.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 63.8% for Placements 

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

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (Hong Kong, re-filed)

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.

News on Upcoming IPOs

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

3. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

4. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.

Stocks with strong inflows (by quantum) were Kweichow Moutai Co Ltd A (600519 CH), Gree Electric Appliances Inc Of Zhuhai (000651 CH), and Midea Group Co Ltd A (000333 CH). Please read this note together with our coverage for December flow and our coverage for January northbound flow. 

5. ZOZO: Earthbound

DOWN AND OUT – ZOZO (3092 JP)‘s third-quarter results which were announced yesterday, saw a 28% quarter-on-quarter increase in sales and trailing-twelve-month (TTM) revenues increased by 25%. Elsewhere the wheels are gradually coming off. In ZOZO most important quarter of the year, Operating Income rose by just 8.2% year-on-year and Net Income by 9.5%. As we mentioned in our previous Insight, Buying a Stairway to Heaven, ZOZO required at least ¥46b in revenues and ¥15b in operating income to meet their full-year forecasts. ¥36b and ¥10b failed to reach this high hurdle and, for the first time since listing, ZOZO has been required to revise down the company’s earnings forecasts. Revenues have been revised down by 20%, OPerating Income by 34% and Net Income by 36% compared to the company’s previous forecasts. Compared to the trailing-twelve-month number the revisions are +1% and -11%, respectively.  

DOWNSIDE RISK – If ZOZO has entered an era of low or no-growth, a revaluation fo the business to reflect such a reality could see the company’s shares fall by up to 50%

In this briefing:

1. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st
2. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?
3. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)
4. ZOZO: Earthbound

1. ECM Weekly (2 February 2019) – Maoyan, China Tower, Dexin, Chalet Hotels, Bharat Hotels, Wingarc1st

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.

Accuracy Rate:

Our overall accuracy rate is 72% for IPOs and 63.8% for Placements 

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

New IPO filings

• Edvantage Group (Hong Kong, ~US$100m)
• Koolearn (Hong Kong, re-filed)
• Shangde Qizhi Education Group (Hong Kong, re-filed)

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.

News on Upcoming IPOs

• China’s Sinochem Energy lets Hong Kong IPO application lapse
• India’s Cleartrip eyes IPO as it plans Gulf expansion
• Blackstone set to IPO inaugural $1 billion Reit before March
• Bursa Malaysia’s outgoing CEO says IPO pipeline for 2019 looks strong
• China to Scrap Price, Debut Gain Limits to Entice Tech IPOs

Smartkarma Community’s this week Analysis on Upcoming IPO

• Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
• Chalet Hotels IPO Review – Backed up into a Corner
• CStone Pharma IPO Preview: Mixed Prospects of Late-Stage Clinical Drug Candidates
• IPO Radar: KTB Securities, the Only Korean Broker in Thailand
• Shanghai Henlius (复宏汉霖) IPO: Not an Impressive Biosimilar Portfolio
• Dreamtech: Trying for an IPO Again at a Lower Price
• Bharat Hotels Pre-IPO – Catching up with Peers
• China Tower Corp: Trading Idea Before Lock-Up Expiry
• Dexin China (德信中国) Pre-IPO – Related Party Transactions and Partial Asset Listing

List of pre-IPO Coverage on Smartkarma

2. Netmarble Games + Tencent = The Most Likely Consortium to Acquire NXC Corp/Nexon?

Netmarble Games (251270 KS) officially announced on January 31st that it is interested in buying Nexon/NXC Corp. We believe that there is a growing likelihood of a potential consortium which includes Tencent and Netmarble Games to acquire NXC Corp/Nexon. Three major reasons why Tencent may want to partner with Netmarble Games to acquire NXC Corp/Nexon include the following:

• Avoid the cultural backlash from Korean gamers
• Among all the companies that Tencent has invested in Korea, Netmarble Games has become the biggest in amount. 
• Netmarble Games is more focused on games and has a stronger balance sheet than Kakao Corp, which has also shown interest in acquiring NXC Corp/Nexon. 

3. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.

Stocks with strong inflows (by quantum) were Kweichow Moutai Co Ltd A (600519 CH), Gree Electric Appliances Inc Of Zhuhai (000651 CH), and Midea Group Co Ltd A (000333 CH). Please read this note together with our coverage for December flow and our coverage for January northbound flow. 

4. ZOZO: Earthbound

DOWN AND OUT – ZOZO (3092 JP)‘s third-quarter results which were announced yesterday, saw a 28% quarter-on-quarter increase in sales and trailing-twelve-month (TTM) revenues increased by 25%. Elsewhere the wheels are gradually coming off. In ZOZO most important quarter of the year, Operating Income rose by just 8.2% year-on-year and Net Income by 9.5%. As we mentioned in our previous Insight, Buying a Stairway to Heaven, ZOZO required at least ¥46b in revenues and ¥15b in operating income to meet their full-year forecasts. ¥36b and ¥10b failed to reach this high hurdle and, for the first time since listing, ZOZO has been required to revise down the company’s earnings forecasts. Revenues have been revised down by 20%, OPerating Income by 34% and Net Income by 36% compared to the company’s previous forecasts. Compared to the trailing-twelve-month number the revisions are +1% and -11%, respectively.  

DOWNSIDE RISK – If ZOZO has entered an era of low or no-growth, a revaluation fo the business to reflect such a reality could see the company’s shares fall by up to 50%

In this briefing:

1. CyberAgent Cuts Its OP Guidance by JPY10bn; We Are Still Bullish
2. Alibaba (BABA): For Dec. Quarter, Focus on Profit Improvement, But Not Revenue Growth, 40% Upside

1. CyberAgent Cuts Its OP Guidance by JPY10bn; We Are Still Bullish

Cyberagent Inc (4751 JP) reported 1Q FY09/19 financial results on Wednesday (30^th January) after the market close. CyberAgent reported revenue of JPY110.8bn (+13.2%YoY) and OP of JPY5.3bn (-35.2%YoY) for 1Q FY09/19.

Revenue and OP both missed consensus (JPY111.7bn and JPY8.2bn respectively). This was mostly due to low OP from the Game business due to increased advertising expenditure for new titles. OP margin of the Internet Advertisement business also fell due to upfront investments for expansion. Media business, driven by AbemaTV, demonstrated strong topline growth driven by robust increase in the number of AbemaTV premium users but continued to make losses due to heavy investment in content development.

CyberAgent revised down its full-year FY03/19E OP guidance to JPY20bn from JPY30bn previously, but we continue to remain positive about the company’s long term performance, driven by the prospects of its passive TV business (see Mio Kato‘s previous note on this Cyberagent: Aggressive Plans for Passive TV).

CyberAgent’s share price closed at JPY3,500 on Thursday (31st January) down 16% from its previous close. CyberAgent’s share price has been on a bearish trend for the last two quarters, down 49% from an all-time high of JPY6,800 in July. We believe this presents an ideal buying opportunity for the stock. Our SOTP valuation for CyberAgent gives a FY1 target price of JPY4,480 which implies a 28% upside to the current market price.

For details on Cyberagent’s business model please see our previous notes CyberAgent: Hot Internet Media Stock Up ~50% YTD (Part 1) and CyberAgent (Part II): Medium-Term Prospects Are Priced In; Positive Long-Term Outlook .

2. Alibaba (BABA): For Dec. Quarter, Focus on Profit Improvement, But Not Revenue Growth, 40% Upside

• For the December quarter results, the market is focusing on the slowdown of the revenue growth, but we notice that the growth rate of operating profits recovered.
• In two of our previous reports, we mentioned BABA’s efforts on cost control in the second half of 2018. Now we can see the results.
• We believe the most important risk is the significant operating losses in the minor business “digital media”.
• The P/E band suggests that the stock price has an upside of 40%.

In this briefing:

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)
2. ZOZO: Earthbound
3. Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target
4. Toppan Printing: Money for Nothing (& Your Clicks for Free)
5. Share Classifications: Jan 2019 Month-End Snapshot

1. Shanghai/Shenzhen Connect – $8.5 Bn of Inflow in January (Kweichow Moutai, Gree, Midea)

In our Discover SZ/SH Connect series, we aim to help our investors understand the flow of northbound trades via the Shanghai Connect and Shenzhen Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by offshore investors in the past seven days.

We split the stocks eligible for the northbound trade into three groups: those with a market capitalization of above USD 5 billion, and those with a market capitalization between USD 1 billion and USD 5 billion.

We note that offshore investors were buying all GICS sectors, and had a strong preference for Consumer Staples, Financials and Consumer Discretionary names. We estimate that total inflow into A-share market via northbound trade amounted to USD 8.5 bn in January.

Stocks with strong inflows (by quantum) were Kweichow Moutai Co Ltd A (600519 CH), Gree Electric Appliances Inc Of Zhuhai (000651 CH), and Midea Group Co Ltd A (000333 CH). Please read this note together with our coverage for December flow and our coverage for January northbound flow. 

2. ZOZO: Earthbound

DOWN AND OUT – ZOZO (3092 JP)‘s third-quarter results which were announced yesterday, saw a 28% quarter-on-quarter increase in sales and trailing-twelve-month (TTM) revenues increased by 25%. Elsewhere the wheels are gradually coming off. In ZOZO most important quarter of the year, Operating Income rose by just 8.2% year-on-year and Net Income by 9.5%. As we mentioned in our previous Insight, Buying a Stairway to Heaven, ZOZO required at least ¥46b in revenues and ¥15b in operating income to meet their full-year forecasts. ¥36b and ¥10b failed to reach this high hurdle and, for the first time since listing, ZOZO has been required to revise down the company’s earnings forecasts. Revenues have been revised down by 20%, OPerating Income by 34% and Net Income by 36% compared to the company’s previous forecasts. Compared to the trailing-twelve-month number the revisions are +1% and -11%, respectively.  

DOWNSIDE RISK – If ZOZO has entered an era of low or no-growth, a revaluation fo the business to reflect such a reality could see the company’s shares fall by up to 50%

3. Koito Outperforms in 3Q While Stanley Disappoints; Latter Still on Track to Achieve FY03/19E Target

Koito Manufacturing (7276 JP) released its 3QFY03/19 earnings that saw revenue outpace consensus estimates by +2%, while Stanley Electric (6923 JP) ’s revenue fell below consensus estimates by -1%. While Koito witnessed revenue growth of 10% YoY, Stanley posted a decline in revenue for the quarter by -4% YoY. On profitability as well, Koito witnessed growth of +6% YoY, achieving an OPM of 12%. Stanley, on the other hand, experienced a decline in OP for the quarter by -7% YoY, although still managing to achieve a relatively higher OPM of 13%. Here again, Koito managed to beat consensus estimates by +1% while Stanley fell below consensus estimates by -3%. Our conservative estimates for 3Q looked a bit light for Koito while they were slightly high for Stanley.  Koito has been the company which usually disappoints the market with its earnings results, although it has proved otherwise this quarter.

That being said, it should be noted that, although Stanley’s three months ended results did not look particularly robust, its nine months ended results were quite favourable. The company witnessed the revenue grow 0.5% YoY (for the nine months ended 30^th Dec 2018) while OP grew by 5.9% YoY, supported by the steady growth in the high-margin LED headlamps. For Koito, on the other hand, the three months ended results seemed quite favourable, although the nine months ended results displayed a revenue decline of -5.1% YoY and OP decline of -2.4% YoY, citing the deconsolidation of its Chinese subsidiary and the decrease in the volume of automobile production in some of its business regions as the key reasons. Thus, the overall YTD financial performance of Stanley looks still attractive compared to that of Koito. Following the earnings release, Stanley opened -3.7% down on Thursday from Tuesday’s close, while Koito closed +4.8% up on Wednesday since Friday’s close.

4. Toppan Printing: Money for Nothing (& Your Clicks for Free)

TOPPAN PRINTING (7911 JP) is Japan’s current Negative Enterprise Value ‘champion’. Although only growing in the low single digits and with margins to match, comprehensive income margins and returns are significantly higher, as they take Toppan’s significant investment portfolio gains into account. The investment portfolio has grown at a 39.1% compound annual growth rate (CAGR) over the last five years, outperforming Toppan’s core operations (6.4% CAGR) and the overall stock market (7.5% CAGR).

MARKET MYOPIA – Despite the investment portfolio’s ¥411b contribution to Shareholder’s Equity, which has otherwise only increased by ¥98b, the stock market preferred to focus on the stagnating top-line, and the shares have been serial underperformers. Toppan’s market capitalisation has grown by only 2% per annum or just ¥34b since December 2013. From the recent peak in June 2017, Toppan shares have underperformed the market by 27% and, for the last year, have been at their most extreme value relative to TOPIX over the previous thirty years.  During this period, Toppan’s equity holdings rose from 43% of the company’s market capitalisation to close to parity at the recent market peak in September 2018. 

BOTTOMING OUT – With the upcoming boost to sales in the printing business from the change in Japan’s gengō (元号) or era name on the accession of the new Emperor in April, the shares have finally broken out of a one-year period in the Oversold ‘doldrums’.

SELLING STRATEGIC INVESTMENTS – More importantly, the company has become more proactive in managing equity risk. On 23rd January, Toppan sold 10.5m shares in Recruit Holdings (6098 JP) for approximately ¥31.5b, reducing Toppan’s holding in Japan’s leading listing employment services business from 6.57% to 6.05%. Despite the boilerplate language used to describe the company’s strategy towards strategic shareholdings, Toppan has begun to address the portfolio more proactively and in accordance with the spirit of the new guidelines on Corporate Governance in Japan.

BUYBACK POTENTIAL – With this sale, Toppan’s liquid assets will now exceed US$3b or 58% of the current market capitalisation, while the company has committed to capital expenditures totalling only ¥125b over the next five years. Toppan last conducted a modest 0.2% share buyback in 2015-Q2, which was ‘unwound’ by a 0.5% reduction in Treasury Stock in 2017-Q3, which was not accompanied by a share cancellation. With just 8% of shares outstanding held in treasury, there is ample room for further buybacks. 

5. Share Classifications: Jan 2019 Month-End Snapshot

This month-end share class summary is a companion insight to Travis Lundy‘s H/A Spread & Southbound Monitors and Ke Yan‘s HK Connect Discovery Weeklies.

This share class monitor provides a snapshot of the premium/discounts for various share classifications around the region, and comprises four sets of data:

1.  82 ADRs 
2.  104 Korean Prefs 
3.  22 Regional Dual Classes
4.  7 Foreign/Local Thai shares 

The average premium/discount for each set over a one-year period is graphed below.

Source: CapIQ

For a granular breakdown of each data set, PDFs are attached at the bottom of this insight.

In this briefing:

1. LG H&H Share Class: Long 1P / Short Common with a Short-Term Horizon
2. Market Largely Untroubled by Kao’s Troubles
3. U.S. Equity Strategy: Market in Wait-And-See Mode; Upgrading Tech
4. Tesla – Shanghai Surprise
5. Zee Entertainment- Present Mess Seems to Be of Short Term in Nature

1. LG H&H Share Class: Long 1P / Short Common with a Short-Term Horizon

• Common was up 4.81% yesterday. 1P went up 2.45%. The duo is now at 232% of σ. Pref discount stands at 40.32%. This is above 120D mean. This much premium on Common is the highest since October. On 120D, price ratio is above 120D mean.
• Current PER on FY19 earnings is 27x. Valuation wise, there doesn’t seem to be much room for further upside. Local sentiments on the fundamentals outlook are relatively divided. This suggests that it’d be hard to build sustainable price momentums.
• I’d trade this duo on the current divergence. Just, we are moving towards March shareholder meeting cycle. Div yield difference on Common/1P is also pretty minimal. I’d have this trade with a very short-term horizon.

2. Market Largely Untroubled by Kao’s Troubles

After an article appeared on Nikkei Asian Review on 29^th January 2019 stating that Kao Corp (4452 JP) is going to miss its revenue and profit projections for FY2018E, we witnessed no panic in the market. Kao Corporation shares opened trading at JPY 7,621.00 per share up by 0.1% from the previous close price of JPY 7,610.00. The price increased further to JPY 7,657.00 before decreasing towards the day’s low of JPY 7,521.00 and it closed at JPY 7,583.00 which was about 0.4% down from the previous day’s closing price. However, the volume traded had an impact because of this news. For the past 3 months, the average daily volume traded has been around 1.73m shares a day, but declined 27.2% on 29^th Jan 2019.

This news came to light from a third-party source, but Kao responded to it on its investor relations website saying:

“The article in the Nikkei on Jan. 29 regarding the earning forecast consolidated results, is not based on any announcement made by Kao Corporation.”

In their latest release to their investor relations website, Kao Corporation keeps quiet on its ability to meet its 2018E guidance.

This has been happening at Kao for the past few years. Each time a news article has been released regarding Kao’s annual results, by a third party a few days prior to the official announcement.

3. U.S. Equity Strategy: Market in Wait-And-See Mode; Upgrading Tech

The S&P 500 has paused just below logical resistance at the downtrend, and we believe the equity market is in wait-and-see mode for incremental information on a variety of issues including trade talks, Fed action and earnings.  Meanwhile, We are upgrading equal-weighted Technology to overweight. Our equal-weighted Tech Sector has surged to the top of our RSR ranks due to broad-based strength in semiconductors last week. Solar stocks are another Group that is emerging as leadership. In today’s report we highlight attractive small-cap Technology stocks, as well as selection of key stocks (MSFT, AMZN, GOOGL, V, NFLX, and ADBE) and subsectors (semis, biotech, and homebuilders) which are all up against logical price resistance.

4. Tesla – Shanghai Surprise

Tesla Motors (TSLA US) stock is in a tailspin, again. Closing at $297 today, the stock is down 11% ytd, well off its high last August at $379 and trailing even 2018’s comparatively tepid average of $316. Tesla bondholders have remained wary, with the benchmark 5.3% senior notes still hovering near 86 where they’ve traded since last September after plunging more than 10 points versus the beginning of 2018.

Investors are spooked as more Wall Street analysts have slashed their formerly ambitious estimates for Tesla’s fourth-quarter and 2019 revenue, profit, and cash flow primarily due to what they now identify as lower than expected demand and profitability for Model 3. The thing is, Tesla has been signaling escalating troubles for months as I have warned in “Great Magic Trick Tesla; Now Do It Again” which digested Tesla’s “miracle” third quarter and “Tesla: Down to the Wire” which reviewed the frantic close of the fourth quarter). 

So while it’s interesting that market estimates are collapsing toward my previously below-consensus estimates–and even I lowered my already cautious 2019 numbers–I’m concerned about other potentially quake-worthy news affecting performance for 2019 and beyond which we are not getting from Tesla.

With little more notice than a tweet,CEO Elon Musk popped into Shanghai, China, in early January for a showy groundbreaking ceremony to launch Tesla’s new multi-billion dollar Gigafactory 3 which reportedly will be capable of doubling Tesla’s current production capacity. Even more surprising, Musk projected Model 3 production will begin there before the end of this year–less than eleven months from now.

Yet three weeks later we still have no idea how much this mega-plant will cost, or whether Tesla has “funding secured” to pay for it–and these may not even be most troubling facts investors don’t have.

Whatare Musk, and Tesla, and Tesla’s banks, and Musk’s China-based financiers not telling us about Shanghai Giga 3? I suspect the answers may come with potentially nasty surprises.

Read more for Bond Angle analysis.

5. Zee Entertainment- Present Mess Seems to Be of Short Term in Nature

Zee Entertainment Enterprises (ZIN) in the last two trading sessions has corrected by almost 13% over an allegation by a media house that has suggested a link of the Essel Group, the parent company with a firm that is being probed by Serious Fraud Investigation Office over deposits worth Rs. 32 bn during demonetization.

However, the company has denied any link with the firm and has blamed some “negative forces” that are behind the fall to hinder the strategic sale of Zee Entertainment, the crown jewel of the group, so that the parent, Essel group can reduce the debt burden that has accumulated over the years due to some bad calls.

We provide the details in this report.

In this briefing:

1. Tesla Motors – Gaining Industrial Strength
2. Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy
3. Bharat Hotels Pre-IPO – Catching up with Peers
4. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results
5. Kumho Tire (073240): Tough Times Ahead Still…

1. Tesla Motors – Gaining Industrial Strength

Tesla Motors (TSLA US) continues to power ahead of the competition in electric vehicles with an 80% market share of all electric vehicles sold in the United States in 2018.  With approximately 140,000 Model 3 cars sold in the U.S., Tesla outsold every marquee sedan brand. Model 3 outsold mid-size SUVs including BMW X3, Acura MDX, Audi Qs, Lexus RX and even the Mercedes C -Class. 

2. Tesla (TSLA): 4Q Earnings and First Impressions on the Company’s Strategy

Tesla’s 4Q results came in lower than consensus expectations.  While the 4Q results did not surprise us, it came as a negative surprise to street consensus that has taken the stock down by 4.7% in after hours trading at the time of this writing.  Here are some initial impressions:

• Deepak Ahuja steps down (again) as CFO but will remain as senior advisor going forward, and Senior Finance VP Zach Kirkhorn will step up to CFO. This may actually be a positive development from the perspective of management at this time.  Ahuja has always played a critical role in pulling Tesla through one existential crisis after another based on our historical observations, and the context under which he originally retired in 2015 coincided with management believing that it was safe at that time.  With the Model 3 production normalization and the company’s subsequent restructuring initiatives, management may be feeling safer about 2019 than 2018.
• We are less concerned with why the quarterly earnings miss took place.  Gross margins for automotive sales took a dive in 4Q but in our view that resulted primarily from a significant mix shift with the Model 3 taking 70% of the delivery mix, from 67% in 3Q18.  This mix shift is likely to continue to pressure Tesla’s overall margins in 2019.  However, given Automotive gross margins came to 24.3% in 4Q we think it is relatively easy for Tesla management to guide a target 25% range especially if that target is set for 4-6 quarters from now.
• Gigafactory 3 in Shanghai is projected to be completed by the end of 2019, with short range Model 3 and the Model Y (based on the Model 3 platform with 78% shared content) beginning production at that time, financed largely with local bank debt.  Battery cell supply will initially come from Nevada, Japan and some local suppliers but modules and packs will be made in-house.  Given the logistic layout of the Gigafactory 3 and labor cost gap, we think it is plausible for management to currently project that China margins by 2020 could be roughly on par with its U.S. manufacturing operations.  It remains to be seen whether this has been thought through well but the trust factor here will have to go to Deepak Ahuja’s deep industry knowledge given his prior auto industry experience before joining Tesla.
• Tesla’s cash on hand at the end of 4Q18 stood at $3.7bn.  While some investors may remain concerned about the $920m 0.25% Convertible Prefs that are due to mature on February 27, 2019 with a conversion price of $359.87 per share, there should be sufficient liquidity on the balance sheet to cover it in our view even if share price is below that price level on maturity.

We have historically said on this forum, despite a healthy dose of skepticism on the operational aspects of the company given a highly charismatic CEO with untested automotive industry credentials, that calling Tesla’s shares is tantamount to a market call (see, e.g., Tesla: Model 3 Production Rate Reaches 5,000/Week, but Shares Fall ).  The fact that share price performance in the past few months have focused more heavily on earnings, we highly suspect that as with many NASDAQ listed stocks, market confidence with Mr. Musk’s capital raising capabilities may not be a key driver for Tesla’s valuations over the next 12 months.

Tesla (TSLA): Consensus Estimates vs. Actual

3. Bharat Hotels Pre-IPO – Catching up with Peers

Bharat Hotels (BHOT IN) plans to raise around US$150m in its Indian IPO in order to pay down debt. The company owns and operates 12 luxury hotels under “The LaLiT” brand and two mid-market hotels under “The LaLiT Traveller” brand. 

BH has been reporting a steady improvement in operations led by a pick-up in occupancy levels. This has resulted in 30% EBITDA CAGR over FY14-18. 

However, only three out of its 12 hotels seem to be performing consistently and have been increasing their contribution to EBITDA, which was at 76% by FY18. In addition, a comparison with its peer group seems to imply that the company still has some more catching up to do.

4. Teasing Updates on CaiNiao Network & Ele.me Out of Alibaba’s Q3 Results

A set of generally solid Q3FY19 earnings results from Chinese e-commerce giant Alibaba Group Holding (BABA US) also yielded some interesting insights into the company’s two main logistics-related ventures (CaiNiao Network and on-demand food delivery specialist ele.me).

Unfortunately, the information we can glean from BABA’s Q3FY19 results suggests CaiNiao and ele.me are either growing slower or generating significant losses — or both.

In our view, the main logistics takeaways from BABA’s results are:

1. Alibaba’s ‘Core Commerce’ revenues continue to grow faster than express delivery. For the seventh consecutive quarter, Alibaba’s ‘core commerce’ grew much faster than China’s parcel delivery market, outgrowing parcel volume by 8% and parcel delivery revenue by almost 18%. At the margins, China’s express delivery firms are being bypassed by new modes of fulfillment, in our view. 
2. CaiNiao Network’s 15% growth in Q3FY19 is disappointing. Revenue at Alibaba’s CaiNiao Network grew by just 15% Y/Y in the December quarter, to 4.5 bn RMB. In other words, CaiNiao grew even slower than overall Chinese express delivery revenue in the December quarter (+17% Y/Y). That’s disappointing for a company that enjoyed an equity valuation of US$20 bn when Alibaba upped its stake to 51% in late 2017.
3. The reporting segment that includes ele.me barely grew from Q2FY19 to Q3FY19. Alibaba’s ‘Local Consumer Services’ segment had revenue of 5.2 bn RMB in Q3FY19, representing Q/Q growth of just 2.7%. It’s unclear how much local services venture Koubei contributed to this, as Alibaba only began consolidating its revenues some time in December.
4. It looks like losses from CaiNiao & ele.me continued to pile up in Q3FY19. Although it’s not an ‘apples-to-apples’ comparison, EBITA losses from the group of companies that includes CaiNiao and ele.me expanded from 5.8 bn RMB in Q2FY19 to over 8.2 bn RMB in Q3FY19.  This suggests the deep losses from this group (which were equivalent to about 15% of BABA’s core ‘marketplace’ EBITA in Q2FY19) aren’t going away soon.

5. Kumho Tire (073240): Tough Times Ahead Still…

Weak car sales in China, Nissan’s removal of Carlos Ghosn, Akebono Brake Industry share price plunge – facts that make everyone cringe at the sound of it. High indebtedness, low margin and weak sales growth were the chief reasons why Akebono’s share price plunge. Kumho Tire’s high debt to equity ratio has been reduced by an equity investment from a Chinese group but will that help to turn the company around? 

In this briefing:

1. Shiseido Co Ltd: Could Become a Victim of Its Own Success

1. Shiseido Co Ltd: Could Become a Victim of Its Own Success

Shiseido Co Ltd (4911 JP)  will Struggle to Replicate its Past Success Over FY2018-23E

In the past few years, Shiseido was able to outpace the rest of the Japanese cosmetics market by a significant margin. Shiseido’s Japanese operations benefited from the tailwinds of an increasing Chinese tourist influx while its international operations steadily expanded its footprint in China and other geographies. The company also managed to improve its EBIT margin in FY2017 to 8.0% cf. 4.3% in FY2016. Margin improvement kept going into 3Q of FY2018 and we expect FY2018E margin to be 10.8%.

In our opinion, Shiseido will struggle to maintain its revenue CAGR of 7.5% over FY2013-18E over the next five years. We expect a more modest revenue CAGR of 4.9% over FY2018-23E.

Also, as a result of revenue growth and other cost efficiencies, Shiseido’s EBIT is expected to grow at a CAGR of 43.9% over FY2014-18E. But we expect Shiseido to find it difficult to improve its EBIT margin from the FY2018E level.

In this briefing:

1. Aristocrat Leisure Ltd near 52 Week Low Has Runway Based on Positive Earnings Outlook Through 2021
2. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector
3. Hyosung Holdings: Current Status & Trade Approach

1. Aristocrat Leisure Ltd near 52 Week Low Has Runway Based on Positive Earnings Outlook Through 2021

• Australia’s big gaming tech maker spurs organic growth with its entry into the digital gaming space.
• A balance of a strong international footprint and big US presence in the casino sector show up in dramatic forward earnings estimates by analysts.
• Sharp decline in entire gaming sector since last summer has kept the ARISTOCRAT story below the radar.

2. Hanon Systems (018880): Overvalued Stocks in The Low Margin Sector

The recent negative sales in the Chinese auto industry and Nissan’s case of Carlos Ghosn removal could put additional pressure on the already thin margin of auto supplier industry. One of the Carlos Ghosn early contribution to Nissan was to cut cost and outsource the auto parts maker to a wide variety of suppliers including to Hanon Systems (018880 KS) . Nissan’s new management may want to undo some of Carlos Ghosn’ legacy including changing the selection criteria of parts supplier.

Hanon’s global peers also experienced a decrease in the inventory turnover and most of them have been priced at PER <10 but Hanon is still trading at 24x PER while its sales growth and profitability is still in low single digit? Facing the onset of the slowdown in the Chinese auto industry, won’t it be another headwind for Hanon Systems?

3. Hyosung Holdings: Current Status & Trade Approach

• Local institutions are busy scooping up Hyosung Corporation (004800 KS) shares lately. The owner risk is now gone. There are increasing signs of improving fundamentals on all of the four major subs. Some are already expecting ₩5,000 per share. This is a 9.2% annual div yield at the last closing price.
• Discount is also attractive. It is now at 46% to NAV. With this much div yield, discount should be much below the local peer average of 40%.
• I’d continue to long Holdco. Hedge would be tricky. Heavy is up 15% YTD. I admit that there is no clear cointegrated relationship between them. But Heavy’s recent rally is more of a speculative money pushing up on the hydrogen vehicle theme. I’d pick Heavy for a hedge.

In this briefing:

1. Pinduoduo (拼多多) Lock-Up Expiry – A Bug with Overhang
2. Nissan/Renault: French State Intervention Continues
3. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%
4. Galaxy Entertainment Bullish Set up for a Breakout
5. Pinduoduo (PDD US): Lock-Up Expiry – Keep Calm, Keep Going

1. Pinduoduo (拼多多) Lock-Up Expiry – A Bug with Overhang

Just as Pinduoduo (PDD US) lock-up expiry date (22nd January) is approaching, there was news of a massive bug that could result in an RMB20bn loss for PDD. According to the company’s official Weibo account, the bug has already been rectified and a police report has been filed. 

In this insight, we will analyze the potential impact of the bug and the number of shares that could potentially be sold upon lock-up expiry.

2. Nissan/Renault: French State Intervention Continues

This past week saw some interesting news out of the ongoing saga of governance and control that is the Renault SA (RNO FP)Nissan Motor (7201 JP) Alliance. 

• A week ago, former Nissan Chief Performance Officer and onetime potential successor to Ghosn and/or Saikawa-san – Jose Munoz – who was put on leave to help Nissan deal with its internal investigation – resigned effective immediately. Some suggest this is the start of a bloodbath of Ghosn loyalists.
• Former Nissan CEO and still-CEO at Renault Carlos Ghosn was in court to appeal the decision to not allow him bail. I expect that will end up at the Supreme Court in not too long, but for the moment he might stay in detention for another 7-8 weeks.
• Nissan sources said (according to a Reuters report) earlier in the week they would be looking to file suit for damages against Ghosn.
• Nissan and Mitsubishi officially announced Friday that as a result of a joint investigation by Nissan and Mitsubishi Motors (7211 JP) into the Nissan-Mitsubishi Alliance entity (Nissan Mitsubishi BV), it was discovered that “Ghosn entered into a personal employment contract with NMBV and that under that contract he received a total of 7,822,206.12 euros (including tax) in compensation and other payments of NMBV funds. Despite the clear requirement that any decisions regarding director compensation and employment contracts specifying compensation must be approved by NMBV’s board of directors, Ghosn entered into the contract without any discussion with the other board members, Nissan CEO Hiroto Saikawa and Mitsubishi Motors CEO Osamu Masuko, to improperly receive the payments.” Saikawa and Masuko were not informed and did not also get paid by the company. The NMBV entity will attempt to recoup the funds from Ghosn. Nissan and Mitsubishi are thinking of dissolving their Dutch alliance entity.
• The Nissan panel reviewing Nissan’s governance structure, made up of three independent directors and four external members, met for the first time Sunday. The proposals are due end-March, upon which the board will propose a new management system/structure for approval at the shareholder meeting at end-June 2019. The co-chair said in a comment after today’s meeting that Ghosn perhaps had questionable ethics.
• French business newspaper Les Echos carried an “exclusive” interview with Nissan CEO Hiroto Saikawa which was reasonably enlightening, or should have been from a French point of view. In the interview, Saikawa is adamant that he fully supports the Renault-Nissan Alliance saying that it was not just important but “crucial” and he “would do nothing to render it harm”, and that the French state’s stake in Renault “posed no problem at all” because the “French state does not impose in any way on Nissan.” Saikawa-san also noted that he had no intention of ridding Nissan of French/foreign employees.
• Renault Director Martin Vial visited Japan with French officials including Emmanuel Moulin – chief of staff to Bruno Le Maire, who is French Minister of the Economy – to meet with Hiroto Saikawa and Japanese officials Wednesday and Thursday. This trip was first reported by Le Figaro in the early hours of Wednesday morning (15 Jan) Asia time, and the point of the trip was reportedly to discuss the changes in governance at the top of Renault which might be coming – i.e. a new chairman as the French state and Renault’s independent directors appear to have decided that another two months of detention for Carlos Ghosn is enough to warrant a change even if they still presume his innocence in the charges brought in Japan. They were also to inquire after Ghosn’s case, though that seemed to have been secondary.
• As a sidebar to this trip, Bruno Le Maire came out Wednesday saying that the State had asked the Renault board to hold a board meeting to replace Ghosn, and said that the French state would leave it to Renault’s directors to choose, but also came out and said that  Cie Generale Des Etablissement MIchelin (ML FP) CEO Jean-Dominique Senard would be a great choice (though other suggestions are that he might take the role of Chairman as others note that Renault Interim CEO Thierry Bolloré’s role could be made permanent). His comments about Mr. Senard included those suggesting that Mr. Senard adheres to certain ideas of the “social responsibilities” of the company – ideas which Mr. Le Maire shares.

Mr Le Maire also said this week…

“Nous souhaitons la pérennité de l’alliance. La question des participations au sein de l’alliance n’est pas sur la table.”

Another quote from an article which came out Saturday night at midnight Paris time was similar. 

“Un rééquilibrage actionnarial, une modification des participations croisées entre Renault et Nissan n’est pas sur la table”, déclare Bruno Le Maire. “Nous sommes attachés au bon fonctionnement de cette alliance qui fait sa force.”   

Both quotes say “we” (the French state) seek for the Alliance to continue functioning in a stable manner and changes of the crossholding relationship or ownership rates between the companies were not on the table. 

The second appears to be a quote from the Journal du Dimanche (article linked above) which was probably conducted a day or two earlier – and it makes a reference to it having been conducted just after his return from Tokyo (it was not revealed earlier this week that he had made the trip with Mssrs. Vial and Moulin so this is something of a question mark). 

All of this was out by Friday. It was all very measured and reassuring. 

Then Sunday saw a bombshell dropped… again…

In the Nikkei and Bloomberg, it was revealed that the French visitors to Tokyo had informed Japanese officials of their intention to have Renault appoint the next chairman of Nissan (as apparently the Alliance agreement allows) and of the French State’s intention to seek to integrate Nissan and Renault under the umbrella of a single holding company. 

This is interesting for three reasons…

1. A holding company where the two companies stay listed does nothing that the Alliance does not do now except put a single board in place on top of both companies. That would be a Dutch Foundation structure. A holding company where one of the two companies loses its listing (because it is taken over) would require one of those companies lose a set of shareholders. 
2. A Dutch Foundation (which is effectively the same thing if the two companies stay listed) was an idea which a year ago in the previous kerfuffle last spring about merging was “not an option acceptable to the government” (Les Echos, 7-Mar-18)
3. This is, once again, the French state seeking to intervene in the governance of Nissan. That’s a no-no according to the Alliance Agreement as modified in December 2015. 

This is widely reported in English, Japanese, and French on Sunday. 

There is a conciliatory article in Bloomberg with a headline suggesting a French official (Le Maire) downplayed the French comments about a holding company, but that refers to the JDD article, which is probably days old and repeated the same comment he made publicly earlier this week, reported by Les Echos and Le Figaro about a lack of change in cross-holding, but a careful read of the timeline suggests his comments were made in France before someone leaked this to the Nikkei.

Saikawa-san was reported to have said this morning (Monday 21 Jan 2019) that he had not heard about this, but that now was not the time to consider revising capital ties.

One should note, once again, that this is not the CEO or independent Chairman of Renault saying this. It is not the board or Nissan saying this. It is the French state. 

What does this all mean?  What are the possibilities and ramifications? Read on…

3. TRACKING TRAFFIC/Chinese Express & Logistics: Inter-City Pricing -9.1%

Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes. 

This month’s issue covers the following topics:

We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing for inter-city shipments appears to be falling faster than costs can be cut, leading to margin compression. 

4. Galaxy Entertainment Bullish Set up for a Breakout

Galaxy Entertainment Group (27 HK) exhibits some valid chart support in the form of a key low at 61.8% retracement and physical price support at the 40 level. This low should stay in place for 2019.

Price and RSI wedge formations are building steam for an upside breakout. MACD bull divergence and the triangle breakout back in November will provide forward upside energy. MACD triangles are some of the most powerful chart set ups.

Currently at an attractive risk to reward support zone for an entry with a reasonably tight stop.

5. Pinduoduo (PDD US): Lock-Up Expiry – Keep Calm, Keep Going

The recent collapse of Xiaomi Corp (1810 HK)’s shares after the end of its six-month lock-up period has focused minds on upcoming lockup expirations. Pinduoduo (PDD US) is the next major Chinese tech company with an upcoming lock-up expiration – its six-month lock-up period expires on 22 January.