Consumer

In this briefing:

1. Maruti Suzuki- Q2FY19 Results Update
2. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion
3. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again
4. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT
5. EM Relative Strength Is Bottoming: Overweight

1. Maruti Suzuki- Q2FY19 Results Update

Maruti Suzuki’s Q2FY19 results were below our expectations. Sales grew by only 2% YoY in Q2FY19 led by a 3.7% increase in realization per unit. But the volumes declined by 1.5% YoY in the same period. We analyze the results.

2. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion

• Improving asset turnover, good risk adjusted price momentum, and relatively strong analyst recommendations relative to its sector
• Larger distribution channel through acquisition of DNA Retail Link to add 95 more stores to current 518 stores
• New mobile product launches in 4Q18 and COM7’s focus on high margin products, such as Android smartphones, should support high earnings growth which was up 56% YoY in 3Q18
• Attractive at a 19CE* PEG of 0.9 versus ASEAN sector at a PEG of 2.7
• Risks: Lower-than-expected demand for new IT products, slower-than-expected store expansions

* Consensus Estimates

3. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again

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:

4. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT

Last Week in Event SPACE …

• Bad banker analysis as Familymart Uny Holdings (8028 JP)‘s tender for Don Quijote Holdings (7532 JP) doesn’t even get close to the mark.
• Spooky action at a distance as the whole episode with Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN) and index providers is baffling. 
• A possible offer for Harbin Electric Co Ltd H (1133 HK) could trigger corporate governance issues.

• Motherson Sumi Systems (MSS IN)‘s potential tilt for Leoni AG (LEO GR) is well telescoped and similarly should be well received.  

• NTT (Nippon Telegraph & Telephone) (9432 JP) has headroom to buy back shares from the government, but going forward there is still more on-market buying to do.

• Young Poong Corporation (000670 KS)‘s holding in Korea Zinc Co Ltd (010130 KS) accounts for an eye-watering ~200% of its market cap.

• A last-minute lump of coal in the stocking from MYOB Group Ltd (MYO AU)? 

• And analysing the trading patterns of 340+ TOPIX inclusions over the past five years.

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

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $546mn; Liquidity: $0.4mn)

Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK) is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending. As HE is PRC incorporated, a privatisation by way of a merger by absorption may be proposed, similar to Advanced Semiconductor Mfg Corp Ltd. (3355 HK) as discussed in ASMC’s Merger By Absorption. 

• It is possible this suspension is not in relation to a takeover, but a major sale of assets, for example, from the parent to the sub. This would make sense given the recent share purchase by HEC (completed in January this year), and the fact HE is playing catch-up to Dongfang Electric Corporation (1072 HK) & Shanghai Electric Group Company (2727 HK). Arguably, launching a takeover shortly after subscribing for more shares is unusual.  Then again, when the two SOE railway behemoths CNR and CSR merged in 2015, a merger was disputed (at the time) when both were suspended on account of the fact CNR was only listed (on the HK exchange) in 2Q14.
• HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn, or HK$7.27/share) was 65%.
• “Fair” pricing to me would be something like the distribution of net cash to zero then taking over the company on PER. I simply don’t see this happening. And if it doesn’t, the fiduciary duty of independent directors will be tested/scrutinised if they recommend an offer to shareholders at any price less than the net cash/share of the company.

(link to my insight: Harbin Electric Expected To Be Privatised)  

Motherson Sumi Systems (MSS IN) (Mkt Cap: $7.7bn; Liquidity: $1.6mn)

Reportedly Motherson has entered merger/acquisition talks with Leoni AG (LEO GR), a leading provider of cables and cable systems for the automotive sector and other industries. Motherson has made four acquisitions so far in this business segment with the latest being PKC in 2017.

• Motherson has always aimed at strengthening this business area internationally, therefore the news about a merger with Leoni comes as no surprise and was mentioned as a potential acquisition target in LightStream Research‘s earlier insight Two More Acquisitions on the Way for Motherson Sumi. 
• Motherson has a strong balance sheet that could support this acquisition, although its ability to make further acquisitions in the short-to-medium term may be hampered – Leoni would be at the higher end of the price range for recent acquisitions. Should the acquisition go through, the company will be very well positioned to reach its US$18bn revenue target by 2020E, given that the combined revenue for FY2017 alone is ~US$13bn.
• Currently, Motherson is trading at an FY1 EV/EBITDA of 10x, slightly above peers such as Mahindra Cie Automotive (MACA IN) (9x) and below peers such as Bosch Ltd (BOS IN) (25x). If the deal goes through, Motherson’s FY1 EV/EBITDA of ~12x would be at a slight premium to local players, but still reasonable compared to international players. 

(link to Aqila Ali ‘s insight: Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni)  

Kohlberg Kravis Roberts reduced its indicative offer to $3.40 from $3.77 on Thursday after sifting through MYOB’s books, with MYOB announcing:

Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. …  The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)

• KKR’s revised non-binding proposal expired at 5pm on Friday, which came and went without any ASX announcement. Presumably, an announcement will be made before the market opens tomorrow (rendering this commentary redundant) with either MYOB grudgingly accepting the lower offer, or MYOB rejecting and KKR walking away (for now), or going hostile.
• Since the initial October proposal, MYOB’s peers (Hansen Technologies (HSN AU), Adacel Technologies (ADA AU), Bravura Solutions (BVS AU), Iress Ltd (IRE AU), Technology One (TNE AU), Xero Ltd (XRO AU) and Wisetech Global (WTC AU)) have traded down 17%, on average, while the ASX is down 10%. That backs out a possible adjusted-downside price range of $2.47-$2.68/share. Shares closed at $2.87 on Friday.

(link to my insight: Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer)

(link to my insight: StubWorld: Young Poong Blows Out, Again)  

Softbank Group (9984 JP) / Softbank Corp (9434 JP)

A forgettable trading debut for Japan’s largest-ever IPO, with Softbank Corp, closing at ¥1,282/share, down from the IPO price of ¥1,500, and closing at ¥1,316/share on Friday, the same day as its FTSE inclusion.

• At around 22% of NAV and 16% of GAV – by my calcs – Corp is a material % of Softbank Group (9984 JP). However as repeatedly seen when a conglomerate adds yet another listco to its stable (in Hong Kong, Wheelock & (20 HK) and Great Eagle Holdings (41 HK) spring to mind), a sustained narrowing in the holdco discount is often not the end result. Nor should it be. Softbank is effectively swapping shares for cash.
• The discount did narrow from the 2Q18 through to early October. Pelham Smithers‘ take on that narrowing is discussed in its insight Why SoftBank’s (9984 JP) Holdco Discount Is Narrowing.

With seven stocks promoted/reassigned from TSE2, MOTHERS, and JASDAQ in November 2018 leading to the same seven stocks being included in TOPIX at the end of December, Travis tested 340+ TOPIX inclusions over the past five years to see what really happens around TOPIX inclusions?

• If you own all but the smallest stocks (with a market cap of less than ¥15bn), odds are that, ON AVERAGE, they will underperform TOPIX from inclusion date or the day after, for many months.
• The larger the market cap, the more marked the AVERAGE underperformance immediately following inclusion. 
• For names in the ¥25-50bn sweet spot of “large enough to be “small cap” with somebody paying attention to it”, outperformance vs underperformance in the next 10 days is a 47/53 proposition. That is a bigger risk. It may be data-idiosyncratic, but it is not clear.
• In the case of the 7 names going into TOPIX at month-end this month, the averages would suggest one could still be long the four largest (at the time of Travis’ insight), but one would not want to be long the others; and one could sell long positions in all the names as of the close of the 27th or 28th and have it be an ex-ante expected net positive outcome vs TOPIX over the following 10-60 trading days.

(link to Travis’ insight: Historical TOPIX Inclusions:  How Do They Do Around Inclusion Date?)

Ke Yan, CFA, FRM provided an update on the HK Connect/southbound flow. Fullshare Holdings (607 HK), Shandong Gold Mining Co Ltd (1787 HK) and Shanghai Fosun Pharmaceutical (Group) (2196 HK) rounded out the top three inflows relative to their free float in the past seven days.  Shandong Gold remained in the top inflow list for the third consecutive week. Top outflows relative to the free float are Wuxi Biologics (Cayman) Inc (2269 HK), China Southern Airlines (1055 HK) and Sino Biopharmaceutical (1177 HK). 

(link to Ke Yan’s insight: Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17))  

Briefly …

• CJ Corp (001040 KS) announced both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10-year duration, and it provides an extra 2% of the face value to what Common gets. Price ratio wise, 1P is currently close to the 2Y mean. This stock dividend should push 1P up, as should CJ’s announcement it would pay a cash dividend. The current div yield difference is a historic high at 1.53%. (link to Sanghyun Park ‘s insight: CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend)  
• There are expectations of a ₩500 year-end dividend (up 25% YoY) for Lg Electronics (066570 KS) Common, or a dividend yield of 0.75%. Prefs will get ₩550 or a dividend yield of 2.03%. The yield spread would be 1.28%, the widest since 2015. There may be some narrowing in the spread as we head into year-end. (link to Sanghyun’s insight: LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap)

• LCY Chemical Corp (1704 TT).  MOEA (Ministry of Economic Affairs) approval has now been received and LCY has applied for the delisting from the TWSE. The last trading day is the 23 Jan 2019 and the stock delists on the 30 Jan.  The settlement is expected to take place mid-Feb.
• Healthscope Ltd (HSO AU). In an ASX announcement on Friday Brookfield said: “based on its enquiries and financing discussions to date, it has no reason to believe it will not be willing and able to proceed with the proposal“. The exclusivity provisions have been extended to 18 January. Separately, Healthscope has also received correspondence from the BGH-AustralianSuper Consortium that it has indicated it is able to commence due diligence immediately. HSO’s board stated it will consider the correspondence. These are both positive developments.

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.   

5. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

In this briefing:

1. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again
2. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT
3. EM Relative Strength Is Bottoming: Overweight
4. FamilyMart: A Shrewd Head-Fake?
5. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

1. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again

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:

2. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT

Last Week in Event SPACE …

• Bad banker analysis as Familymart Uny Holdings (8028 JP)‘s tender for Don Quijote Holdings (7532 JP) doesn’t even get close to the mark.
• Spooky action at a distance as the whole episode with Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN) and index providers is baffling. 
• A possible offer for Harbin Electric Co Ltd H (1133 HK) could trigger corporate governance issues.

• Motherson Sumi Systems (MSS IN)‘s potential tilt for Leoni AG (LEO GR) is well telescoped and similarly should be well received.  

• NTT (Nippon Telegraph & Telephone) (9432 JP) has headroom to buy back shares from the government, but going forward there is still more on-market buying to do.

• Young Poong Corporation (000670 KS)‘s holding in Korea Zinc Co Ltd (010130 KS) accounts for an eye-watering ~200% of its market cap.

• A last-minute lump of coal in the stocking from MYOB Group Ltd (MYO AU)? 

• And analysing the trading patterns of 340+ TOPIX inclusions over the past five years.

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

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $546mn; Liquidity: $0.4mn)

Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK) is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending. As HE is PRC incorporated, a privatisation by way of a merger by absorption may be proposed, similar to Advanced Semiconductor Mfg Corp Ltd. (3355 HK) as discussed in ASMC’s Merger By Absorption. 

• It is possible this suspension is not in relation to a takeover, but a major sale of assets, for example, from the parent to the sub. This would make sense given the recent share purchase by HEC (completed in January this year), and the fact HE is playing catch-up to Dongfang Electric Corporation (1072 HK) & Shanghai Electric Group Company (2727 HK). Arguably, launching a takeover shortly after subscribing for more shares is unusual.  Then again, when the two SOE railway behemoths CNR and CSR merged in 2015, a merger was disputed (at the time) when both were suspended on account of the fact CNR was only listed (on the HK exchange) in 2Q14.
• HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn, or HK$7.27/share) was 65%.
• “Fair” pricing to me would be something like the distribution of net cash to zero then taking over the company on PER. I simply don’t see this happening. And if it doesn’t, the fiduciary duty of independent directors will be tested/scrutinised if they recommend an offer to shareholders at any price less than the net cash/share of the company.

(link to my insight: Harbin Electric Expected To Be Privatised)  

Motherson Sumi Systems (MSS IN) (Mkt Cap: $7.7bn; Liquidity: $1.6mn)

Reportedly Motherson has entered merger/acquisition talks with Leoni AG (LEO GR), a leading provider of cables and cable systems for the automotive sector and other industries. Motherson has made four acquisitions so far in this business segment with the latest being PKC in 2017.

• Motherson has always aimed at strengthening this business area internationally, therefore the news about a merger with Leoni comes as no surprise and was mentioned as a potential acquisition target in LightStream Research‘s earlier insight Two More Acquisitions on the Way for Motherson Sumi. 
• Motherson has a strong balance sheet that could support this acquisition, although its ability to make further acquisitions in the short-to-medium term may be hampered – Leoni would be at the higher end of the price range for recent acquisitions. Should the acquisition go through, the company will be very well positioned to reach its US$18bn revenue target by 2020E, given that the combined revenue for FY2017 alone is ~US$13bn.
• Currently, Motherson is trading at an FY1 EV/EBITDA of 10x, slightly above peers such as Mahindra Cie Automotive (MACA IN) (9x) and below peers such as Bosch Ltd (BOS IN) (25x). If the deal goes through, Motherson’s FY1 EV/EBITDA of ~12x would be at a slight premium to local players, but still reasonable compared to international players. 

(link to Aqila Ali ‘s insight: Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni)  

Kohlberg Kravis Roberts reduced its indicative offer to $3.40 from $3.77 on Thursday after sifting through MYOB’s books, with MYOB announcing:

Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. …  The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)

• KKR’s revised non-binding proposal expired at 5pm on Friday, which came and went without any ASX announcement. Presumably, an announcement will be made before the market opens tomorrow (rendering this commentary redundant) with either MYOB grudgingly accepting the lower offer, or MYOB rejecting and KKR walking away (for now), or going hostile.
• Since the initial October proposal, MYOB’s peers (Hansen Technologies (HSN AU), Adacel Technologies (ADA AU), Bravura Solutions (BVS AU), Iress Ltd (IRE AU), Technology One (TNE AU), Xero Ltd (XRO AU) and Wisetech Global (WTC AU)) have traded down 17%, on average, while the ASX is down 10%. That backs out a possible adjusted-downside price range of $2.47-$2.68/share. Shares closed at $2.87 on Friday.

(link to my insight: Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer)

(link to my insight: StubWorld: Young Poong Blows Out, Again)  

Softbank Group (9984 JP) / Softbank Corp (9434 JP)

A forgettable trading debut for Japan’s largest-ever IPO, with Softbank Corp, closing at ¥1,282/share, down from the IPO price of ¥1,500, and closing at ¥1,316/share on Friday, the same day as its FTSE inclusion.

• At around 22% of NAV and 16% of GAV – by my calcs – Corp is a material % of Softbank Group (9984 JP). However as repeatedly seen when a conglomerate adds yet another listco to its stable (in Hong Kong, Wheelock & (20 HK) and Great Eagle Holdings (41 HK) spring to mind), a sustained narrowing in the holdco discount is often not the end result. Nor should it be. Softbank is effectively swapping shares for cash.
• The discount did narrow from the 2Q18 through to early October. Pelham Smithers‘ take on that narrowing is discussed in its insight Why SoftBank’s (9984 JP) Holdco Discount Is Narrowing.

With seven stocks promoted/reassigned from TSE2, MOTHERS, and JASDAQ in November 2018 leading to the same seven stocks being included in TOPIX at the end of December, Travis tested 340+ TOPIX inclusions over the past five years to see what really happens around TOPIX inclusions?

• If you own all but the smallest stocks (with a market cap of less than ¥15bn), odds are that, ON AVERAGE, they will underperform TOPIX from inclusion date or the day after, for many months.
• The larger the market cap, the more marked the AVERAGE underperformance immediately following inclusion. 
• For names in the ¥25-50bn sweet spot of “large enough to be “small cap” with somebody paying attention to it”, outperformance vs underperformance in the next 10 days is a 47/53 proposition. That is a bigger risk. It may be data-idiosyncratic, but it is not clear.
• In the case of the 7 names going into TOPIX at month-end this month, the averages would suggest one could still be long the four largest (at the time of Travis’ insight), but one would not want to be long the others; and one could sell long positions in all the names as of the close of the 27th or 28th and have it be an ex-ante expected net positive outcome vs TOPIX over the following 10-60 trading days.

(link to Travis’ insight: Historical TOPIX Inclusions:  How Do They Do Around Inclusion Date?)

Ke Yan, CFA, FRM provided an update on the HK Connect/southbound flow. Fullshare Holdings (607 HK), Shandong Gold Mining Co Ltd (1787 HK) and Shanghai Fosun Pharmaceutical (Group) (2196 HK) rounded out the top three inflows relative to their free float in the past seven days.  Shandong Gold remained in the top inflow list for the third consecutive week. Top outflows relative to the free float are Wuxi Biologics (Cayman) Inc (2269 HK), China Southern Airlines (1055 HK) and Sino Biopharmaceutical (1177 HK). 

(link to Ke Yan’s insight: Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17))  

Briefly …

• CJ Corp (001040 KS) announced both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10-year duration, and it provides an extra 2% of the face value to what Common gets. Price ratio wise, 1P is currently close to the 2Y mean. This stock dividend should push 1P up, as should CJ’s announcement it would pay a cash dividend. The current div yield difference is a historic high at 1.53%. (link to Sanghyun Park ‘s insight: CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend)  
• There are expectations of a ₩500 year-end dividend (up 25% YoY) for Lg Electronics (066570 KS) Common, or a dividend yield of 0.75%. Prefs will get ₩550 or a dividend yield of 2.03%. The yield spread would be 1.28%, the widest since 2015. There may be some narrowing in the spread as we head into year-end. (link to Sanghyun’s insight: LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap)

• LCY Chemical Corp (1704 TT).  MOEA (Ministry of Economic Affairs) approval has now been received and LCY has applied for the delisting from the TWSE. The last trading day is the 23 Jan 2019 and the stock delists on the 30 Jan.  The settlement is expected to take place mid-Feb.
• Healthscope Ltd (HSO AU). In an ASX announcement on Friday Brookfield said: “based on its enquiries and financing discussions to date, it has no reason to believe it will not be willing and able to proceed with the proposal“. The exclusivity provisions have been extended to 18 January. Separately, Healthscope has also received correspondence from the BGH-AustralianSuper Consortium that it has indicated it is able to commence due diligence immediately. HSO’s board stated it will consider the correspondence. These are both positive developments.

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.   

3. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

4. FamilyMart: A Shrewd Head-Fake?

We think the failed tender but continued asset sale between Familymart Uny (8028 JP) and Don Quijote (7532 JP)  is astutely beneficial for Familymart Uny Holdings (8028 JP) and parent Itochu Corp (8001 JP) . More details below 

5. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook. 

Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in. 

Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.

THEY GOT NOTHING.

I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners. 

In FamilyMart Tender for Don Quijote – Elmer vs Mr. Partridge? I recalled how “Old Turkey” (from Edwin Lefevre’s Reminiscences of a Stock Operator) did not want to lose his position while Elmer was eager to take profits.

“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation. 

Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected. 

The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.

There was a clearly-available trading strategy based on that. 

The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).

In this briefing:

1. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth
2. ASAP: Weak Profitability Priced In, While Growth Still Intact
3. New Pride Rights Offer: Tempting but Tricky
4. Maruti Suzuki- Q2FY19 Results Update
5. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion

1. GUNKUL (GUNKUL TB): Solar to Drive Top-Line Growth

• Good payout ratio, good growth in core profit, and strong long-term sales growth relative to its sector
• Acquisition of 49% stake in a 30MW solar farm in Malaysia with a commercial operation date (COD) set for 1Q20 to support revenue growth
• High volume of solar rooftop installation projects planned for Charoen Pokphand Foods Pub (CPF TB) and other private firms to boost GUNKUL’s construction revenue
• Attractive at 19CE* PEG ratio of 0.5 relative to ASEAN Industry at 1.6
• Risk: Lower than expected electricity demand, unfavorable weather conditions

* Consensus Estimates

2. ASAP: Weak Profitability Priced In, While Growth Still Intact

We maintain a BUY rating on ASAP with new 2019E target price of Bt3.80 (from Bt6.50), derived from 19.6xPE, which is 1.0x PEG of earnings growth in 2019-20E.

The story:

• Trimmed 2018-20F earnings forecast by 35%
• Not a falling knife, but fallen angel
• Potential disruptor in car rental industry
• Expect a 20% CAGR for earnings in 2019-20E

Risks:

• Contract termination of airport space leases
• Participating in a highly competitive industry
• Cash-flow management will be a challenge in a growth phase

3. New Pride Rights Offer: Tempting but Tricky

• New Pride Corp (900100 KS) announced a ₩36.2bil rights offer. This is a public offering, so there won’t be subscription rights to trade. Pricing will be done as 3-day VWAP on Jan 9~11 at a 30% discount.
• Supposedly, we can have ample opportunity to arb trade. This may be what the company is hoping. Simply, we wait until Jan 16~17 (subscription period) and see the spread. At this much discount, there must be a huge spread opening.
• Proration risk can be much more annoying than a usual stockholder offering. In the previous public offering event by New Pride, subscription rate went as high as 370 to 1. It should be way much lower this time. But still this is risky enough.

4. Maruti Suzuki- Q2FY19 Results Update

Maruti Suzuki’s Q2FY19 results were below our expectations. Sales grew by only 2% YoY in Q2FY19 led by a 3.7% increase in realization per unit. But the volumes declined by 1.5% YoY in the same period. We analyze the results.

5. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion

• Improving asset turnover, good risk adjusted price momentum, and relatively strong analyst recommendations relative to its sector
• Larger distribution channel through acquisition of DNA Retail Link to add 95 more stores to current 518 stores
• New mobile product launches in 4Q18 and COM7’s focus on high margin products, such as Android smartphones, should support high earnings growth which was up 56% YoY in 3Q18
• Attractive at a 19CE* PEG of 0.9 versus ASEAN sector at a PEG of 2.7
• Risks: Lower-than-expected demand for new IT products, slower-than-expected store expansions

* Consensus Estimates

In this briefing:

1. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance
2. Discovery Management Will Likely Soon Be Helping Narrow the Share Class Spread
3. Satellite Companies Securing Agreements to Sell C-Band Spectrum
4. Nio Surged 31% in November; Will Momentum Continue Through 2019?

1. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

Over the weekend I published Softbank Corp, Takeda, and Newton’s Three Laws of Motion. Newton’s Three Laws helpfully guide one to understanding the nature of interaction of forces and bodies and the motion which results. Later, Euler’s laws of motion applied a framework for rigid and continuum bodies, and since then “action at a distance” has been replaced be Einstein’s Theory of General Relativity.

After I wrote the bit about one part of the index impact, FTSE unhelpfully changed their mind on timing based on an unhelpful change by the LSE. On Monday, the TSE exercised its discretion – clearly stated in the TOPIX Index Guidebook on p4 (2nd sentence of the opening paragraph) as something it may do – to go its own course in how it will adapt index changes to the first couple of increases in share count due to mergers with foreign corporations.

If an event not specified in this document occurs, or if TSE determines that it is difficult to use the methods described in this document, TSE may use an alternative method of index calculation as it deems appropriate.

So with the changes at FTSE and now TOPIX and JPX Nikkei 400, we no longer have quite the same clarity of forces on the bodies, and therefore less clarity on the resulting motion. The LSE’s announced market change appears to have led the MSCI to change its deletion date for Shire as well, now also (along with FTSE) deleting Shire at the close of the 21st (announcement early this AM Asia time).

Investors have prepared based on the idea that there was a reasonably tight relationship – helped because it was a lot of force applied in a short period (selling and buying all done in a short period in January) between the particles. Now that relationship is being stretched. A lot. 

The problem resembles that which Einstein famously pooh-poohed as “Spooky Action At a Distance”. Schrödinger called this entanglement – and it turns out to be one of the weirder branches of quantum mechanics – a field broken wide open by Bell’s Theorem a decade after Einstein shuffled off this mortal coil* – and about which John Wheeler famously said, “If you are not completely confused by quantum mechanics, you do not understand it.”

I cheerfully say quantum mechanics completely baffles me. 

I less cheerfully say this whole episode with Takeda and index providers has baffled me too.

But it is important to note that the timing and implications are vastly different than expected just two trading days ago. And the difference is worth thinking about. When the FTSE/MSCI net sell of risk was just 3 days apart, there was a clear connection across that three day distance. Now, the 6-10 week spread of time between the FTSE/MSCI events, the weird two weeks of SETSqx illiquid purgatory just as everyone is full up of risk, then the walk through the Valley of the Shadow of Flowback before we get the first really good net index inclusion to cover the Shire risk people have been dumping for months means that the certainty of understanding the movement of the particle on the other side is substantially lower.

If it all works out well, it might just be Spooky Action At a Distance.

2. Discovery Management Will Likely Soon Be Helping Narrow the Share Class Spread

As share class trades go, Discovery has presented several opportunities over the years to take advantage of index changes, corporate events, and a management that has aggressively repurchased nonvoting DISCK shares versus voting DISCA shares.

3. Satellite Companies Securing Agreements to Sell C-Band Spectrum

Satellite companies attempting to convince the Federal Communications Commission to allow them to sell C-band spectrum they license from the U.S. have begun talks to secure customers, sources told CTFN.

4. Nio Surged 31% in November; Will Momentum Continue Through 2019?

• NIO Inc (NIO US) surged 30.7% in November after reporting steady growth in production and following certain notable investors such as Baillie Gifford & Co (largest investor in Tesla Motors (TSLA US) after Elon Musk) acquiring a stake in the company creating a bullish view on the company.
• The EV start-up delivered 3,089 vehicles in November, registering a more than 96% increase from October, indicating a smooth flow in its production line of ES8. The latter was something its rival, Tesla, took long to establish. The company has reached a total production of more than 10,000 units thus far.
• On the 15^th of December which is the company’s ‘Nio Day’, Nio hopes to launch its ES6, a 5-seater, two-row, high-performance premium electric SUV that will have a longer range and at a lower price than its three-row seven-passenger ES8. Production and delivery of ES6 are expected to begin in 2019.
• Q3 FY2018 results although slightly below the company’s expectations was an improvement compared to the previous quarter and acted as a tailwind in increasing investor confidence in the company. Sales increased to USD214m in Q3 from USD 46 in Q2. Though the company has not yet generated any profits, operating losses as a % of revenues have declined to -191.2% in Q3 cf.-4,077% in Q2.
• For Q4 FY2019E the company expects to deliver 6,700 to 7,000 vehicles more than double the total deliveries during Q3, forecasting revenue between USD 418.5-436 m, at 95-100% increase from Q3. The company has not guided on OP.
• Although the company is still fighting for profits, which seems to be normal for a start-up, it should be noted that the company has a quite steady cash reserve to fund its operation and ramp up production of its to-be-released ES6 model. In our opinion, if the launch of ES6 is as successful as ES8 and the company avoids production delays like Tesla, then it may break even or even make profits within a shorter time period than which Tesla took (almost 8 years). That said, Nio’s stock is likely to witness further surges through 2019 following its recovery since November.

In this briefing:

1. Lawson’s New Online Service Is Working, Doubles Coverage

1. Lawson’s New Online Service Is Working, Doubles Coverage

Lawson (2651 JP) Fresh Pick is the convenience store operator’s new e-commerce solution for food launched earlier this year, and replacing various other less successful experiments.

Unlike competing services, Lawson’s service is limited to just 600 SKUs (stock keeping units), all fresh foods, and Lawson offers no home delivery, only click-and-collect.

In the nine months since launch, the service has expanded from 200 to 1,200 stores, currently concentrated in west Tokyo and Kanagawa.

It is a model that will expand rapidly across the rest of the country because Lawson has to invest so little to make this happen.

In this briefing:

1. ASAP: Weak Profitability Priced In, While Growth Still Intact
2. New Pride Rights Offer: Tempting but Tricky
3. Maruti Suzuki- Q2FY19 Results Update
4. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion
5. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again

1. ASAP: Weak Profitability Priced In, While Growth Still Intact

We maintain a BUY rating on ASAP with new 2019E target price of Bt3.80 (from Bt6.50), derived from 19.6xPE, which is 1.0x PEG of earnings growth in 2019-20E.

The story:

• Trimmed 2018-20F earnings forecast by 35%
• Not a falling knife, but fallen angel
• Potential disruptor in car rental industry
• Expect a 20% CAGR for earnings in 2019-20E

Risks:

• Contract termination of airport space leases
• Participating in a highly competitive industry
• Cash-flow management will be a challenge in a growth phase

2. New Pride Rights Offer: Tempting but Tricky

• New Pride Corp (900100 KS) announced a ₩36.2bil rights offer. This is a public offering, so there won’t be subscription rights to trade. Pricing will be done as 3-day VWAP on Jan 9~11 at a 30% discount.
• Supposedly, we can have ample opportunity to arb trade. This may be what the company is hoping. Simply, we wait until Jan 16~17 (subscription period) and see the spread. At this much discount, there must be a huge spread opening.
• Proration risk can be much more annoying than a usual stockholder offering. In the previous public offering event by New Pride, subscription rate went as high as 370 to 1. It should be way much lower this time. But still this is risky enough.

3. Maruti Suzuki- Q2FY19 Results Update

Maruti Suzuki’s Q2FY19 results were below our expectations. Sales grew by only 2% YoY in Q2FY19 led by a 3.7% increase in realization per unit. But the volumes declined by 1.5% YoY in the same period. We analyze the results.

4. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion

• Improving asset turnover, good risk adjusted price momentum, and relatively strong analyst recommendations relative to its sector
• Larger distribution channel through acquisition of DNA Retail Link to add 95 more stores to current 518 stores
• New mobile product launches in 4Q18 and COM7’s focus on high margin products, such as Android smartphones, should support high earnings growth which was up 56% YoY in 3Q18
• Attractive at a 19CE* PEG of 0.9 versus ASEAN sector at a PEG of 2.7
• Risks: Lower-than-expected demand for new IT products, slower-than-expected store expansions

* Consensus Estimates

5. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again

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:

In this briefing:

1. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis

1. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis

December turned out to be more eventful than expected. Guess not everyone is waiting peacefully at home for Santa to hop by. Here’s a quick run-down on stories that have impact (at least indirectly) on Thai equities.

• Winning bids, losing confidence. PTTEP crushes Chevron in a mighty bid to secure the Bongkot and Erawan fields, but investors responded by driving their shares down 6%. Energy guru Manoon Siriwan pushes back on the bears saying that while costs are high, getting Erawan field on a greenfield basis should more than outweigh the negatives.
• Huawei and trade wars. Trump’s trade wars take a strange turn following the arrests of Huawei CFO and Canadian citizens in China. As commerce and politics gets mixed up, talks abound about Apple moving production to Vietnam or…Thailand?
• ERC puts the final nail to Glow’s coffin. This is lamest ruling ever! ERC rejects GPSC’s appeal saying that other industrial estates are already monopolies, and they don’t wanna turn MapTaPhut into another one. Their reasoning defies logic and forced us to capitulate on our Glow position.
• End of the LTF era. As the tax exemptions from LTFs are phased out, critics point that equities-based programs favor the rich over the poor, while the Puay Ungpakorn Institute points out that insurance companies could benefit from this unfortunate event.
• CP Group Routs the Mighty BTS in its bid for the high speed railway project, though their victory still predicates on the terms of government subsidy. Though this CP Group entity isn’t listed and many consortium members are foreign, two listed Thai consortium members include BEM and ITD, the country’s biggest construction company.

In this briefing:

1. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
2. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum
3. Anmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
4. LG Holdings Stub Trade: Current Status & Trade Approach
5. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan

1. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat

In October, the Nikkei leaked and Familymart Uny Holdings (8028 JP) immediately thereafter announced that Familymart would sell the rest of its GMS (and financing) subsidiary UNY to Don Quijote Holdings (7532 JP) (which bought 40% of the company in 2017) and would conduct a Tender Offer later in 2018 at a 20% premium to the then-current price to buy a stake in Don Quijote of just over 20%. The Tender Offer was announced November 6th. Familymart had arranged to borrow shares it did not manage to buy in the tender so that at the next record date it will have 20% of the voting rights by hook or by crook. 

Don Quijote shares jumped to the Tender Offer price the same day and then spent a day there before investors decided that the news and structure of the deal was better news for Don Quijote than Familymart had priced in. 

Results of the Tender Offer have just been announced. Familymart had been trying to buy 32,108,700 shares for JPY 212 billion. They just missed. They got 0.08% of the total desired, or 24,721 shares for just over JPY 163 million.

THEY GOT NOTHING.

I expect Familymart had zero idea this would happen. I expect their bankers are surprised as well. They should not have been. They analysed this badly. There was a decent chance they would find it difficult to dislodge shares from owners. 

In FamilyMart Tender for Don Quijote – Elmer vs Mr. Partridge? I recalled how “Old Turkey” (from Edwin Lefevre’s Reminiscences of a Stock Operator) did not want to lose his position while Elmer was eager to take profits.

“I couldn’t think of selling that stock.” “You couldn’t?” asked Elmer, beginning to look doubtful himself. It is a habit with most tip givers to be tip takers. “Why not?” And Elmer drew nearer. “Why, this is a bull market!” The old fellow said it as though he had given a long and detailed explanation. 

Growth stock managers don’t like selling growth stocks until the growth stops growing. Don Quijote is still growing. And with UNY, Don Quijote may grow faster than previously expected. 

The announcement at the end of the Tender Offer Results announcement is also VERY telling. There was a plan to make Don Quijote an equity-method affiliate by buying in the Tender Offer, buying in the market, or borrowing lots of shares. There was a plan for Familymart to appoint directors to DQ.

There was a clearly-available trading strategy based on that. 

The new announcement puts that strategy into question. And Mr. Partridge might not be so inclined to call it a bull market. Since the launch of the deal, the markets have started the trip to Gehenna in a trug. From the one-month average prior to the Familymart bid news, Don Quijote is up 25%. Familymart is up 40%, the Nikkei 225 is down 10.7%, the TOPIX retail sector is down 5.5% but Familymart and Don Quijote have influenced that performance (without those two names, average performance is worse).

2. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum

• Improving asset turnover, relatively strong analyst recommendations, and slow asset growth relative to its sector
• New launches in FY2019-20 e.g. CX-3 facelift and 7-seat SUV CX-8 should stimulate sales going forward. Sales were up by 24% in 1QFY19 YoY
• Equity income from JV with Mazda Motor (7261 JP) should increase as production volume ramps up to meet strong ASEAN demand. Production up by 40% YoY in FY2018
• Attractive at a 19CE* 0.4 PEG ratio versus ASEAN Consumer Discretionary at a PEG of 0.9 and BAUTO is net cash
• Risks: Regulations and sluggish consumer demand, FX risk JPY and PHP

* Consensus Estimates

3. Anmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders

Anmol Industries (ANMOL IN) plans to raise US$100m+ in its India IPO via a sell-down of secondary shares. As per Frost & Sullivan, Anmol is the fourth largest biscuit manufacturer in India, behind the likes of Britannia Industries (BRIT IN), Parle and Sunfeast (owned by ITC Ltd (ITC IN)).

In FY17, the company undertook a restructuring wherein it merged three of its operating entities and demerged its treasury operations. Owing to this one can’t really come up with a clear picture of its past performance.

The picture on the demerger is a lot clearer though, as it led to the founders getting US$38m worth of liquid investments. Furthermore, the founder’s employment arrangements seem to be designed in such a way to let them take 12% of the PATMI each year, with no strings attached and additional 13% of FY17 PATMI as salary.

4. LG Holdings Stub Trade: Current Status & Trade Approach

• LG Holdings (003550 KS) is mainly made up of LG Group’s 4 major listed subsidiaries. The four account for 76.85% of NAV, and 90.18% of holdings assets. The MC scatter chart shows that Holdings and the four are integrated.
• I initiated a stub trade on Sep 26, LG Group Restructuring: Holdings a CLEAR ‘LONG’ & LGE ‘Short’ in Market Neutral Setup. I went long Holdings and short Elec. This trade is delivering a 8.40% yield. Short-term wise on a 20D MA, a reverse stub trade seems to make sense. Holdings is now at +1 σ.
• I’d rather hunt for mean reversion on a longer horizon. Holdings breakup is now a distant possibility. Yearend dividend factor should be another plus. As a hedge, I’d go short Chem. It has fallen relatively less. Struggle in the Chinese battery market will be getting more attention.

5. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan

While Nissen and Senshukai (8165 JP) have hit new lows in the past five years, Belluna (9997 JP) has gone from strength to strength by sticking with printed catalogues and tying these to e-commerce and retail store expansion.

The company’s strategy is also helped by the core customer demographic being women over the age of 50, one of the few population segments that is still growing.

As a result, group sales have risen by 28.8% in five years and operating profit has almost doubled from ¥7.8 billion to ¥13 billion.

The acquisition of Sagami, a kimono retailer that suffered from lack of attention under Uny’s management, could also result in a boost to profits in the next year.

In this briefing:

1. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion
2. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again
3. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT
4. EM Relative Strength Is Bottoming: Overweight
5. FamilyMart: A Shrewd Head-Fake?

1. COM7 (COM7 TB): Acquisition to Support Aggressive Expansion

• Improving asset turnover, good risk adjusted price momentum, and relatively strong analyst recommendations relative to its sector
• Larger distribution channel through acquisition of DNA Retail Link to add 95 more stores to current 518 stores
• New mobile product launches in 4Q18 and COM7’s focus on high margin products, such as Android smartphones, should support high earnings growth which was up 56% YoY in 3Q18
• Attractive at a 19CE* PEG of 0.9 versus ASEAN sector at a PEG of 2.7
• Risks: Lower-than-expected demand for new IT products, slower-than-expected store expansions

* Consensus Estimates

2. TRACKING TRAFFIC/Chinese Express & Logistics: Parcel Pricing Weak, Again

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:

3. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT

Last Week in Event SPACE …

• Bad banker analysis as Familymart Uny Holdings (8028 JP)‘s tender for Don Quijote Holdings (7532 JP) doesn’t even get close to the mark.
• Spooky action at a distance as the whole episode with Takeda Pharmaceutical (4502 JP)/Shire PLC (SHP LN) and index providers is baffling. 
• A possible offer for Harbin Electric Co Ltd H (1133 HK) could trigger corporate governance issues.

• Motherson Sumi Systems (MSS IN)‘s potential tilt for Leoni AG (LEO GR) is well telescoped and similarly should be well received.  

• NTT (Nippon Telegraph & Telephone) (9432 JP) has headroom to buy back shares from the government, but going forward there is still more on-market buying to do.

• Young Poong Corporation (000670 KS)‘s holding in Korea Zinc Co Ltd (010130 KS) accounts for an eye-watering ~200% of its market cap.

• A last-minute lump of coal in the stocking from MYOB Group Ltd (MYO AU)? 

• And analysing the trading patterns of 340+ TOPIX inclusions over the past five years.

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

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $546mn; Liquidity: $0.4mn)

Power generation equipment manufacturer Harbin Electric Co Ltd H (1133 HK) is currently suspended pursuant to Hong Kong’s Codes on Takeovers and Mergers and Share Buy-backs, suggesting a privatisation offer from parent Harbin Electric Corporation (“HEC”) is pending. As HE is PRC incorporated, a privatisation by way of a merger by absorption may be proposed, similar to Advanced Semiconductor Mfg Corp Ltd. (3355 HK) as discussed in ASMC’s Merger By Absorption. 

• It is possible this suspension is not in relation to a takeover, but a major sale of assets, for example, from the parent to the sub. This would make sense given the recent share purchase by HEC (completed in January this year), and the fact HE is playing catch-up to Dongfang Electric Corporation (1072 HK) & Shanghai Electric Group Company (2727 HK). Arguably, launching a takeover shortly after subscribing for more shares is unusual.  Then again, when the two SOE railway behemoths CNR and CSR merged in 2015, a merger was disputed (at the time) when both were suspended on account of the fact CNR was only listed (on the HK exchange) in 2Q14.
• HE has perennially traded at discount to net cash. As at its last traded price, the discount to net cash (using the 2018 interim figure of HK$12.4bn, or HK$7.27/share) was 65%.
• “Fair” pricing to me would be something like the distribution of net cash to zero then taking over the company on PER. I simply don’t see this happening. And if it doesn’t, the fiduciary duty of independent directors will be tested/scrutinised if they recommend an offer to shareholders at any price less than the net cash/share of the company.

(link to my insight: Harbin Electric Expected To Be Privatised)  

Motherson Sumi Systems (MSS IN) (Mkt Cap: $7.7bn; Liquidity: $1.6mn)

Reportedly Motherson has entered merger/acquisition talks with Leoni AG (LEO GR), a leading provider of cables and cable systems for the automotive sector and other industries. Motherson has made four acquisitions so far in this business segment with the latest being PKC in 2017.

• Motherson has always aimed at strengthening this business area internationally, therefore the news about a merger with Leoni comes as no surprise and was mentioned as a potential acquisition target in LightStream Research‘s earlier insight Two More Acquisitions on the Way for Motherson Sumi. 
• Motherson has a strong balance sheet that could support this acquisition, although its ability to make further acquisitions in the short-to-medium term may be hampered – Leoni would be at the higher end of the price range for recent acquisitions. Should the acquisition go through, the company will be very well positioned to reach its US$18bn revenue target by 2020E, given that the combined revenue for FY2017 alone is ~US$13bn.
• Currently, Motherson is trading at an FY1 EV/EBITDA of 10x, slightly above peers such as Mahindra Cie Automotive (MACA IN) (9x) and below peers such as Bosch Ltd (BOS IN) (25x). If the deal goes through, Motherson’s FY1 EV/EBITDA of ~12x would be at a slight premium to local players, but still reasonable compared to international players. 

(link to Aqila Ali ‘s insight: Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni)  

Kohlberg Kravis Roberts reduced its indicative offer to $3.40 from $3.77 on Thursday after sifting through MYOB’s books, with MYOB announcing:

Following completion of due diligence and finalisation of debt funding commitments, KKR has revised the offer price to $3.40 per share. …  The board has informed KKR that it is not in a position to recommend the revised proposal, however it remains in discussions with KKR regarding its proposal. (my emphasis)

• KKR’s revised non-binding proposal expired at 5pm on Friday, which came and went without any ASX announcement. Presumably, an announcement will be made before the market opens tomorrow (rendering this commentary redundant) with either MYOB grudgingly accepting the lower offer, or MYOB rejecting and KKR walking away (for now), or going hostile.
• Since the initial October proposal, MYOB’s peers (Hansen Technologies (HSN AU), Adacel Technologies (ADA AU), Bravura Solutions (BVS AU), Iress Ltd (IRE AU), Technology One (TNE AU), Xero Ltd (XRO AU) and Wisetech Global (WTC AU)) have traded down 17%, on average, while the ASX is down 10%. That backs out a possible adjusted-downside price range of $2.47-$2.68/share. Shares closed at $2.87 on Friday.

(link to my insight: Friday Deadline Looms As MYOB Snubs KKR’s Reduced Offer)

(link to my insight: StubWorld: Young Poong Blows Out, Again)  

Softbank Group (9984 JP) / Softbank Corp (9434 JP)

A forgettable trading debut for Japan’s largest-ever IPO, with Softbank Corp, closing at ¥1,282/share, down from the IPO price of ¥1,500, and closing at ¥1,316/share on Friday, the same day as its FTSE inclusion.

• At around 22% of NAV and 16% of GAV – by my calcs – Corp is a material % of Softbank Group (9984 JP). However as repeatedly seen when a conglomerate adds yet another listco to its stable (in Hong Kong, Wheelock & (20 HK) and Great Eagle Holdings (41 HK) spring to mind), a sustained narrowing in the holdco discount is often not the end result. Nor should it be. Softbank is effectively swapping shares for cash.
• The discount did narrow from the 2Q18 through to early October. Pelham Smithers‘ take on that narrowing is discussed in its insight Why SoftBank’s (9984 JP) Holdco Discount Is Narrowing.

With seven stocks promoted/reassigned from TSE2, MOTHERS, and JASDAQ in November 2018 leading to the same seven stocks being included in TOPIX at the end of December, Travis tested 340+ TOPIX inclusions over the past five years to see what really happens around TOPIX inclusions?

• If you own all but the smallest stocks (with a market cap of less than ¥15bn), odds are that, ON AVERAGE, they will underperform TOPIX from inclusion date or the day after, for many months.
• The larger the market cap, the more marked the AVERAGE underperformance immediately following inclusion. 
• For names in the ¥25-50bn sweet spot of “large enough to be “small cap” with somebody paying attention to it”, outperformance vs underperformance in the next 10 days is a 47/53 proposition. That is a bigger risk. It may be data-idiosyncratic, but it is not clear.
• In the case of the 7 names going into TOPIX at month-end this month, the averages would suggest one could still be long the four largest (at the time of Travis’ insight), but one would not want to be long the others; and one could sell long positions in all the names as of the close of the 27th or 28th and have it be an ex-ante expected net positive outcome vs TOPIX over the following 10-60 trading days.

(link to Travis’ insight: Historical TOPIX Inclusions:  How Do They Do Around Inclusion Date?)

Ke Yan, CFA, FRM provided an update on the HK Connect/southbound flow. Fullshare Holdings (607 HK), Shandong Gold Mining Co Ltd (1787 HK) and Shanghai Fosun Pharmaceutical (Group) (2196 HK) rounded out the top three inflows relative to their free float in the past seven days.  Shandong Gold remained in the top inflow list for the third consecutive week. Top outflows relative to the free float are Wuxi Biologics (Cayman) Inc (2269 HK), China Southern Airlines (1055 HK) and Sino Biopharmaceutical (1177 HK). 

(link to Ke Yan’s insight: Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17))  

Briefly …

• CJ Corp (001040 KS) announced both Common and Pref will get 0.15 class B pref shares for each share they already own. This new class B pref is convertible to Common with a 10-year duration, and it provides an extra 2% of the face value to what Common gets. Price ratio wise, 1P is currently close to the 2Y mean. This stock dividend should push 1P up, as should CJ’s announcement it would pay a cash dividend. The current div yield difference is a historic high at 1.53%. (link to Sanghyun Park ‘s insight: CJ Corp Share Class: Huge Net Gain Difference Between Common & Pref from Stock Dividend)  
• There are expectations of a ₩500 year-end dividend (up 25% YoY) for Lg Electronics (066570 KS) Common, or a dividend yield of 0.75%. Prefs will get ₩550 or a dividend yield of 2.03%. The yield spread would be 1.28%, the widest since 2015. There may be some narrowing in the spread as we head into year-end. (link to Sanghyun’s insight: LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap)

• LCY Chemical Corp (1704 TT).  MOEA (Ministry of Economic Affairs) approval has now been received and LCY has applied for the delisting from the TWSE. The last trading day is the 23 Jan 2019 and the stock delists on the 30 Jan.  The settlement is expected to take place mid-Feb.
• Healthscope Ltd (HSO AU). In an ASX announcement on Friday Brookfield said: “based on its enquiries and financing discussions to date, it has no reason to believe it will not be willing and able to proceed with the proposal“. The exclusivity provisions have been extended to 18 January. Separately, Healthscope has also received correspondence from the BGH-AustralianSuper Consortium that it has indicated it is able to commence due diligence immediately. HSO’s board stated it will consider the correspondence. These are both positive developments.

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. EM Relative Strength Is Bottoming: Overweight

Relative strength for MSCI EM is bottoming vs. MSCI EAFE despite continued global equity market weakness.  Although the MSCI EM’s price index remains in a downtrend, we are seeing signs of outperformance ona a relative strength basis and would add incremental exposure. In this report we highlight attractive and actionable themes within EM.

5. FamilyMart: A Shrewd Head-Fake?

We think the failed tender but continued asset sale between Familymart Uny (8028 JP) and Don Quijote (7532 JP)  is astutely beneficial for Familymart Uny Holdings (8028 JP) and parent Itochu Corp (8001 JP) . More details below 

In this briefing:

1. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis
2. ECM Weekly (15 December 2018) – Wanka, Alpha Smart, CMGE Tech, Junshi Science, Xinyi Energy.
3. Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric
4. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow

1. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis

December turned out to be more eventful than expected. Guess not everyone is waiting peacefully at home for Santa to hop by. Here’s a quick run-down on stories that have impact (at least indirectly) on Thai equities.

• Winning bids, losing confidence. PTTEP crushes Chevron in a mighty bid to secure the Bongkot and Erawan fields, but investors responded by driving their shares down 6%. Energy guru Manoon Siriwan pushes back on the bears saying that while costs are high, getting Erawan field on a greenfield basis should more than outweigh the negatives.
• Huawei and trade wars. Trump’s trade wars take a strange turn following the arrests of Huawei CFO and Canadian citizens in China. As commerce and politics gets mixed up, talks abound about Apple moving production to Vietnam or…Thailand?
• ERC puts the final nail to Glow’s coffin. This is lamest ruling ever! ERC rejects GPSC’s appeal saying that other industrial estates are already monopolies, and they don’t wanna turn MapTaPhut into another one. Their reasoning defies logic and forced us to capitulate on our Glow position.
• End of the LTF era. As the tax exemptions from LTFs are phased out, critics point that equities-based programs favor the rich over the poor, while the Puay Ungpakorn Institute points out that insurance companies could benefit from this unfortunate event.
• CP Group Routs the Mighty BTS in its bid for the high speed railway project, though their victory still predicates on the terms of government subsidy. Though this CP Group entity isn’t listed and many consortium members are foreign, two listed Thai consortium members include BEM and ITD, the country’s biggest construction company.

2. ECM Weekly (15 December 2018) – Wanka, Alpha Smart, CMGE Tech, Junshi Science, Xinyi Energy.

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 64% for Placements 

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

New IPO filings this week

• Shanghai Henlius Biotech (Hong Kong, ~US$500m)
• Ingrid Millet (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

• Chat-service firm Slack taps Goldman Sachs to lead IPO: sources
• Kyobo Life Insurance to seek IPO next year
• Uber has confidentially filed to go public
• London billionaire Michael Spencer boosts stake in Singapore Life, considers IPO
• Brokerages scramble on tepid investor response over SoftBank IPO
• After delivering 24 electric cars, this Chinese startup has IPO dreams
• Solar energy firm Xinyi said to postpone up to $582m Hong Kong IPO

Smartkarma Community’s this week Analysis on Upcoming IPO

• Alpha Smart – Pre-IPO – PE Investors Recovered 56% of Their Cost in Two Years but Left It in Debt
• Xinyi Energy IPO Valuation: Asking More Than What It Is Paying to Acquire Target Portfolio
• CMGE Tech (中手游) Pre-IPO Review – Unfortunate Timing
• Junshi Bioscience (君实医药) IPO: Rich Is Valuation, but Catalyst Ahead
• Junshi Biosciences IPO Valuation: Sensibly Priced with Upside at the Low-End
• Wanka Online IPO – Quick Note – Even After the Downsize Its Still Too Expensive
• Xinyi Energy (信义能源) IPO: High Dividend Yield but Depreciating Asset
• Softbank IPO: Signs Point to Risk of Early IPO Price Break
• WuXi AppTec IPO Valuation: Bull/Bear Case DCF Scenarios
• Wuxi Apptec (药明康德) IPO: What You Need to Know Before the Trading Debut

List of pre-IPO Coverage on Smartkarma

3. Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric

Weichai Power, China’s largest independent Diesel engine producer, has been looking for a new core business to survive in long term downward trend of its current core business (Diesel engine for commercial vehicle and construction machines) since 2012 when it acquired 25% stake of KION Group AG (KGX GR). By now Weichai owns KION (materials handling equipment), Dematics (integrated automated supply chain technology, directly own ed by KION),  Power Solutions International (PSIX US) (cleantech engine). It also has stakes in Ballard Power Systems (BLDP CN) (PEM fuel cell products), Ceres Power Holdings (CWR LN) (fuel cell technology and engineering). Lately, Weichai entered into an agreement with Westport Fuel System (WPRT.US) to develop and commercialise HPDI 2.0.

It seems Weichai decides to put its chip on fuel cell and low-emission engines. However, our analysis shows all the above investment would not be enough to secure Weichai’s market outlook in the next 5-10 years. 

This note focus on an evaluation of Weichai’s technology choices on a 5-10 year time horizon. We will discuss the company’s 12-months view in another note.   

4. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow

• Mahindra & Mahindra (MM IN) reported 2QFY19 PAT of Rs 17,788 mn vs our estimate of Rs 15,240 mn. The revenues were 2.5% lower than estimated. EBITDA was Rs 18,493 mn as against our estimate of Rs 20,721 mn. EBITDA margins were  14.5% against our estimate of 15.8%.  Overall the performance was lower than our expectation.
• EBITDA margins were impacted due to higher raw material cost and higher launch cost related to Marazzo (7/8 seater utility vehicle). We expect the margins to remain under pressure for the 2HFY19E as the Company has lined up more new model launches.
• The shift in the festive season from 2Q to 3Q impacted the tractor sales volume in this quarter. M&M management expects the tractor industry to growth in the range of 12-14% YoY in FY19E where M&M is expected to grow at 12.5% YoY in FY19E.
• We have lowered EPS estimates for FY20E by 8%. Over FY18-21E, we expect revenue and PAT to grow at CAGR 14% and 13% respectively. We expect EBITDA margin to expand from 14.8% in FY18 to 15.5% in FY21E.
• Our EPS estimates for FY20E & 21E stand at Rs 47.3/- & Rs 53.7/- respectively. We have maintained the PE multiple of 17x with an EPS of Rs 47.2/- for the year ending September- 20E and valued its share in the subsidiaries at Rs 315/- to arrive at the fair value estimate of Rs 1,115/- for the next 12 months.