Consumer

In this briefing:

1. Last Week in Event SPACE: Familymart, Takeda, Harbin Electric, Motherson, Young Poong, NTT
2. EM Relative Strength Is Bottoming: Overweight
3. FamilyMart: A Shrewd Head-Fake?
4. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
5. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum

1. 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.   

2. 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.

3. 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 

4. 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).

5. 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

In this briefing:

1. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap
2. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action
3. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor
4. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
5. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance

1. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap

• LG Group’s tech affiliates will likely increase dividends this year. Local street expects a ₩500 yearend dividend for LGE Common, up 25% YoY. Pref will get ₩550. Dividend yield difference will be 1.28%p, highest since 2015. Price gap should be narrowing as we move towards the end of the year.
• On 20D moving average, we don’t seem to have an opening for stat arb. But on 2Y mean, we have room for mean reversion. This is a 6~7% potential yield. Improved street sentiments on LGE fundamentals next year will also push this mean reversion. I’d go long Pref and short Common at this point to hunt for this.

2. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action

• We believe that TME is fairly valued based on peer companies’ price / sales ratios.
• The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
• We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).

3. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor

• Hyundai Motor Co (005380 KS) and Hyundai Mobis (012330 KS) are way more correlated than what internal sales dependency suggests. Their 2Y correlation coefficient is 0.84. The scatter chart shows they are clearly cointegrated.
• The owner family potentially buying Mobis shares may create divergence in favor of Motor. They need to sell their Motor shares to buy Mobis shares. The higher Motor price and the lower Mobis price are, the happier and wealthier they become.
• Current price ratio is a little below 2Y stat mean. I expect it to reach a +0.5~1 σ level on 2Y SD. This is a 4.5~9% yield. I’d go long Motor and short Mobis to hunt for this. 

4. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

• After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
• This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
• In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.

5. 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.

In this briefing:

1. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study
2. Goldwin Tops Sports Market Growth Through Store Investment
3. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance

1. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study

• We believe Luckin copies SBUX’s site selection, but chooses low rental places close to Starbucks shops.
• Starbucks plans to add delivery business to raise margins and comparable store sales, but Luckin has focused on delivery since inception.
• Starbucks needs the China market as its growth momentum, but we believe Luckin’s parasitical tactic will be a major resistance.

2. Goldwin Tops Sports Market Growth Through Store Investment

Marketing of sports brands has become increasingly retail-led in the last decade and a focus on retailing has enabled Goldwin (8111 JP) to make serious gains while the two biggest domestic brands, Asics Corp (7936 JP) and Mizuno Corp (8022 JP), have been distracted by overseas expansion.

Goldwin took a close look at its beleaguered business 15 years ago and decided retail could be its salvation.

At current rates it will catch up with Mizuno’s domestic sales in a few years.

Overall, we are bullish about Goldwin but also the wider sports category because sports and sports fashion is in many ways one of the few consumer categories to be largely immune to a demographically challenged market like Japan – all age segments are buying into sports apparel, including the over 60s.

3. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance

Hengan Intl Group (1044 HK), China’s leading sanitary towel and nappy producer, has been targeted by a short seller, Bonitas Research. Hengan has denied Bonitas’ allegations to which Bonitas has responded that Hengan’s response was weak and evasive. The shares have continued to slide suggesting that investors are less than convinced with Hengan’s rebuttal.

In this briefing:

1. Anmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders
2. LG Holdings Stub Trade: Current Status & Trade Approach
3. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan
4. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni
5. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

1. 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.

2. 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.

3. 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.

4. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni

On Friday, following news about entering merger/acquisition talks with Leoni AG (LEO GR), shares of Motherson Sumi Systems (MSS IN) closed up 3.1% up to INR166. Leoni’s stock, on the other hand, increased by 2.7% at Friday’s close, although the stock has been experiencing a declining trend over the past year. We mentioned in Two More Acquisitions on the Way for Motherson Sumi, that Leoni could be a potential acquisition target for Motherson in its wire harnessing segment, although on the higher end of the size spectrum. The company representatives have not commented on this acquisition news and the deal is not finalised yet. Thus, this could simply remain at the discussion stage with no real transaction taking place.

 Leoni has been experiencing a decline in its earnings during the recent quarters of FY2018, expecting negative free cashflows for FY2018E. However, recent news is that Leoni has recently been undertaking a comprehensive restructuring programme after cutting its earnings target for FY2018E and has appointed a new chief executive in September to lead these efforts. Further, it should be noted that Leoni is a well-established company in the auto components business and thus, could overcome its current struggles and be in a good position to exploit the long-term growth prospects of this market. Thus, acquiring Leoni is likely to strengthen Motherson’s position globally by providing the latter with increased coverage geographically and product wise. 

5. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

In this briefing:

1. EM Relative Strength Is Bottoming: Overweight
2. FamilyMart: A Shrewd Head-Fake?
3. FamilyMart Tender Offer for Don Quijote Misses The Mark as Mr. Partridge Stands Pat
4. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum
5. Anmol Industries Pre-IPO Quick Take – No Growth, Generous Payments to Founders

1. 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.

2. 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 

3. 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).

4. 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

5. 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.

In this briefing:

1. LG Holdings Stub Trade: Current Status & Trade Approach
2. Belluna: Growing by Selling Gentility to the Expanding Older Market in Japan
3. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni
4. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price
5. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap

1. 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.

2. 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.

3. Motherson In Merger Talks with One of Our Previously Short-Listed Candidates – Leoni

On Friday, following news about entering merger/acquisition talks with Leoni AG (LEO GR), shares of Motherson Sumi Systems (MSS IN) closed up 3.1% up to INR166. Leoni’s stock, on the other hand, increased by 2.7% at Friday’s close, although the stock has been experiencing a declining trend over the past year. We mentioned in Two More Acquisitions on the Way for Motherson Sumi, that Leoni could be a potential acquisition target for Motherson in its wire harnessing segment, although on the higher end of the size spectrum. The company representatives have not commented on this acquisition news and the deal is not finalised yet. Thus, this could simply remain at the discussion stage with no real transaction taking place.

 Leoni has been experiencing a decline in its earnings during the recent quarters of FY2018, expecting negative free cashflows for FY2018E. However, recent news is that Leoni has recently been undertaking a comprehensive restructuring programme after cutting its earnings target for FY2018E and has appointed a new chief executive in September to lead these efforts. Further, it should be noted that Leoni is a well-established company in the auto components business and thus, could overcome its current struggles and be in a good position to exploit the long-term growth prospects of this market. Thus, acquiring Leoni is likely to strengthen Motherson’s position globally by providing the latter with increased coverage geographically and product wise. 

4. AALI (AALI IJ): Indonesian Biodiesel Mandate to Support CPO Price

• Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
• Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
• Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
• Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
• Risks: Low palm-based commodities and crude palm oil prices

* Consensus Estimates

5. LG Electronics Share Class: Long Pref/Short Common on a 4Y High Discount & Div Yield Gap

• LG Group’s tech affiliates will likely increase dividends this year. Local street expects a ₩500 yearend dividend for LGE Common, up 25% YoY. Pref will get ₩550. Dividend yield difference will be 1.28%p, highest since 2015. Price gap should be narrowing as we move towards the end of the year.
• On 20D moving average, we don’t seem to have an opening for stat arb. But on 2Y mean, we have room for mean reversion. This is a 6~7% potential yield. Improved street sentiments on LGE fundamentals next year will also push this mean reversion. I’d go long Pref and short Common at this point to hunt for this.

In this briefing:

1. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action
2. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor
3. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
4. Takeda: Move Over Newton! Now It’s Spooky Action At a Distance
5. Discovery Management Will Likely Soon Be Helping Narrow the Share Class Spread

1. Tencent Music (TME): Both Live Video and Music Fairly Valued, No Action

• We believe that TME is fairly valued based on peer companies’ price / sales ratios.
• The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
• We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).

2. Hyundai Motor & Hyundai Mobis Pair: Owner Buying Mobis May Create Divergence in Favor of Motor

• Hyundai Motor Co (005380 KS) and Hyundai Mobis (012330 KS) are way more correlated than what internal sales dependency suggests. Their 2Y correlation coefficient is 0.84. The scatter chart shows they are clearly cointegrated.
• The owner family potentially buying Mobis shares may create divergence in favor of Motor. They need to sell their Motor shares to buy Mobis shares. The higher Motor price and the lower Mobis price are, the happier and wealthier they become.
• Current price ratio is a little below 2Y stat mean. I expect it to reach a +0.5~1 σ level on 2Y SD. This is a 4.5~9% yield. I’d go long Motor and short Mobis to hunt for this. 

3. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

• After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
• This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
• In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.

4. 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.

5. 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.

In this briefing:

1. Small Potatoes Nikkei 225 Changes on Christmas Day
2. Last Week in Event SPACE: ANTA, Japan Display, Pioneer, Naspers, Huatai, Red Hat
3. Snippets #17: PTTEP’s Winner Curse, Huawei’s Crisis
4. ECM Weekly (15 December 2018) – Wanka, Alpha Smart, CMGE Tech, Junshi Science, Xinyi Energy.
5. Weichai Power(2338.HK)： Fuel Cell Not the Answer (Yet), More Boldness Needed on All-Electric

1. Small Potatoes Nikkei 225 Changes on Christmas Day

Specialty steel maker Nisshin Steel (5413 JP) is slated to merge with parent company Nippon Steel & Sumitomo Metal (5401 JP) as of January 1, 2019. For that, Nisshin Steel will be delisted on December 26th (i.e. the last day of trading is the 25th) and that means the Nikkei Inc was obliged to choose a replacement to take Nisshin Steel’s place in the Nikkei 225 and other indices.

On December 11th, the Nikkei Inc announced Itoham Yonekyu Holdings Inc (2296 JP) would take Nisshin’s place in the Nikkei 500 Index, announced that Japan Post Holdings (6178 JP) would join the Nikkei 300 Index, and announced that Dic Corp (4631 JP) would replace Nisshin Steel in the Nikkei Stock Average, better known as the Nikkei 225.

The only one which matters is the Nikkei 225 (the other two have tiny tracking), and this is not a huge index trade as both Nisshin Steel and DIC are deemed 500 yen par value stocks.

This is an event one could “miss.”

And it will happen on Christmas Day, after a long weekend for Japan traders. 

2. Last Week in Event SPACE: ANTA, Japan Display, Pioneer, Naspers, Huatai, Red Hat

 Last Week in Event SPACE …

• The reward/risk is pretty decent on the Anta Sports Products (2020 HK) /Amer Sports Oyj (AMEAS FH) trade.
• A rumoured Chinese partner would quickly help resolve Japan Display (6740 JP)‘s battered balance sheet.
• After being under the cosh for years, Pioneer Corp (6773 JP)‘s investors are being asked to approve a cramdown where they themselves are the victims.
• Naspers Ltd (NPN SJ)‘s risk profile appears attractive as the company continues to take steps to narrow the valuation gap.
• For the Huatai Securities Co Ltd (H) (6886 HK) GDRs, it all boils down to fungibility. 
• Red Hat Inc (RHT US) sets a January shareholder meeting, while the HSR U.S. antitrust 30 day waiting period expires this week.
• Travis discusses Newton’s Three Laws of Motion and their relevance to the Softbank Corp (9434 JP) IPO and Takeda Pharmaceutical (4502 JP) / Shire PLC (SHP LN) merger situations.
• Australian Pharma Indus (API AU) tilts at Sigma Healthcare (SIG AU) and the result after a 40+% pop is probably still a mismatch in terms and value.
• Plus a swag of share classification insights on A/H, dual class and ADRs. 

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

ANTA Sports Products (2020 HK) (Mkt Cap: $12.8bn; Liquidity: $28mn)

Amer Sports Oyj (AMEAS FH) announced (ANTA’s is here) an Offer at €40/share (a 39% premium to the undisturbed price of 10 September 2018), and announced that the Board of Directors of Amer Sports has decided to unanimously recommend that Amer Sports’ shareholders accept the Tender Offer. Several major shareholders holding 7.91% have irrevocably undertaken to tender, and Maa-ja vesitekniikan tuki r.y., who hold ~4.29%, have expressed that they view the Tender Offer positively. ANTA indirectly holds 1,679,936 shares (1.4%) as well.

• As noted in Travis Lundy‘s first insight ANTA (2020 HK) Lobs Possible €40/Share Bid for Amer, this is a relatively full bid. It has a fair bit of promise though as it gets a bunch of new brands into new stores. 
• ANTA and consortium appear to have the funding. As suspected and discussed in the original doc, FountainVest is a fair bit smaller than 50%. The equity stakes are, indirectly, 57.95% ANTA, 15.77% FountainVest, 5.63% Tencent Holdings (700 HK), and 20.65% Anamered Investments (Chip Wilson’s vehicle). There is a Shareholders’ Agreement which allows FountainVest the right to effect a Trade Sale if a “Qualified IPO does not take place within 5 years”, which seems reasonable. This effectively means that the company will be put up for sale in 5yrs.
• It should be 11.5 weeks from Monday to Tender Offer completion, with 81-83 days between trade settlement and payment for Tender shares. That is ~27.1% annualized as of Friday’s close. This spread should drop at least by half after the Tender Launch scheduled for 20 December. Anti-trust and other authorities’ approval will be required. If ANTA gets over 90% of the shares, they intend to commence mandatory redemption (squeezeout) proceedings.
• It should be noted that this deal offers significant leverage to ANTA and even more to the minority investors. ANTA is effectively collateralizing some LBO debt with its own earnings. As ANTA will not consolidate, the only way to see the numbers will be to look through the affiliate income. The saving grace here for everyone may be that it is remote from ANTA, which means transfer pricing will be carefully watched.

links to:
Travis’ insight: ANTA (2020 HK) Angling on Amer Apparent
Arun’s insight: ANTA/Amer: Good Deal for Amer and FountainVest, a Poor Deal for ANTA 

Japan Display (6740 JP) (Mkt Cap: $520mn; Liquidity: $15mn)

NHK reported JDI was in talks to sell about a 33% stake to a Chinese consortium for $440m (probably ¥50bn) which would value the company at about 3.5x (at the time) its current market cap. INCJ is also, apparently, considering support. These moves would go a long way toward restoring the company’s beaten-up balance sheet and the cost cuts should allow the company to survive – although Apple’s struggles still cast a shadow on a return to a strong level of profitability. JDI’s share price shot up 34.6% on the news on Friday. 

• JDI’s massive share price drop since its listing has been due to its weakened balance sheet and a slow shift to OLED, which this reported funding will go some way to addressing. Mio Kato, CFA‘s view is that JDI has some very promising businesses and the company is undervalued.
• JDI still has an unhealthy over-dependence on Apple but they are doing everything they can to dilute the influence, increasing automotive display sales at double-digit rates and maintaining and growing their top market share in that segment, as well as producing more VR and notebook LTPS screens.
• There still remains excess capacity in the industry due to Chinese government subsidies for display panel manufacturers and an over-ambitious build-out of both LTPS and OLED capacity. This is not going to improve drastically anytime soon but some of the planned OLED capacity expansions are being pushed out and much of the LTPS capacity increases have already been completed.

(link to Mio’s insight: Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet) 

Pioneer Corp (6773 JP)(Mkt Cap: $210mn; Liquidity: $4.2mn)

After Pioneer revealed in September it had sold its Tohoku Pioneer subsidiary to Denso Corp (6902 JP) for ¥10.9bn, it announced an MOU with Barings and went into debt to them. That seemed like “the end of the line” for the company. Pioneer needed a sponsor, but it was going to stay listed. Last week, Pioneer announced a “Partnership” with Baring Private Equity Asia which is a revitalization plan of ¥102bn. The deal offers minority shareholders an exit. The announcement does not mention investors are effectively being asked to approve their own squeezeout at 25% below the last price.

• In the deal as presented, shareholders are being asked to approve an exit price 75% below 52-week highs which came AFTER the capital reduction in summer 2017, and after the sale of assets earlier this year, sell their shares at roughly one-third of existing book value per share, and sell its 3D LiDAR business and technology for… zero.
• There are caveats. ALL of Pioneer’s net equity is intangibles. It has payables higher than receivables as of the end of September, and ¥25bn in net debt (increased by the ¥25bn lent by Baring).  The company has roughly 2.5x EBITDA in inventory, and in a company which is losing money by being in business, inventory as marked is not as good as cash. The company has close to ~¥30bn in underfunded pension liabilities. 
• Travis does not expect a public activist outcry. Activists who wanted to buy into this have already done so.  Any who do going forward have no vote because the record date for the vote was 7 December.

(links to Travis’ insights: Barring Beleaguered Booster Boldness, Baring Buys Pioneer (In a Takeunder))  

On December 3^rd, the boards of both Hindustan Unilever (HUVR IN) (“HUL”) and GlaxoSmithKkine (“GSKCH”) approved a merger (subject to regulatory and shareholder approval) – at an exchange ratio of 4.39 HUL shares for every 1 GSKCH share – in a £3.1 bn deal.  Combining with GSKCH should see HUL leapfrog both Britannia Industries (BRIT IN) and Nestle India (NEST IN) in food and refreshment revenue, and put it roughly on level pegging with ITC Ltd (ITC IN).

• Approvals should be a foregone conclusion. With neither Unilever or GSK required to abstain, the 75% shareholder approval threshold is all but a lock.  GSKCH’s shareholders get the benefit of HUL’s vast distribution network, while HUL gets a better understanding of the pharma channel. 
• Regulatory approval should not be an issue. 90% of cases handled by India’s anti-trust body CCI have been approved without the requirement for any modification. There is minimal overlap here – this is HUL’s big splash to build a sustainable and profitable food and refreshment business in India. Greater opposition would be expected if either BRIT, NEST or ITC made a tilt for GSKCH.
• The transaction should be completed in one year, subject to regulatory and shareholder approvals. It’s a long-dated, but low-risk deal. Expect the tight spread to remain tight – this deal may close faster than the “expected” one-year timeframe. 

(link to my insight: Hindustan And GSK In The Pursuit of Happiness)  

Red Hat Inc (RHT US) (Mkt Cap: $31bn; Liquidity: $485mn)

Red Hat has set a meeting date of January 16, 2019 for shareholders to vote on the merger agreement with Intl Business Machines (IBM US), and related matters. Red Hat also set a record date of December 11th, 2018 for shareholders entitled to vote on the deal. 

• The fact the meeting date has been set means the SEC chose not to review the merger proxy (a less common occurrence than a review) and notified the companies of this decision within the expected 10 calendar days. 
• While the Company issued the press release, a new proxy has not yet been filed. John DeMasi expects we will see a definitive merger proxy filed within the next few days. Since the HSR U.S. antitrust 30 day waiting period will not expire until December 21st, he doesn’t expect an update on HSR in the definitive proxy, and it still appears the EC Competition filing has not been made according to the EC website.
• John believes the deal is still on track for a Q2/Q3 2019 close and believes the risk/reward looks attractive here.

(link to John’s insight: Red Hat Sets January 16, 2019 Special Meeting Date to Vote on IBM Deal)  

Macquarie Radio Network (MRN AU) (Mkt Cap: $235mn; Liquidity: $0.1mn)

Reportedly, preliminary discussions are underway between Nine Entertainment Co Holdings (NEC AU) and MRN’s second-largest shareholder, John Singleton. This development is not entirely unsurprising; it appears formal discussions were deferred until the Nine/Fairfax Media (FXJ AU) merger was formally completed (which occurred on 7 December). Nine acquired Fairfax’s 54.5% stake in MRN in the merger, discussed in my insight Nine & Fairfax – Integrated Advertising.

• Also reported in the press, Nine has offered $2/share (a 9.3% premium to the closing price of A$1.83 on December 4^th), with Singleton (a willing seller) believed to be holding out for $2.15/share. In a further twist, Alan Jones, with 1.27% of MRN, is understood to have certain conditions/clauses attached to that stake, which may make an offer tabled by Nine potentially untenable.  
• MRN was trading between A$1.20 and A$1.60 during the first half of the year. Following the announcement of the Nine-Fairfax merger in July, the share price reached a high of A$2.18. While the expected offer price of A$2.00 is 8.3% lower than this lifetime high, it is still 26% higher than the stock’s undisturbed price of A$1.59 before the Nine-Fairfax merger deal was announced.
• Nine is interested in mopping up shares in MRN it does not already own. John Singleton is a seller, at the right price. Nine’s CEO Hugh Marks is keen to move quickly, not just taking full control of MRN, but also divesting assets that do not focus on digital subscriptions, mass audiences and national advertisers. It’s now a question of how much Nine is willing to pay, and the added benefits therein to Nine from a privatisation compared to its current majority and consolidating stake.

(link to my insight: Macq Media In The Crosshairs As Fairfax Merger Completes)  

Celltrion Inc (068270 KS) / Celltrion Healthcare (091990 KS)

While Inc and Healthcare are not cross-linked by any shareholding, Healthcare is ostensibly Celltrion’s internal sales arm. Their fundamentals and prices should be (& are) highly correlated.

• Sanghyun initiated a pair trade (short Celltrion / long Healthcare) on Oct 22. The ongoing FSS investigation is hammering both, Healthcare more so as it is more directly exposed. But given what happened to Samsung Biologics Co., (207940 KS), it is very unlikely that this will be a serious risk.

(link to Sanghyun’s insight: Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare)  

• The deal is at a nice premium – 46.8% to the one-month average, and 69% to the day before. It was about 10% better than where API started buying.
• But it may not be good enough. The deal offers some cash, but also offers expensive scrip. API appears to need this deal as much as some would say Sigma does.
• Sigma is in the process of doing a zero-based full business review with Accenture and indications are that everyone thinks the company is worth a lot more than where it was trading last week.
• This deal looks like it has a big premium but it may not be enough.

(link to Travis’ insight: API Tilts at Sigma Healthcare: Expect More)

• Assuming the GDRs trade similarly to the Hs, or even 1% of their maximum issuance quantity, and assuming they have a similar discount to the As as do the Hs, the GDRs will not likely trade more volume than the H Shares.
• It is not clear WHY the GDRs would, over time, maintain a tighter discount to the A Shares than the H Shares would …. Except for the fungibility. Which may be the only reason to hold the GDRs at a 20% discount when you can get the H-shares at a 30+% discount. But the system may not be ready to handle GDR creation by mainland domestic investors trying to export capital, even at a discount. 
• The whole deal comes across as somewhat iffy. It is not clear why the deal needs to be done other than to fill a political need to get the ball rolling. But one wonders why the London-Shanghai Connect ball actually needs to be rolled. 

(link to Travis’ insight: Huatai Securities GDR Gets The Green Light, Taps Brakes) 

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

Naspers’ recent underperformance against Tencent has resulted in the discount to NAV widening to near-on 12 months lows. While Naspers remains a function of what happens to Tencent, it offers potentially interesting long-term prospects.    

• This pseudo-venture capital company is taking steps to narrow the valuation gap via the reduction in its Tencent stake, the sale of successful investments (Flipkart and tbogroup), the listing of profitable entities (Multichoice), the investment in specific areas (classifieds, online retail, payments businesses and food delivery), working to reduce its exposure to the Johannesburg Stock Exchange, and perhaps pursue a dual listing outside of SA, such as Hong Kong. To me, Naspers’ risk profile appears attractive here.
• New Street Research‘s Alastair Jones views the most recent Naspers results as broadly positive with continued progress in profitability from its e-commerce assets. He also believes that, given moves to unbundle the pay-TV assets in 2019, there is scope for the NAV discount to narrow.  The current low/negative valuation for the unlisted assets ignores their significant value.

links to:
my insight: StubWorld: Naspers And The Valuation Gap.
Alastair’s insight: Naspers: Profitability Improvements Continue

Toyota Industries (6201 JP) / Toyota Motor (7203 JP)

Curtis Lehnert recommends a Toyota Industries’ set-up at current levels which are in excess of -2 Standard Deviations below the long-term average, while Toyota Industries is trading at a 35% discount to his NAV – Toyota Industries’ stake in Toyota Motor accounts for 60%).

• The group boasts the #1 global market share in forklifts with an estimated 20% market share. Toyota Industries’ closest competitor in the materials handling business is KION Group AG (KGX GR); however, Curtis estimates the market is implying 0.83x for these ops, 28% lower than Kion’s 1.15x.

(link to Curtis’s insight: TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave)  

Newton’s Three Laws of Motion And How They Pertain to Index Inclusions

Travis Lundy noted that Newton’s Third Law, commonly understood that for every action there is always an equal and opposed reaction, applies in some measure to index inclusions.

• For every index upweight, there is an equal and opposite downweight.
  
• Because of the listing of Softbank Corp (9434 JP) and the closing of the Takeda Pharmaceutical (4502 JP) / Shire PLC (SHP LN) merger, there will be roughly ¥1.35 trillion of index selling to make room for those two stocks.
• Read his insight for more.

(link to Travis’ insight: Softbank Corp, Takeda, and Newton’s Three Laws of Motion)

Briefly …

• The HDC Holdings (012630 KS) / HDC-OP (294870 KS) price ratio is close to a year low. The Holdco discount now stands at 47.92% to NAV.  The major shareholder Chung Mong-kyu bought an additional 0.63% stake in HDC Holdings for ₩16.1bn from Dec 6~10, however that selling now appears to be over.
  (link to Sanghyun’s insight: HDC Holdings Holdco Trade: Status Update & Recommended Action)
• The BGF Co Ltd (027410 KS) / Bgf Retail (282330 KS) price ratio is at a new yearly low. The Holdco discount now stands at 48.55% to NAV. There is now an estimated 1.5~2% difference in dividend yield. 
  (link to Sanghyun’s insight: BGF Holdo Trade: Status Update & Recommended Action)

Travis published his H/A Spread Monitor Project offering a brief look at recent changes in H-Share and A-Share spreads, Southbound flow and impact, and where the spreads are trading within their own historical ranges. My share class monitor provides a snapshot of the premium/discounts for 215 share classifications around the region. Ke Yan, CFA, FRM issued his Discover HK Connect series, to help understand the flow of southbound trades via the Hong Kong Connect.

• The largest net buys this week were generally in healthcare and IT, and consumers. Large net buys were seen in Yichang Hec Changjiang Pharm (1558 HK), Tingyi (Cayman Islands) Holding Corp (322 HK), Semiconductor Manufacturing (981 HK) , BYD Co Ltd (H) (1211 HK), and Sands China Ltd (1928 HK). The largest net sells this past week were Tencent Holdings (700 HK), and several banks, real estate developers, and then Sunny Optical Tech (2382 HK). 

• For liquid Korean prefs, Samsung Electronics Pref Shares (005935 KS), which trades $36m a day, is at a 36% discount, which compares with its annual range of -42%/+36%.

links to:
Travis’ insight: H/A Spread & Southbound Monitor – Going Into Year End
my insight: Share Classifications: Mid-December 2018 Snapshot   
Ke Yan’s insight: Discover HK Connect: Mainlanders Are Buying Shandong Gold, Tingyi, YiChang HEC (2018-12-10)  

Hyundai Motor Co (005380 KS) (Mkt Cap: $20.7bn; Liquidity: $64mn)

The 1P (005385 KS) / 2P (005387 KS) dividend yield difference of 0.53% is close to a year high. Of interest is the recently announced hydrogen cell investment, which may be considered a signal that the HMG-government relation has vastly improved. This potentially suggests that any HMG restructuring may get accelerated, which would be positive for 1P. (link to Sanghyun’s insight: Hyundai Motor Share Class: Time for 1P to Catch Up)  

• Trade Me (TME NZ) and Apax Partners have entered into a scheme implementation agreement. Apax Funds have increased their offer price to $6.45/share (from $6.40) since the indicative proposal, following the completion of their due diligence. The Board has unanimously backed the offer.  A booklet containing information relating to the scheme is expected to be mailed to Trade Me shareholders in March 2019. The Board expects that Trade Me shareholders will have the opportunity to vote on the scheme at a meeting in April 2019. If all the conditions are satisfied, the scheme is expected to be implemented in the second quarter of 2019. Hellman & Friedman was not expected to materially counter and promptly pulled out of the race. 
• Cityneon Holdings (CITN SP).  West Knighton now has 98.6% of shares out and will move to compulsory acquire shares it does not own. The closing date has been extended until the 26 December. 
• Sinotrans Shipping (368 HK). As expected from the onset, shareholders approved the privatisation. Turnout was low – around 47.6% of shareholders entitled to vote, did so. Friday was the last day of trading. Cheques are expected to be dispatched on or before the 22 Jan 2019. 
• Stanmore Coal (SMR AU)‘s has released the Target Statement. The board continues to recommend shareholders reject the $0.95/share unsolicited Golden Investments. The IFA  has a fair value range of $1.48-$1.90/share. Shares closed at A$1.04 on Friday.

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.   

3. 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.

4. 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

5. 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.   

In this briefing:

1. Satellite Companies Securing Agreements to Sell C-Band Spectrum
2. Nio Surged 31% in November; Will Momentum Continue Through 2019?
3. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races
4. The GER Weekly EVENTS Wrap: Anta/Amer, Trade Me, Hengan and API/Sigma
5. Lawson’s New Online Service Is Working, Doubles Coverage

1. 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.

2. 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.

3. Start Your Engines: SoftBank Corp (9434 JP) Is Off to the Races

The price has been set. The book building is done. Like watching a sleek race car aligned on the starting grid, the world eagerly awaits the start of trading for Softbank Corp (9434 JP) on Wednesday, 19 December. 

We are also eager to see the stock go live. It’s not only nostalgia for the stock code “9434” to be brought back into the race, but it will be helpful to be able to compare the stock and to gain better insights into the domestic Japanese telecom industry.

That said, the past few weeks have been full of drama, and some of the drama has longer-term implications. In this insight, we take a more detailed look at some of the challenges facing SoftBank Corp. and some of the concerns that may give investors pause, or at least some things to keep in mind, over the months ahead.

Specifically, we look at issues related to:

• Network outages
• Huawei network equipment
• Corporate governance
• Regulatory headwinds
• Competitive threats

4. The GER Weekly EVENTS Wrap: Anta/Amer, Trade Me, Hengan and API/Sigma

Below is a recap of the key event-driven research produced by the Global Equity Research team. This week Arun develops a differentiated view on the deal between Anta Sports Products (2020 HK) and Amer Sports Oyj (AMEAS FH) which he thinks is worse for the former and better for the latter. In addition, we check the bump possibilities for Trade Me (TME AU) which we think is limited by valuation. Further, we find some validity in the short-seller case on Hengan Intl Group (1044 HK) and believe a bump is needed for Australian Pharma Industries (API AU) to close the deal on Sigma Healthcare (SIG AU)

The rest of our event-driven research can be found below

Best of luck for the new week – Arun, Venkat and Rickin

5. 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. Mahindra & Mahindra Ltd- 2QFY19 – New Launches Cause Margin Pain, Benefits to Follow
2. Fosun Tourism IPO Trading Update – Low Traded Volume and Fair Value Indicate It Has a Long Way to Go
3. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
4. Hyundai Motor Share Class: Time for 1P to Catch Up
5. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study

1. 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.

2. Fosun Tourism IPO Trading Update – Low Traded Volume and Fair Value Indicate It Has a Long Way to Go

Fosun Tourism (1992 HK)‘s IPO was priced at the low-end, HKD15.60/share. The retail tranche was undersubscribed while the institutional tranche was said to be moderately over-subscribed. I have covered most aspects of the deal in my earlier insights:

• Fosun Tourism Pre-IPO – No Improvement or Major Changes in Club Med Since the Acquisition
• Fosun Tourism IPO – Fair Value Is Probably Below Low-End

In this insight, I’ll provide an update on the deal dynamics, valuations and provide a table with the implied valuations at different share price levels.

3. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles

As we mentioned in a comment in  Japan Display: Cost Structure Improvement Is Good but Shipment Delay and IPhone XR Cloud Outlook the NHK reported last night that JDI was in talks with a Chinese consortium to secure something in the region of ¥50bn in funding (more than its market cap yesterday) for a more than 33% stake in the company. The Nikkei shed light on the identities of some of the consortium this morning mentioning investment fund Silk Road, Minth Group Ltd (425 HK) and  Shenzhen O Film Tech Co A (002456 CH). Bloomberg has also mentioned that the consortium could invest a further ¥500bn to establish a new facility in China for the production of OLED panels.

We spoke to the company this morning to get colour on these announcements.

4. Hyundai Motor Share Class: Time for 1P to Catch Up

• 1P (005385 KS) was supposed to make a catchup move yesterday relative to 2P (005387 KS). But it didn’t. Price ratio is currently well below -1 σ. Div yield difference is at 0.53%p. This is close to yearly high. At this level, 1P has no other way but to catch up with 2P.
• In my previous insight, I suggested holding onto 1P/2P long/short position. This trade hasn’t performed well. We are at a 5.07% loss at yesterday’s closing. I’d still hold onto this position for the same reasonings as before.
• Tricky one is the recently announced hydrogen cell investment. This may be seen as something boosting Common and likely 2P. Hydrogen cell investment should rather be considered as a signal that the HMG-government relation has vastly improved. This suggests that the restructuring may get accelerated. Anything positively affecting the restructuring should be positive on 1P.

5. Starbucks (SBUX): China Strategy Reaped by Luckin’s Parasitical Tactic, a Visit and Case Study

• We believe Luckin copies SBUX’s site selection, but chooses low rental places close to Starbucks shops.
• Starbucks plans to add delivery business to raise margins and comparable store sales, but Luckin has focused on delivery since inception.
• Starbucks needs the China market as its growth momentum, but we believe Luckin’s parasitical tactic will be a major resistance.