Category

Consumer

Consumer: Helen’s International Holding, Kakao Pay, K Car, Gsi Creos Corp, NagaCorp Ltd and more

By | Consumer, Daily Briefs

In today’s briefing:

  • Helens Intl (海伦司国际) IPO – Cheap Drinks, Expensive Valuation
  • Kakao Pay Listing: Revision Summary & Pricing Details
  • K Car (Korea’s Carvana?): Offering Details, Pricing Structure, & Valuation Issues
  • Japan’s Governance: TSE Market Reorganization And “Transitional Measures”
  • Morning Views Asia: NagaCorp Ltd

Helens Intl (海伦司国际) IPO – Cheap Drinks, Expensive Valuation

By Zhen Zhou, Toh

Helen’s International Holding (9869 HK) (HIH) is looking to raise up to US$358m in its Hong Kong IPO. 

Helens International Holdings (HIH) is the operator of a bar chain called “Helen’s”. The company was the largest bar chain in China in 2018 –  March 2021, in terms of the number of bars, according to Frost and Sullivan (F&S).

In this note, we will look at deal dynamics, assumptions, and share our thoughts on valuation.

Our previous coverage of the IPO:


Kakao Pay Listing: Revision Summary & Pricing Details

By Sanghyun Park

Revision summary

Kakao Pay has just submitted a revised securities declaration with a downward revision of the indicative price band. The new price band is ₩60,000 to ₩90,000, which is about a 4~6% cut from the previous one. The total number of publicly offered shares is still 17 million shares. As a result, the funds to be raised through this IPO are between ₩1.02T and ₩1.53T.

Indicative price bandLow, PreviousHigh, PreviousLow, RevisedHigh, Revised
Price₩63,000₩96,000₩60,000₩90,000
Base deal size₩1.07T₩1.63T₩1.02T₩1.53T
– Institutional allotment₩0.59T₩0.90T₩0.56T₩0.84T
Implied market cap₩8.21T₩12.52T₩7.82T₩11.73T
Source: DART

The revised schedule is as follows. The book for overseas institutional investors (through Goldman Sachs and JP Morgan) opens on September 23rd and closes on the 30th at 5 pm (local time). For your reference, the book for those local institutions dealing with Samsung Securities opens on September 29th. The payment date is October 8, and the listing date will be announced later.

Schedule
IR begins2021. 09. 23
Book open2021. 09. 29
Book close2021. 09. 30
Allotment2021. 10. 01
Subscription2021. 10. 05
Payment2021. 10. 08
ListingTBA
Source: DART

K Car (Korea’s Carvana?): Offering Details, Pricing Structure, & Valuation Issues

By Sanghyun Park

Offering overview

K Car (formerly known as SK Encar), the largest used car brokerage company in Korea, has filed a securities declaration. K Car will be listed on the KOSPI, and a total of 16.83M shares will be offered through this IPO. This is 35.90% of the total number of shares before listing. The amount allocated to institutions is 55-75%.

Offering size
BourseKOSPI
Pre-IPO SO46,884,369
Offering16,830,288
– % of SO35.90%
Institutional allotment9,256,659
– % of the offering55.00%
Source: DART

Yes, we have a massive secondary offering here. The secondary offering percentage is a whopping 92.86%. This is basically a private equity-owned company. One of the largest local PEs, Hahn & Company, owns a full 100% stake. It acquired full ownership from SK Inc in 2018. Hahn & Co has been pushing to sell its stake in K Car since last year. The most well-known candidate was Lotte Rental. However, as these attempts ended in vain, Hahn & Co opted for an exit strategy through IPO.

Split
Primary %7.14%
Secondary %92.86%
Post-IPO shares outstanding48,086,533
Capital increase rate2.56%
Dilution2.50%
Source: DART
ShareholdingPost-IPOSharesLock-up
Hahn & Company65.00%31,256,2451 year
ESOP (post-IPO)7.00%3,366,0571 year
IPO28.00%13,464,231
Total100.00%48,086,533
Source: DART

The schedule is as follows. The book opens on September 13th and closes on the 28th. The payment date is October 6, and the listing date will be announced later.

Schedule
Book open2021. 09. 13
Book close2021. 09. 28
Allotment2021. 09. 29
Subscription2021. 09. 30
Payment2021. 10. 06
ListingTBA
Source: DART

Japan’s Governance: TSE Market Reorganization And “Transitional Measures”

By Aki Matsumoto

On July 9, 2021, Tokyo Stock Exchange, Inc. (TSE) released the results of its initial assessment of compliance with the listing maintenance requirements of the new market classification. In response to the announcement, a number of information disclosures entitled “Notice of Application for Selection of New Market Classification ‘Prime Market (or Standard Market, Growth Market)'” were made to report the selection of the listing market. In response to this, the TSE has set the period from September 1 to December 30 as the review period, and the results of the listed company’s selection of the new market segment will be announced on January 11, 2022, prior to April 4, 2022, when the current market segment will be shifted to the three new market segments of “Prime Market, Standard Market and Growth Market.” The results of the selection of the new market segments will be announced on January 11, 2022.


Morning Views Asia: NagaCorp Ltd

By Charles Macgregor

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.


Before it’s here, it’s on Smartkarma

Consumer: Alibaba Group, WH Group, BYD, K Car, Helen’s International Holding, Mitra Adiperkasa, Signature International, VGI PCL, Genting Bhd and more

By | Consumer, Daily Briefs

In today’s briefing:

  • Alibaba Cloud: Near-Zero Dollars Valuation Is Not Entirely Impossible
  • WH Group Low Re Test
  • HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping
  • Byd (1211) Vs BYDE (285): Carry On
  • K Car IPO Preview
  • Helens Intl (海伦司国际) Pre-IPO – Peer Comparison
  • Mitra Adiperkasa (MAPI IJ) – One Step Beyond
  • Minor MCO Disruptions in 4QFY21
  • VGI: Plenty of Business Synergy with JMART
  • Commendable RWLV’s First 6-day Performance

Alibaba Cloud: Near-Zero Dollars Valuation Is Not Entirely Impossible

By Oshadhi Kumarasiri

Reuters reported last week that the Chinese city of Tianjin has asked government firms to migrate their data from private sector operators like Alibaba Group (9988 HK) and Tencent (700 HK) to a state-backed cloud system called “guoziyun” by next year. The decision to exclude private cloud platforms was made under direct instructions by China’s cabinet, the State Council and it prohibits government firms from entering or renewing contracts with third-party cloud platforms for the use of cloud services.

It seems like the intention of the Chinese government is to follow through with all the proposed policy changes regardless of the devastating impact on the Chinese tech sector valuations.

Even though the valuations have dropped drastically from the peak, valuation multiples have plenty of room to the downside. Meanwhile, we think regulatory clampdowns are yet to reach the home stretch, making the risk-reward balance still heavily skewed to the risk side. Thus, we think it is prudent to avoid investing in the Chinese tech sector for the time being.


WH Group Low Re Test

By Thomas Schroeder

WH Group (288 HK)  shows some downside pressure to re test key support lows that will set up a value long play but needs to hold 5.28. Overhead resistance will provide headwinds at 6.70-90.

Big flat bottomed range formation from 2019 shows increasing pressure to the downside.

6.70/90 is near term resistance that will cap a recovery attempt. Short sellers should focus on this area.

5.93 is pivot support to crack.

MACD bull wedge is constructive but needs more time to full mature with buy support outlined.

Buying a washout low tied to the 2018 low holding.


HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping

By Brian Freitas

The upcoming rebalances for the Hong Kong Hang Seng Index (HSI INDEX), Hang Seng China Enterprises Index (HSCEI INDEX) and Hang Seng Tech Index (HSTECH INDEX) will be implemented at the close of trading on 3 September. The rebalance will use data from todays close to cap the stocks in the index at a maximum of 8% of the index weight.

In this Insight, we show the flows after capping stocks using the close on 30 August. The final numbers will be marginally different based on todays closing prices.

For the Hong Kong Hang Seng Index (HSI INDEX) there are 3 inclusions – Xinyi Glass Holdings (868 HK)Li Ning Co Ltd (2331 HK) and China Merchants Bank H (3968 HK) and 1 exclusion – Bank Of Communications Co H (3328 HK).

For the Hang Seng China Enterprises Index (HSCEI INDEX), the inclusions are JD Logistics (2618 HK) and Li Ning Co Ltd (2331 HK) while the deletions are Shimao Property Holdings (813 HK) and Anhui Conch Cement (914 HK).

For the Hang Seng Tech Index (HSTECH INDEX) there is one set of changes with Trip.com (9961 HK) / Trip.com (TCOM US) replacing Koolearn (1797 HK).

Alibaba Group (9988 HK)‘s weight in all 3 indices is higher than 8% following the increase in the number of index shares at the July monthly rebalance. The stock will have the largest passive selling due to capping back to 8%.

Capping and float changes will lead to passive buying on Tencent (700 HK), Meituan (3690 HK) and Kuaishou Technology (1024 HK), while there will be passive selling on HSBC Holdings (5 HK), AIA Group Ltd (1299 HK), China Construction Bank H (939 HK), Xiaomi Corp (1810 HK) and HKEX (388 HK).

There will be selling on a lot of the Hong Kong Hang Seng Index (HSI INDEX) constituents due to funding flows.


Byd (1211) Vs BYDE (285): Carry On

By Henry Soediarko

1H 2021 result for BYD (1211 HK) was a good topline growth but not followed with a good bottom-line growth due to the gross profit margin contraction from the handset business while the auto business is still producing solid growth with more catalysts to come. 

If investors are willing to take BYD Electronics’ prospects, or long-only investors, when buying BYD (1211 HK) then having BYD only is not a bad idea. However, if a long-short investor prefers not to have exposure to BYD Electronics while still very much in love with the BYD Auto business, then shorting BYD Electronics in addition to going long on BYD can be considered. 
The ratio should be:
1. Long 100 shares of BYD (1211 HK) 
2. Short 50 shares of BYD Electronics (285 HK) .

K Car IPO Preview

By Douglas Kim

K Car is another interesting upcoming IPO in Korea. K Car, the largest used car e-commerce player in Korea, is getting ready to complete its IPO in early October. The IPO price range is from 34,300 won to 43,200 won per share. The IPO base deal size is from US$498 million to US$627 million. Of the 16.8m shares offered in the IPO, 15.6m shares are old shares and 1.2m are new shares).

According to the bankers’ valuation, the expected market cap of the company is from 1.8 trillion won to 2.2 trillion won. The lead underwriters include NH Investment & Securities and Goldman Sachs. The book building for the institutional investors starts on 27 September 2021. 

K Car is mainly in the used car and rental car businesses. Hahn & Co, a private equity firm in Korea, acquired the controlling stake in K Car in April 2018. Hahn & Co Auto Service Holdings currently has a 100% stake in K Car. Post the IPO, it will have a 61% stake in K Car. 

Deal Specifics of K Car IPO
 
Lead underwriters of the IPO: 
NH Investment & Securities, Goldman Sachs
Expected IPO price per share: 
34,300 won (low)/43,200 won (high)
Number of Shares for IPO:
16.83m shares (15.6mn old shares; 1.2mn new shares)
IPO base deal size: 
US$498mn (low);  US$627mn (high)
Expected common shares outstanding, fully diluted (post-IPO):  
50.89m shares
Expected market cap after IPO:
1,745 billion won (low)/2,198 billion won (high)
Book open: 
27-Sep-21
Book closed:
28-Sep-21
Listing date: 
TBC
Source: Company data

Helens Intl (海伦司国际) Pre-IPO – Peer Comparison

By Zhen Zhou, Toh

Helen’s International Holding (HIH HK) is looking to raise US$300m in its upcoming Hong Kong IPO. 

Helens International Holdings (HIH) is the operator of a bar chain called “Helen’s”. The company was the largest bar chain in China in 2018 –  March 2021, in terms of the number of bars, according to Frost and Sullivan (F&S).

In this note, we will compare HIH to Hong Kong-listed F&B peers.


Mitra Adiperkasa (MAPI IJ) – One Step Beyond

By Angus Mackintosh

Mitra Adiperkasa (MAPI IJ) reported an impressive set of 1H2021 results but has obviously seen a significant negative impact from the government’s imposition of mobility restrictions under Emergency PPKM. This led to the closure of around 70% of the malls in the country in  July, more especially in Java and Bali, where the majority of the company’s stores are located.  

Our post-results conversation with management suggests we are coming out of this difficult period and should expect a gradual recovery in the coming months.

The company’s Unified Retail Strategy continues to bear fruit with online mono-brand and multi-brand sites both doing well. 

July was most severely impacted this year given the mall closures but consumers are showing less anxiety this year to the lock-down measures and restrictions started to ease from 10th August.

The company also went into 3Q2021 with very healthy inventories given it had flushed out old inventory over Lebaran. It has also shortened its purchasing strategy, which will allow more flexibility.

Mitra Adiperkasa (MAPI IJ) is also more focused on building out its health & beauty exposure opening three Boots stores with plans for six by the end of 2021 and may open more in 2022.

Department stores have been quite hard hit during the pandemic but Mitra Adiperkasa (MAPI IJ) plans to increase the level of cross-selling its own brands within department stores.

Food & Beverage has held up relatively well, with more delivery sales for Starbucks, which now makes up 20% of total Starbucks sales. Source: Pt Map Boga Adiperkasa Utama Tbk (MAPB IJ) 

Mitra Adiperkasa (MAPI IJ) trades on 14.9x FY22E PER versus its 5-year average forward PER of 21x, which looks attractive in light of the expected recovery and the success of its digital strategies, which are helping to boost sales and profitability.


Minor MCO Disruptions in 4QFY21

By TA Securities Holdings Bhd

Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

VGI: Plenty of Business Synergy with JMART

By Research Group at Country Group Securities

The company announce to acquire newly issued ordinary shares in JMART (15% stake) with investment cost of Bt6.3bn. We are positive toward the deal given a number of upcoming potential synergy with accretive value created as a purchased price of JMART is at 21.6xPE’22, a substantial discount to VGI current trading at 62.4x’FY23.

• We estimate approximately Bt80m earnings upside or accounts for 9% of our net profit forecast in FY2023.
• Medium term synergy including; ability to increase Out-of-Home media revenue from advertisement of JMART’s group products, expanding product line for Fanslink (51% stake), and, 3.) Kerry Express Thailand (18% stake) could offer delivery services for JMART’s mobile devices and electric appliances from SINGER. Benefit from technology and market data sharing will be a long-term synergy.
We maintain BUY rating for VGI with a target price of Bt6.90 derived from SOTP method.

Commendable RWLV’s First 6-day Performance

By TA Securities Holdings Bhd

Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

Before it’s here, it’s on Smartkarma

Consumer: WH Group, Coupang, Aristocrat Leisure, Health And Happiness (H&H), Associated British Foods PLC, Steel Strips Wheels and more

By | Consumer, Daily Briefs

In today’s briefing:

  • WH Group Post-Tender Outlook – Index Selldown and Back-End Trading/Valuations
  • Thoughts on Short-Selling Coupang Aimed at September 6th Massive Lockup Release
  • Aristocrat Leisure Ltd: A Top Gaming Equipment Maker Poised for a Post-Pandemic Resumption Growth
  • Morning Views Asia:
  • Associated British Foods: Too Conservatively Priced To Be Ignored
  • Steel Strips Wheels: Exponential Growth On The Anvil

WH Group Post-Tender Outlook – Index Selldown and Back-End Trading/Valuations

By Travis Lundy

WH Group (288 HK) will see its Tender Offer completed on Monday 30 August. I expect the result will be out as per the 30 July Circular – at 7pm HKT. 

Then we wait. 

And things get a little weird and possibly a little bumpy this week. 

And into the week after…

But we wait anyway. 

More below the fold. 

Insights on This WH Group Event To Date

DateAuthorTitle
02-Jun-21David BWH Group (288 HK): Today’s Pig Is Tomorrow’s Bacon? 
06-Jun-21myselfWH Group Buyback Offer Announced – Strong Accretion Creates Accretion Risk 
20-Jun-21myselfWH Group Vs Peers – Too Many Piggies Going to Market? 
05-Jul-21myselfWH Group – Trading Opportunities Abound 
10-Jul-21myselfWH Group – Long-Only Fundamental Investors Can Take Advantage Too 
30-Jul-21myselfWH Group Offer Doc Out – This Little Piggy Went To Market 
17-Aug-21myselfWH Group Partial Buyback Offer Now Unconditional 
18-Aug-21myselfWH Group – Stock Plummets as Ousted Son Drags Pigs Into The Mud 

Thoughts on Short-Selling Coupang Aimed at September 6th Massive Lockup Release

By Sanghyun Park

Why is Coupang below $30?

Coupang’s stock price finally fell below $30.

As we all know, the main reason for this is the disappointment with the second-quarter results announced on August 11th. Coupang’s stock has plummeted nearly 20% since the 11th.

Coupang posted sales of $4.48B in the second quarter, which is pretty much in line with the market average forecast of $4.45B. However, EPS was -0.30 dollars, which fell short of the market average forecast of -0.13 dollars.

It is true that the cost of the fire at the Deokpyeong Logistics Center that occurred on June 17, which was $295M, resulted in a significant increase in the net loss. Coupang has insurance to cover this cost. So, it is expected that insurance payments will cover these fire-related losses in the third quarter.

However, even excluding these costs, the key point is that Coupang failed to reduce the size of its net loss as much as the market expected in the second quarter.

Although Coupang is not yet in the black, the secret to maintaining a huge market cap is the declining SG&A ratio through economies of scale.

In fact, the SG&A ratio to Coupang’s total sales has continuously decreased from 31% in 2018 to 27% in 2019 and 22% in 2020. So, the market predicted that Coupang could turn to the black from 2023. The current market cap size requires both sales growth and SG&A decline. However, as the SG&A decline did not continue in the second quarter as in the first quarter, investors began to feel anxious.

These results are sufficiently expected. In the absence of a profitable anchor business like Amazon’s AWS, Coupang’s survival strategy is to continuously expand its market share. However, there are many questions about how Coupang could overcome and survive it from a cost perspective when the bleeding competition of local competitors intensifies to the extent that has never been seen.

Competition with Naver, an existing online commerce powerhouse, is a concern. But even more worrisome is Shinsegae, the strongest player in the local offline commerce market. It is making every effort to secure liquidity, which is the basis of the bleeding competition against Coupang, by selling most of its real estate assets.


Aristocrat Leisure Ltd: A Top Gaming Equipment Maker Poised for a Post-Pandemic Resumption Growth

By Howard J Klein

  • Australia-based Aristocrat’s business segment are diverse in slot machines, monitoring systems, digital social gaming. They are now also an earl mover in cashless gaming. Its fully valued, but still a buy.
  • 2019 baseline results show pre-pandemic growth strong at home, in the US and Asia. 2020 showed tolerable decline under adverse conditions globally.
  • Its net earnings growth over 5 years averages 17.4% reflects a management that executes a long term strategy that is deserving of a higher valuation.

Morning Views Asia:

By Charles Macgregor

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.


    Associated British Foods: Too Conservatively Priced To Be Ignored

    By Vladimir Dimitrov, CFA

    • Associated British Foods now trades at one of its lowest levels for the past 5-year period.
    • Primark sales hit rock bottom during the past twelve months but are likely to recover as stores reopen.
    • All other businesses within the group are performing exceptionally well.
    • Current valuation factors in too pessimistic assumptions about the future and, in my view, an attractive long-term opportunity.

    Steel Strips Wheels: Exponential Growth On The Anvil

    By Axis Direct

    We retain a BUY rating on the stock and value the company at 6x FY23E EV/EBIDTA to arrive at a revised target price of Rs 2,122/share, giving an upside of 13% from CMP.

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Before it’s here, it’s on Smartkarma

    Consumer: Matahari Department Store, Helen’s International Holding and more

    By | Consumer, Daily Briefs

    In today’s briefing:

    • Matahari Department Store (LPPF IJ) – Turning Corners
    • Helens Intl (海伦司国际) Pre-IPO – Largest Bar Chain Targeted at Youths
    • Matahari Department Stores (LPPF IJ) – 2Q21: Bottom line turned positive and above expectation; …

    Matahari Department Store (LPPF IJ) – Turning Corners

    By Angus Mackintosh

    Matahari Department Store (LPPF IJ) released its 2Q2021 results after market yesterday, which revealed a significant turnaround in the business, with the company returning to profitability both on EBITDA and net profit.

    Management managed to navigate a tricky Lebaran holiday season successfully despite mudik bans and reduced operating hours,  flushing out most of its discontinued brands with only a little leftover in inventory, leading to healthier gross margins. 

    Matahari Department Store (LPPF IJ) continued to make good progress in key operational areas with its store enhancement work in progress, along with a re-organization of operating regions, more focused use of capex and continuing rationalization of underperforming stores.

    The company has a new merchandising team in place with a focus on modernizing the mix of products with a focus on in-house brands such as Coles, Nevada, and Connexion.

    Matahari Department Store (LPPF IJ) continues to collaborate with Bank Nationalnobu (NOBU IJ) and has seen a +59%  increase in the value of its investment since November 2020. We see this as a potentially positive collaboration but would not want to see any more significant capital commitments to the bank. 

    The company has seen a significant strengthening of its balance sheet for 1H2021, with Matahari Department Store (LPPF IJ) now debt-free and in a net cash position.

     No doubt there will be some disruption from Emergency PPKM measures in July and August but the performance in 2Q2021 has put the company on course for a strong recovery toward the end of the year, with a much healthier stores portfolio, with new stores added trading well with strong profitability.

    Matahari Department Store (LPPF IJ) looks like it has finally turned the corner after a strong performance over the Lebaran quarter and this turnaround has come slightly earlier than expected. 

    Valuations look attractive versus history with the company trading on 9.7x FY22E PER and 6.5x FY22E PER versus its 5-year average forward PER of 12x, making the company an attractive prospect in light of its turnaround.


    Helens Intl (海伦司国际) Pre-IPO – Largest Bar Chain Targeted at Youths

    By Zhen Zhou, Toh

    Helen’s International Holding (HIH HK) is looking to raise US$300m in its upcoming Hong Kong IPO. 

    Helens International Holdings (HIH) is the operator of a bar chain called “Helen’s”. The company was the largest bar chain in China in 2018 –  March 2021, in terms of the number of bars, according to Frost and Sullivan (F&S).

    In this note, we look at the company’s operational and fundamental performance and share our initial thoughts on the IPO.


    Matahari Department Stores (LPPF IJ) – 2Q21: Bottom line turned positive and above expectation; …

    By Mirae Asset Securities

    2Q21: Bottom line turned positive and above expectation; Debt is fully repaid

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Before it’s here, it’s on Smartkarma

    Consumer: Kewpie Corp, Woolworths Ltd, Eicher Motors, Pola Orbis Holdings, Media Prima Bhd, Ozon Holdings PLC, Genting Malaysia, UMW Holdings, Matahari Department Store, MBM Resources and more

    By | Consumer, Daily Briefs

    In today’s briefing:

    • Kewpie (2809 JP) Share Cancellation Index Event
    • Woolies (WOW AU) Announces ~4.4% Off-Market Buyback
    • Eicher Motor’s Cosy NRC Rewards CEO-Promoter Lavishly Year After Year as Performance Plunges
    • Japan’s Governance: POLA ORBIS HOLDINGS (4927)
    • 4th Consecutive Quarter of Profitability
    • Ozon Holdings: Healthy Q2 Growth But Slower-Than-Expected Path To Profitability
    • Reality Check
    • Expecting Better 2H
    • Matahari Department Stores (LPPF IJ) – 2Q21: Bottom line turned positive and above expectation; …
    • Demand Broadly Outpaces Supply

    Kewpie (2809 JP) Share Cancellation Index Event

    By Travis Lundy

    Today after the close, $3bn Japanese condiment maker Kewpie Corp (2809 JP) – famed for its mayonnaise in a slightly-floppy squeeze-bottle – announced that it would buy cancel 8.5 million shares or 5.67% of shares out. 

    The share cancellation takes place on 13 September 2021. 

    That causes an index effect, and given the time of year, I would expect minimal earnings-related updates between now and then. 

    More below the fold. 


    Woolies (WOW AU) Announces ~4.4% Off-Market Buyback

    By Travis Lundy

    Woolworths Ltd (WOW AU) yesterday announced earnings to June 2021 with revenues up 5.7%yoy (e-commerce now at 8.3% of the total and up 58% on the year), EBIT +13.7%, and NPAT +22.9% to A$1.972bn for the year. 

    The final dividend was announced at 55 cents, up 14.6% on the year for a full-year dividend of 108cts (+14.9%) after EPS from continuing operations was 119.1cts (+20.7%yoy) and EPS from continuing operations after one-offs was 127.1cts (+73%). 

    In addition to a high payout ratio, the company also announced a A$2bn Off-Market Buyback (OMB). This was not unexpected. 

    Like the previous off-market buyback executed in May 2019, this OMB has a two-tier approach, significantly favouring small investors. 


    Eicher Motor’s Cosy NRC Rewards CEO-Promoter Lavishly Year After Year as Performance Plunges

    By Hemindra Hazari

    Institutional investors were recently in the news for opposing a 10% pay hike for a CEO-promoter in FY2021, a year of bad results for his firm. One big story went unremarked: that the latest pay hike was on a high base, since the CEO had received a 51% pay hike in the previous year of poor performance (FY2020). Interestingly, two of the three ‘independent directors’ who staff the crucial Nominations and Remuneration Committee (NRC) are former employees of the firm.

    Special Resolutions, proxy advisory firms and institutional shareholders are proving to be the bane of corporate India and of Chief Executive Officers (CEO) with generous remuneration packages seeking reappointment.  The case of Siddhartha Lal, the CEO-promoter of Eicher Motors (EIM IN), received wide publicity when institutional shareholders at the August 7, 2021 annual general meeting delivered a humiliating rebuke by rejecting his candidature. They expressed discomfort with the 10% remuneration hike Lal received in FY2021 on the back of poor financial performance by the company, and with the clause which stated that Lal’s future remuneration would be capped at 3% of the company’s profits.  On August 23, 2021, a chastened Eicher Motors decided to once again reappoint Lal as managing director, but with a reduced remuneration cap of 1.5% of the company’s profits. They also issued a clarification justifying his remuneration hike in FY2021.

    The revised notice, citing Manvi Sinha, Chairperson of the NRC, gives rise to questions. It underlines the fact that NRCs appear ever willing to rubber stamp and defend the liberal remuneration packages provided to CEOs. The remuneration for promoter-CEOs like Lal ought to be dependent on the performance of the company, unlike remuneration for the general cadre of employees; thus the average 10% hike the firm claims it gave its employees (after adjusting for new hires/retirees) cannot be a justification for providing a 10% hike to Lal. Furthermore, Lal as a promoter with a substantial equity interest in the company, is also rewarded through dividends, and hence his remuneration is only one component of the monetary benefits he derives for his efforts.

    The clarifications by S. Sandilya (chairman, Eicher Motors) and by Manvi Sinha, both members of the NRC, fail to explain why, in FY2020, when the sales, profits and profitability of the company declined, Lal was given a 51% (57% as per a different disclosure) hike in remuneration, in contrast to the 5% decrease in median salary of all employees. Therefore the 10% hike in Lal’s remuneration in FY2021 was on a base of a 51% hike in FY2020. For two successive years of declining performance by the company, an indulgent NRC was willing to handsomely reward Lal, completely delinking the CEO’s remuneration from the company’s performance. When institutional shareholders witness such blatant indulgence, it is a scathing comment on the independence and competence of the NRC and the board of directors.

    The NRC of Eicher Motors consists of 3 independent directors. Manvi Sinha has a background in media and has reportedly known Lal from childhood; S. Sandilya was for many years a senior executive in Eicher Motors; and Inder Mohan Singh, partner of the law firm Shardul Amarchand Mangaldas, was earlier the Head – Legal and Secretarial at Eicher Motors. While independent directors may have known the promoters or worked with them earlier, their decisions on the board must defend the interests of the company and not just the promoter. Sadly, the manner in which the board has rewarded Lal for two consecutive years, when the company performed poorly, speaks volumes about its competence and independence.


    Japan’s Governance: POLA ORBIS HOLDINGS (4927)

    By Aki Matsumoto

    Corporate Governance Research: POLA ORBIS HOLDINGS (4927)

    SUMMARY:

    POLA ORBIS HOLDINGS’ corporate governance is slightly above average*. Although it may be a bit out of corporate governance, its financial performance in ROA and ROA remains lacking due to inefficiencies such as asset efficiency. On the other hand, we can say that Tobin’s Q is over 3x and the share price is highly valued for its high profit margin on sales, such as maintaining 7.8% OP margin even in FY12/2020, which was affected by COVID-19 pandemic.

    The corporate governance of the Company cannot be described without mentioning that it is, after all, a founding family company. In terms of corporate governance practices, the following are commendable: no anti-takeover provisions, no policy holdings, strong board evaluation and board training policies, clear dividend policy, capital allocation and growth policy, and strong shareholder returns. On the other hand, what I do not appreciate are the matters related to human resources. The term of office for directors is two years instead of one year, the majority of the Board of Directors is composed of internal directors, the President chairs the Board of Directors meetings, the committees are advisory committees and are chaired by an internal director (probably the President), there is insufficient disclosure of compensation incentives, and the ratio of variable compensation to fixed compensation and the objectivity of the linkage to medium-term business performance are lacking. There is room for improvement in terms of the ratio of variable to fixed remuneration and objectivity regarding the linkage with medium-term business performance, and there is no disclosure of ex-CEO advisors.

    As mentioned in the text below, it is questionable whether the Board of Directors and committees, where the founder family holds the majority of the Company’s outstanding shares and the second generation founder is the president, can make decisions that are not in line with the president’s wishes. The company manufactures cosmetics, which are widely used by women, and aims to expand its sales both domestically and internationally. As such, the company has to be sensitive to consumer trends, and it is necessary to foster a corporate culture that is supported by consumers. This is the reason why corporate governance practices in the company have progressed in the areas mentioned above in the criteria On the other hand, the criteria that cannot be evaluated have much to do with the fact that the founding family company controls the management. This is because personnel matters are non-negotiable in order for the founding family to maintain control in the future. Whether or not governance practices improve in these matters is related to whether or not the founding family will maintain control in the future. In this sense, if the founding family does not make concessions, I do not see any further progress in governance in the immediate future. Even if some progress is made in these matters, we should be careful to see if it is an inherent improvement. Even if progress is made in any of these matters, will the president, who is the chairman of the Personnel and Compensation Committee and controls personnel and compensation, really make a decision that is not in line with the president’s wishes when he chairs a board meeting with many internal directors? Even if such a decision is made, can it really be made in a situation where the founding family, which holds the majority of voting rights at the shareholders’ meeting, can overturn the decision? Concerns always remain as to whether essential improvements in governance practices will be made in such an environment. Whether we can dispel such concerns and ensure the objectivity and transparency of our Board of Directors and practices is a serious challenge for the Company.

    *Pora Orbis Holdings has a METRICAL CG Score of 62.78 (versus an average of 53.77 for the 1,722 companies in the universe as of July 2020). The company’s score is above average in the universe.


    4th Consecutive Quarter of Profitability

    By TA Securities Holdings Bhd

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Ozon Holdings: Healthy Q2 Growth But Slower-Than-Expected Path To Profitability

    By Moat Investing

    • Number of orders reached 40.9 mln (up 180% YoY).
    • GMV reached RUB 89 bln (up 94% YoY).
    • Adj EBITDA was RUB – 9.1 bln equal to 10.3% of GMV, compared to Q2 2020 (RUB 1.8 bln equal to 3.9% of GMV) reflecting the sharp increase in volumes.
    • Operating cash flow was RUB – 7.7 bln (RUB – 2.1 bln in Q2 2020).

    Reality Check

    By TA Securities Holdings Bhd

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Expecting Better 2H

    By TA Securities Holdings Bhd

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Matahari Department Stores (LPPF IJ) – 2Q21: Bottom line turned positive and above expectation; …

    By Mirae Asset Securities

    2Q21: Bottom line turned positive and above expectation; Debt is fully repaid

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Demand Broadly Outpaces Supply

    By TA Securities Holdings Bhd

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Before it’s here, it’s on Smartkarma

    Consumer: Sony Corp, Wm Morrison Supermarkets, IDP Education, Health And Happiness (H&H), JD Health, AllDay Marts, MercadoLibre Inc, Nestle (Malaysia), Safari Industries India and more

    By | Consumer, Daily Briefs

    In today’s briefing:

    • Conviction Call Sony – No Way Home to the Spider-Verse?
    • FTSE100 Index Rebalance Preview: Takeover Names in Focus
    • IDP Education Placement – Stock Is Expensive and Deal Is Big, but It Is Also Very Well Flagged
    • Health & Happiness (1112 HK): Zesty Paws Acqsn. In Pursuit of Growth. At a Price.
    • JD Health: Strong Earnings but Regulatory Environment Remains a Concern
    • AllDay Marts Inc IPO Preview: A Small Fish in a Big Pond
    • H&H International – Earnings Flash – H1 FY 2021 Results – Lucror Analytics
    • MercadoLibre: Positive Q2 Results But Valuation Upside Is Now Limited
    • High Raw Material Cost Eating into Profitability
    • Safari Industries: Well Placed for Growth as Normlacy Set In

    Conviction Call Sony – No Way Home to the Spider-Verse?

    By Mio Kato

    Almost two years ago to the day, we discussed the potential for Sony to step into the breach created by the end of the first generation of the MCU. We suggested that based on the company’s IP assets within the Spider-Man universe and the broad popularity of the family-friendly IP. With the release of the Spider-Man: No Way Home trailer, it is looking like things are coming together extremely well for the Spider-Verse, or as it is now called Sony’s Spider-Man Universe.


    FTSE100 Index Rebalance Preview: Takeover Names in Focus

    By Brian Freitas

    The UKX Index (UKX INDEX) is made up of the 100 largest UK companies by full market cap which meet the criteria for inclusion in the index.

    The results of the September index review will be announced on 1 September and the changes will be effective after the close of business on 17 September. The data to determine the stocks to be included and excluded will use the closing prices from 31 August.

    Using end of day data from 24 August, we see two high probability changes. Wm Morrison Supermarkets (MRW LN) and Meggitt PLC (MGGT LN) will be added to the index, while Weir Group (WEIR LN) and Just Eat Takeaway (JET LN) will be deleted from the index.

    Just Eat Takeaway (JET LN) is a deletion due to a change in the company’s nationality from UK to Netherlands. This makes the stock ineligible for inclusion in the UKX Index (UKX INDEX).

    Dechra Pharmaceuticals (DPH LN) is ranked just outside the inclusion zone. A 3% move higher over the next 5 trading sessions could see the stock being included in the index. That would also mean that ITV PLC (ITV LN) would be deleted from the index.

    Wm Morrison Supermarkets (MRW LN) and Meggitt PLC (MGGT LN) are subjects of bidding wars and the potential passive buying adds an interesting angle for short term trades.



    Health & Happiness (1112 HK): Zesty Paws Acqsn. In Pursuit of Growth. At a Price.

    By Devi Subhakesan

    Health And Happiness (H&H) (1112 HK) announced a USD 610 Mn acquisition of a privately-held US-based pet nutrition company, Zesty Paws. In this report, we discuss the acquisition details and significance of this deal for Health and Happiness both in terms of business outlook and impact on its financials.

    With China’s long-term birth rate on a decline despite regulatory intervention ( China’s 3-Child Policy Unlikely to Reverse Trend. Child-Care Stocks Can Derate, Prefer Diverse Plays), companies with a dominant focus on the Baby & children segment have to look elsewhere for growth. H&H had forayed into the high-growth pet care segment in 2020 with its acquisition of “Solid Gold” – a US-based holistic pet food brand. With its Zesty Paws acquisition,  H&H adds to its stable of pet care brands that could help the company diversify the product portfolio away from baby nutrition, and add a healthy dose of growth. 

    Our earlier published Smartkarma original report Pet Care Sector in Asia: Saga Has Just Started. Opportunities Galore. discusses in detail the rapidly growing pet care sector in China.


    JD Health: Strong Earnings but Regulatory Environment Remains a Concern

    By Shifara Samsudeen, ACMA, CGMA

    JD Health (6618 HK) reported 1H2021 results on Tuesday (24th August) which saw revenues growing 55.4% YoY to RMB13.6bn (vs consensus revenues of RMB9.4bn) driven primarily by the sale of pharmaceutical and healthcare products as a result of expansion in the number of user accounts.

    The company reported an operating loss for the period compared to an OPM of 4.5% in 1H2020. However, huge share-based payment expense during 1H2021 was the reason for the operating losses during the period and excluding these costs, JD Health made an OPM of 3.4% for 1H2021.

    JD Health’s shares have lost about 72% since mid-July with the ongoing regulatory overhaul in the Chinese tech sector and news surfacing about the government of China preparing to introduce new regulations to increase supervision of  prescription drugs sold through online platforms.


    AllDay Marts Inc IPO Preview: A Small Fish in a Big Pond

    By Oshadhi Kumarasiri

    • AllDay Marts (123 PM) is a supermarket chain in the Philippines targeting the mid-premium segment consumers. There are a number of things that we like about AllDay Marts Inc such as the favorable macro-environment, growth opportunities through leveraging its parent’s real estate exposure and digitization and e-commerce growth. However, we are not convinced that AllDay Marts Inc is the best company in the highly competitive supermarket space in the Philippines.
    • The company intends to raise around $100.0m from the proposed IPO by selling 6.8bn primary shares at an indicative offer price of ₱0.80 per share. We think the IPO pricing is not cheap enough as the indicative offer price implies trailing EV/Sales, EV/OP and PE of 2.0x, 38.8x and 63.9x respectively. Nevertheless, most IPOs in the Philippines tend to price below the initially indicated price. At the indicative offer price, we believe the risk/reward balance is not skewed to the reward side to consider an investment.

    H&H International – Earnings Flash – H1 FY 2021 Results – Lucror Analytics

    By Chuanyi Zhou

    H&H International’s H1/21 results were soft but within our expectations. The company has been gradually recovering, but continues to face increasing competition in China and other territories. We have yet to observe a margin recovery, and remain cautious on whether the company will cut selling prices to boost revenue growth. Overall, H&H’s financial risk profile is solid and liquidity is sound. The company has minimal short-term debt obligations.

    We foresee that revenue growth may remain under pressure, especially given intensifying competition for the Baby Nutrition & Care segment (due to the low birth rate in China). Income from the ANZ market could also continue to face pressure. H&H seems to have achieved promising results in other territories, which might make up for ANZ in terms of revenue contribution.


    MercadoLibre: Positive Q2 Results But Valuation Upside Is Now Limited

    By Moat Investing

    • Net Revenues reached $1.7 bln (102.6% YoY) on an FX neutral basis; Gross profit was $753 mln (44.3% margin), and the Income from operations was $166.2 mln ($99.4mln in Q1 20).
    • Net income before taxes was $138.9 mln ($89,3 mln in Q1 20); Net profit was $68.2 mln and Total Payment Volume was $17.5 bln, up 72% YoY on a FX neutral basis.
    • GMV was $7 billion, up 46% YoY on a FX neutral basis and the Unique active users reached 75.9 mln (+ 47,4% YoY);
    • Mercado Envios shipped over 230.5 mln items (+46.4% YoY) and Mobile Wallet delivered $2.9 bln in TPV (almost 200% growth YoY on a FX neutral basis.
    • Mercado Credito portfolio has reached $800 mln.

    High Raw Material Cost Eating into Profitability

    By TA Securities Holdings Bhd

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Safari Industries: Well Placed for Growth as Normlacy Set In

    By Axis Direct

    We maintain our BUY rating and value the stock at 45x P/E on its FY24E EPS (premium to its peer) as we expect Safari to report strong growth over FY21-24E. Our revised TP is Rs 900/share (earlier Rs 790/share).

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Before it’s here, it’s on Smartkarma

    Consumer: MR D.I.Y. Group, Pinduoduo, The Walt Disney Co, Erawan Group, Maruti Suzuki India, Berjaya Sports Toto, MK Restaurants Group, Arvind Fashions and more

    By | Consumer, Daily Briefs

    In today’s briefing:

    • MR DIY Placement – Has Done Exceptionally Well Since Listing
    • PDD – Strong (And First Ever) Profit in Q2 2021 but Likely Transient
    • Disney+ to Launch in Korea in November: Winners & Losers?
    • ERW: Expect to Return to Pre-COVID Levels in 2023
    • Strategy for net zero emissions needs to be India focused
    • Support From H.R.Owen
    • M: Expect 3Q21 Earnings Will Be the Bottom Quarter
    • Arvind Fashions: Capital Restructuring to Aid in Navigating Uncertainties


    PDD – Strong (And First Ever) Profit in Q2 2021 but Likely Transient

    By Jason Yap, CFA

    PDD posted its first quarterly profit since listing and committed to re-invest net profits towards a newly launched RMB10 billion Agriculture Initiative.

    Revenue and active buyers recorded strong growth but otherwise confirmed signs of decelerating growth compared with prior quarters.  Further, PDD’s management confirmed that its profitability going forward is likely to be affected both by investments in the Agriculture Initiative and intensifying competition in an evolving China e-commerce landscape.

    Notwithstanding the above, US investors read PDD’s significant profit milestone positively, with PDD’s share price up 22.3% by US trade closing (24 Aug 2021).  

    We previously discussed deteriorating sequential quarter on quarter financial and operating metrics and operating cashflows, PDD’s pivot to asset heavy strategy, and decelerating GMV and revenue growth.  To its credit, PDD’s strong Q2 2021 results has debunked some of these concerns although PDD’s latest disclosures and management representations indicate that the strong performance may not repeat in H2 2021. 

    We provide updates on the Q2 2021 results and discuss the relevant issues in this article.


    Disney+ to Launch in Korea in November: Winners & Losers?

    By Douglas Kim

    • Disney+ finally plans to make its long-awaited launch in Korea in November 2021. There are millions of Disney fans in Korea and it is near-certain that Disney+ will become a big success. Disney+ will compete heads on with other leading OTT services available in Korea including Netflix and Wavve.
    • Disney will be pursuing its own mobile app service in Korea, similar to Netflix. However, it will partner with the local telcos for Internet TV services. On 24 August, it was reported in the local Korean media that KT’s OTT service Seezn plans to provide numerous Disney+ contents. Apparently, LG Uplus is still negotiating with Disney for a potential partnership as well for the OTT service. However, Disney plans to partner with LG Uplus for providing its contents on its IPTV services. 
    • There will likely be two groups of companies that could benefit from the launch of Disney+ ‘OTT services and Disney contents in Korea. They include the two local telcos (KT Corp and LG Uplus) as well as the major Korean drama producers such as Jcontentree Corp., Studio Dragon, and Astory.

    ERW: Expect to Return to Pre-COVID Levels in 2023

    By Research Group at Country Group Securities

    We maintain SELL rating with a new target price of Bt2.46 (-5% from previous target price) based on DCF method (WACC of 7% and terminal growth of 2%), implying 35.5xPE’23 due to less possibility to open country for tourists by the next six months due to prolonged COVID-19 impact and a slow COVID-19 vaccine rollout in Thailand.

    • Trimmed 2021-23E forecast to factor in  a reduction in inter-provincial travel caused by COVID impact and partial lockdown measures continue to pressure in operations.
    • However, the company still maintains its financial health with an interesting bearing debt-to-equity ratio of 1.7x.
    • We expect its operations to incur loss in 2H21 due to weak domestic demand and partial lockdown measures and expect earnings to return to profit and near pre-COVID levels in 2023.

    Strategy for net zero emissions needs to be India focused

    By Motilal Oswal

    Strategy for net zero emissions needs to be India focused CAF-2 compliance strategy in place Rs Car subscription service for easy access MSIL’s FY21 annual report highlights the initiatives (digitization, online financing, subscription service, etc.) it took to emerge stronger from the COVID-19 pandemic. The management has shared its thought process on the path to attaining net zero emissions….

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Support From H.R.Owen

    By TA Securities Holdings Bhd

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    M: Expect 3Q21 Earnings Will Be the Bottom Quarter

    By Research Group at Country Group Securities

    Yesterday analyst meeting came out with a neutral tone. SSSG remain dropped at -50%-60% in July 2021. However, we expect SSSG in three main brands are likely to recover MoM in September 2021 after a slowdown number of COVID-19 cases and expect lockdown easing in September 2021.

    • We expect M to report net loss in 3Q21 from a loss of Bt99m in 2Q21 and net profit of Bt465m in 3Q20. However, it should be the bottom quarter in 2021 supported by a slowdown number of COVID-19 cases and an increase in number of vaccinated.
    • We expect strong earnings recover in 2022 onwards supported by allow dine-in services and improving customers confidence after high vaccination rate.
    A sign for earnings recovery as a slowdown number of COVID-19 cases. We reiterate BUY with a target price of Bt61 based on 25xPE’22E, closed to the Asia ex-Japan consumer staple sector.

    Arvind Fashions: Capital Restructuring to Aid in Navigating Uncertainties

    By ICICI Securities Limited

    We expect gross debt to reduce from Rs 903 crore in FY21 to Rs 500 crore by FY23E. The management’s focus on prudent capital allocation, stringent working capital policy is expected to translate to positive FCF by FY23E, with pre Ind-AS 116 EBITDA margin of ~7%. We change our stance from REDUCE to HOLD owing to strengthened b/s. Better capital allocation towards profitable brands with improvement in margin profile, debt reduction would be key monitorables. We value…

    Content is external broker report sourced from online content aggregator through publicly available sources and is displayed below for general informational purposes only. Refer full disclaimer below.

    Before it’s here, it’s on Smartkarma

    Consumer: Great Wall Motor, Nongfu Spring, Momo.Com Inc, Huon Aquaculture, JD.com Inc (ADR), Volkswagen, Ace Hardware Indonesia, Monogatari Corp and more

    By | Consumer, Daily Briefs

    In today’s briefing:

    • FTSE China A50 Index Rebalance Preview: Great Wall, Cosco Shipping Potential Adds
    • FTSE China 50 Index Rebalance Preview: Regulation, Volatility, 4 Changes, 10% Turnover
    • FTSE TWSE Taiwan 50 Index Rebalance Preview: Momo.com to Replace Asia Cement
    • Huon Ag (Huo AU): Twiggy Went To Market
    • JD.com (JD): 4Q21, Strong Service Revenue Matters
    • Liquid Universe of European Ordinary and Preferred Shares: August Report
    • JD – Q2 Results Beat Consensus but Lower than Prior Quarter Growth
    • Ace Hardware Indonesia (ACES IJ) – Summer Lull
    • Japan’s Governance: Diversity Is Strength
    • JD.com (JD US): Solid Growth Flying Under the Radar

    FTSE China A50 Index Rebalance Preview: Great Wall, Cosco Shipping Potential Adds

    By Brian Freitas

    The FTSE China A50 Index (XIN9I INDEX) is designed to represent the performance of the 50 largest companies by full market cap of the mainland Chinese market that is available to domestic and international investors via the QFII, RQFII and Stock Connect programs.

    The next rebalance will be effective after the close of trading on 17 September and the changes will be announced on 1 September. The September review will use data from todays close of trading to determine the stocks to be included and excluded.

    Great Wall Motor (601633 CH) and Cosco Shipping Holdings (601919 CH) are high probability inclusions to the index, while CSC Financial Co Ltd (601066 CH) and China Citic Bank Corp (601998 CH) are the likely deletions.

    Estimated one-way turnover is 1.63% and there is minimal impact of the funding trade on the other index constituents.


    FTSE China 50 Index Rebalance Preview: Regulation, Volatility, 4 Changes, 10% Turnover

    By Brian Freitas

    The FTSE China 50 index is designed to represent the performance of Chinese companies (H-shares, P-chips and Red chips) that are listed on the Hong Kong Stock Exchange. The index is a free float weighted market cap index and the weights of the constituents are capped at 9% on a quarterly basis.

    The next rebalance will be effective after the close of trading on 17 September and the changes will be announced on 1 September. The September review will use data from close of trading on 23 August to determine the stocks to be included and excluded.

    Using prices from the close on 23 August, we see 4 potential inclusions: Nongfu Spring (9633 HK), Ganfeng Lithium (1772 HK), Geely Auto (175 HK) and Sunny Optical (2382 HK).

    The 4 potential deletions are Hansoh Pharmaceutical (3692 HK), Alibaba Health Information Technology (241 HK), Haidilao (6862 HK) and China Merchants Securities Co Ltd (H) (6099 HK).

    We see Li Ning (2331 HK) missing index inclusion by 0.18%. There is a small possibility that the stock is included in the index which would complete a hattrick of inclusions following entry into the Hong Kong Hang Seng Index (HSI INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX)

    One-way turnover is estimated at 9.66% and will result in a one-way trade of HK$4,240m. The large turnover is a result of changes to index members and due to capping changes following the large price drops in the largest index constituents.


    FTSE TWSE Taiwan 50 Index Rebalance Preview: Momo.com to Replace Asia Cement

    By Brian Freitas

    The FTSE TWSE Taiwan 50 Index is a market cap weighted index adjusted for free float and Foreign Ownership Limits and is designed to represent the performance of 50 of the largest and most liquid stocks that trade on the Taiwan stock market.

    The next rebalance will be effective after the close of trading on 17 September and the changes will be announced on 3 September. The September review will use data from close of trading on 23 August to determine the stocks to be included and excluded.

    As of the close on 23 August, we see Momo.Com Inc (8454 TT) as a high probability inclusion to the index, while we expect Asia Cement (1102 TT) to be deleted from the index.

    At rank 41, we see Unimicron Technology (3037 TT) missing index inclusion and consequently Far Eastern New Century (1402 TT) avoids deletion.

    Momo.Com Inc (8454 TT) is an inclusion to the MSCI Standard index at the close on 31 August and passive MSCI trackers are estimated to buy 2.8m shares (US$165m; 4.7 days of ADV). The stock has come off post the MSCI inclusion announcement as some pre-positions have likely been taken off and the stock could rally in the days leading up to MSCI implementation.

    Asia Cement (1102 TT) stock has dropped this month as Q2 results have missed expectations. Passive selling could provide an opportunity to buy the stock since it trades cheaper to its closest peer. Short interest on the stock is 6 days of ADV to cover and there could be some support for the stock as shorts look to cover.


    Huon Ag (Huo AU): Twiggy Went To Market

    By David Blennerhassett

    Back on the 26 February this year, Huon announced a loss of A$95.3mn for the 1H21, including a non-impairment charge of A$113.9mn. In a market update earlier that month, Huon said salmon prices had declined ~40% relative to the first six months of 2020. Concurrent with its 1H21 results, Huon said the board has initiated a strategic review to assess the potential for corporate-level transactions for the benefit of shareholders. In a follow-up announcement on the 25 June, Huon said that strategic review remained ongoing. 

    The most likely outcome of the review was a take-private transaction, however, an auction process dragged on, with a number of bidders pulling out on account of pricing. 

    On the 6 August, Huon announced a firm Offer, by way of a Scheme, with  Brazil’s JBS SA (JBSS3 BZ). Huon shareholders would receive A$3.85/share in cash. A fully-franked dividend of $0.0125/share – if paid – will be netted.

    The cash price was a 61% premium to the last close, before the strategic review was announced on the 26 February. The Bender family with 53% of shares out intend to vote all of their shares in support of the Scheme, in the absence of a superior offer. The Offer also required approval from FIRB.

    Apart from FIRB signing off – no small ask given JBS had fallen foul of US regulators recently – this looked like a done deal, with possible completion in November. 

    But Andrew Forrest’s family fund Tattarang had other plans and promptly upped its stake to 18.51% on the 10 August from 7.33% at the time of the SID announcement. That current stake all but blocks a Scheme. 

    Not to be outdone,  JBS announced a parallel takeover bid on the 13 August. This second Offer is conditional on 50.1% acceptances from shareholders.  With the Bender’s stake, that Offer is effectively done – barring FIRB rejection. The Bender family also entered in a pre-bid acceptance agreement for 19.9% of shares out. 

    It was unclear at the time whether Forrest was trying to block JBS in Huon or just looking for a better price.

    In various media advertisements last Friday, Forrest called on JBS to commit to the same principles as Tattarang’s agri-food business, Harvest Road, and its beef processing company, Harvey Beef.

    For a small expense and through good management at Harvey Beef, we have established a clear No Pain No Fear framework in the critical stages of cattle processing as part of our ambition to exceed animal welfare standards and create a path for others to follow.

    This means our customers don’t have to compromise their values when they choose to buy our products.

    Animals provide humans with a valuable source of protein, the least we can do is respect this by ensuring they are treated with the utmost care.

    As the world’s biggest protein producer, JBS can rise to this same standard.

    Not altogether surprisingly, JBS took umbrage with this challenge, saying it already adheres to high standards in its animal handling. As did Huon. 

    Huon said this morning…   that it has been…

    uncompromising in its commitment to the highest standards of animal husbandry, biosecurity, environmental management, and sustainable farming practices. Huon remains the only seafood producer in Australia to achieve RSPCA Approved Farming certification and firmly believes its sustainable salmon farming practices can be benchmarked against the best standards in the world.

    Huon also added Tattarang had earlier expressed interest in Huon and submitted a non-binding and conditional indicative offer. Tattarang was invited to participate further in the strategic review process but declined to do so. Tattarang’s non-binding and conditional indicative offer was at a material discount to JBS’s $3.85 offer.

    Oddly, Huon is trading almost at terms. Given the non-negligible risk FIRB blocks the deal, I would avoid shares here.

    More below the fold. 


    JD.com (JD): 4Q21, Strong Service Revenue Matters

    By Ming Lu

    • We believe “service” is more like main business than “direct sales”.
    • We believe service revenue will grow by 46% in 2021 and 29% in 2022.
    • JD Logistics’ IPO related expenses are one-time things. 
    • We believe the stock has an upside of 38% for the end of 2021.

    Liquid Universe of European Ordinary and Preferred Shares: August Report

    By Jesus Rodriguez Aguilar

    Trends

    Spreads have generally tightened during the last five weeks, with some notorious exceptions like Roche and Volkswagen.

    Interesting situations and trades

    • The discount of Carlsberg A/S (CARLB DC) B shares (2 voting rights per share) has shrinked to 9.8% discount (from 28.4% on 19 April) vs. the A shares (with 20 voting rights per share). Maintain LONG B shares/short A shares on, if you can get hold of any A shares.

    • The discount of the preferred shares of Bayerische Motoren Werke AG (BMW GR) has been shrinking since reaching a maximum of 26.1% in November 2020. It is now 13.7%, roughly at the same level of mid-July, and approaching pre-Covid levels. Maintain long BMW prefs, short common shares on, with a target of a 12% discount.

    • Fuchs Petrolub SE (FPE GR) ‘s preference shares premium seems to vary within a range, which is probably liquidity related. It has widened to 26.1% (from 22.3%% by mid-July). With over 50% of the ordinary shares, the Fuchs family maintains the majority vote.

      Although there is no reason why the voting rights should be specially dear in Fuchs’s case, voting rights are still valuable and neither the dividend advantage of the preferred shares nor their being members of several midcap indexes (Prime Standard/MDAX; STOXX Europe 600; DAXplus Familiy 30) justify the large premium, in my view. Maintain the trade long common/short prefs on, with a 10% target.

    • Henkel AG & Co KGaA (HEN3 GR) shows a long-term trend towards a reduction of the premium of the preferred shares. The premium has recently tightened and is now 7.3% (vs. 11.5% by mid-July and 16.1% by mid-May), thus below my 10% target.

    • Voting rights are valuable in a company like Volkswagen (VOW GR). Prefs discount has widened to 31.1% back to March levels (it reached a maximum of 33.4% on 12 August). Preference shares have in the past traded at a premium due to its higher liquidity and inclusion in stock indexes. That said, ordinary shares are also liquid. It seems again time to put on long prefs/short ords.

    • The premium of Telecom Italia Sp A (TIT IM) savings shares tightened to 4.4% vs. ordinary shares. The market may have given up on a conversion of savings into ords à la Buzzi Unicem or Danieli. A conversion makes financial sense as it would save the dividend advantage for the savings. But that would dilute the voting power of Vivendi (23.943% of the votes, the second largest shareholder is Cassa Depositi e Prestiti with 5.031%). Short savings/long ords.
    • Grifols SA (GRF SM) B shares are trading at an almost 40% discount vs. A (ordinary) shares (vs. 36.1% by mid-April and 39.7% by mid-February). Ordinary shares are unloved as of lately and so are B shares. It may be a better time now to put on the trade long B, short A shares. There are some issues around Grifols leverage and some creative solutions to keeping it contained. The Covid-related antitakeover provisions issued by the Spanish Government mean that the voting rights are less valuable now. Moreover, the by-laws contain a poison pill that should significantly reduce the discount in case of a takeover attempt. The discount in Grifols B shares has averaged 28% since listing of the B shares in February 2016. I recommend setting up the trade long B shares (traded on Nasdaq), short A shares (traded in Madrid). The target is a 27% discount. Please note there is FX risk, which can be hedged.

    • The current discount in Atlas Copco AB (ATCOA SS) B shares vs. A shares is 15.2%  and seems to be on a widening trend.

    • On 10 May, Industrivärden divested its entire holding in SSAB AB (SSABA SS). Top shareholder is now LKAB (Luossavaara-Kiirunavaara Aktiebolag), a government owned Swedish mining company. LKAB is now consolidating its influence in SSAB “in order to take responsibility and ensure that the company continues to have a clear industrial ownership influence at a time when the steel industry is facing major change”. On 7 June, LKAB communicated its increased holding in SSAB (16.0% of the votes and 10.5% of the capital). The discount has widened to 14.6% (vs. 11.3% by mid-July and 6.6% by mid-April). It seems the time to go long B shares/short A shares.

    • The discount in Volvo AB (VOLVB SS) B shares has slightly tightened since mid-June, from 2.7% to 1.6%. Still highest levels since January 2016.

    • The discount of non-voting Roche Holding AG (ROG SW) shares has widened to 9.3% (vs. 7.9% by mid-July). Shareholding seems very stable, so there is no reason for the voting shares to become dearer vs. the non-voting stock. Softbank has quietly purchased nearly $5 bn of non-voting shares, according to the FT.

    • The premium of Schindler Holding AG (SCHN SW) participation certificates to Schindler Holding shares is 5.3% (vs. 3.6% by mid-July and a discount by January). Like Roche, Schindler also seems on a widening trend.

    • The discount in Schroders PLC (SDR LN) non-voting stock vs. voting one reflects Schroders’ corporate governance and the influence of family control (45.4% voting rights with a 36% economic interest). The discount has widened to 31.2% (vs. 28.4% by mid-July). I would maintain long non-voting/short voting shares on. I would maintain long non-voting/short voting shares on.

    Please read on for table and charts.


    JD – Q2 Results Beat Consensus but Lower than Prior Quarter Growth

    By Jason Yap, CFA

    JD reported revenue and earnings ahead of consensus expectations but which are a marked decline from the growth seen in Q2 2020 when JD benefitted (aided by its superior supply chain and logistics infrastructure) from an unprecedented e-commerce boom amid pandemic lockdowns. 

    On the earnings call, JD’s management sought to address regulatory concerns by highlighting its supply chain and logistics capabilities and customer service differentiation, focus on supporting the real economy, and compliance with labour laws, including social insurance contributions – throwing shade at Meituan‘s recent troubles.

    Further, JD highlighted that they have in fact benefitted from the anti-monopoly measures as they saw a return of merchants to JD e-commerce platform formerly bounded by 2 choose 1 policies at competing e-commerce platforms. 

    Following the key issues discussed in the Q2 2021 preview (JD – Analysing Earnings Calls and Disclosures Using a Forensic Approach), we update the Q2 2021 financial and operating metrics and highlight relevant observations. 


    Ace Hardware Indonesia (ACES IJ) – Summer Lull

    By Angus Mackintosh

    Ace Hardware Indonesia (ACES IJ) released 1H2021 last week with sales down by -7.0% YoY and operating profits by -27.6% YoY, while net profit fell by -21.3% YoY. Obviously, 1Q2020 represented partial a high-base given that the pandemic had not yet impacted Indonesia in a big way.

    The company saw sales in Jakarta affected most by the pandemic, with Java ex-Jakarta increased its share of sales and stores outside Java also increasing share of the total.

    Ace Hardware Indonesia (ACES IJ) continued to expand its stores in 1H2021 despite the pandemic.  The fact that  a large portion of stores are in malls has meant that it has been heavily impacted by the recent Emergency PPKM measures, which is not yet reflected in these numbers. 
    The most recent round of Emergency PPKM measures has seen 155 stores closed in July, which remain closed in August. The company has managed to shift some of its sales online but this is still small.

    Ace Hardware Indonesia (ACES IJ) continued to grow its members under its Ace Reward scheme, with member sales now accounting for 73.1% of total sales in 1H2021. Members spend significantly more than the average ticket size.

    Ace Hardware Indonesia (ACES IJ) recently released predictably weak SSSG numbers for July, which saw a -50.7% decline YoY reflecting the imposition of Emergency PPKM mobility restrictions versus a more open environment last year. We would expect a gradual recovery in September, as PPKM measures are relaxed further. 

    The company trades on 30.1x FY21E PER and 23.0x FY22E PER, with forecast EPS growth of +13.7% and +30.7% for FY21E and FY22E respectively, making it look attractive versus its 5-year average forward PER of 25.0x 


    Japan’s Governance: Diversity Is Strength

    By Aki Matsumoto

    In the ESG initiatives, it seems that many Japanese companies are more enthusiastic about E than about S and G. In the case of E, it is relatively easy for Japanese companies, which have a successful experience of setting technical numerical targets such as CO2 emission targets and improving the level of technology through bottom-up efforts led by engineers, to finally achieve high targets. Even with S and G, it is possible to set clear goals and timeframes for improvement without setting numerical targets. I have mentioned several times on this website that respect for human rights, or in other words, understanding of diversity, is crucial for creating a society where people from all different backgrounds can live comfortably. I would like to update the diversity initiatives that I discussed in my previous article “Japan’s Governance: Social and Human Rights.


    JD.com (JD US): Solid Growth Flying Under the Radar

    By Mitchell Kim

    JD.com Inc (ADR) (JD US)‘s 2Q21 results may not seem inspirational, but a closer look under the hood reveals a solid business that is continuing to improve.  Considering the regulatory overhang and the near-term losses from the new community group buying business offsetting the overall profit growth, poor investor sentiment may continue for the Chinese e-commerce stocks including JD.  However, I remain constructive on JD’s fundamentals, and I believe JD is a good rebound candidate when the overhang is lifted.      

    What I saw under the hood: 

    • Solid top-line growth of 26%.
    • Historic quarterly active user additions.
    • Rising appeal from lower-tier market users.
    • Higher engagement from existing users.
    • Acceleration of order volume growth.
    • Healthy core JD retail operating profit  

    Before it’s here, it’s on Smartkarma

    Consumer: Bestway Global Holding, Las Vegas Sands, Tata Motors Ltd and more

    By | Consumer, Daily Briefs

    In today’s briefing:

    • Bestway Global’s Scheme Document, IFA Opinion
    • Las Vegas Sands: Its an Asian Story Now Still Mispriced and Cheap
    • Bestway Global (3358 HK): Scheme Doc Out. Court Meeting On Sept 15th
    • Morning Views Asia: Tata Motors ADR

    Bestway Global’s Scheme Document, IFA Opinion

    By Arun George

    Bestway Global Holding (3358 HK) has despatched the scheme document in relation to a privatisation offer from Great Success Enterprises Holdings. The offeror is owned 92.0% by Mr Zhu (Founder, Chairman & CEO) and 8.0% by Mr Zhu Jiachen, the son of Mr Zhu. The offeror will offer HK$4.38 per scheme share. 

    Unsurprisingly, the IFA considers the offer to be fair and reasonable. We broadly agree with the IFA analysis with the exception that the peer multiple comparisons could be improved. 

    The key condition precedents are the headcount test along with the scheme approved by at least 75% disinterested shareholders and <10% rejection by all disinterested shareholders. Fidelity holds a blocking stake of 2.45% of shares outstanding (source: CapitalIQ) but will likely support the privatisation offer due to the substantial premium of the offer price to long-term average share prices and P/E multiples.  

    The court meeting is scheduled for 10 am on 15 September. At the last close price of HK$4.18 per share, the gross spread to the offer price is 4.8%. 


    Las Vegas Sands: Its an Asian Story Now Still Mispriced and Cheap

    By Howard J Klein

    • The stock has been hammered YTD by sector pandemic woes but this has disguised its superb asset base with its Vegas properties having been sold for US$6.2b, part of the proceeds of which will be invested in  third Asian nation by 2022.
    • Since the death of visionary founder Adelson, management has been seen as a slow off the mark responder to new opportunities and challenges in Asia.
    • LVS shares are ~100% down from high early this year as sector investors have yet to see the stock as a buy point on this huge dip.

    Bestway Global (3358 HK): Scheme Doc Out. Court Meeting On Sept 15th

    By David Blennerhassett

    Back on the 25 June, outdoor leisure products manufacturer Bestway Global Holding (3358 HK) received a privatization Offer by way of a Scheme from founder/chairman/CEO Zhu Qiang. Zhu controls 54.3% of Bestway via Great Success Enterprises Holdings Limited (the Offeror), and offered HK$4.38/share (in cash), a 27% premium to last close. The Offer Price would not be increased. Any dividend declared and paid from hereon would be netted from the Offer price.

    Together with concert parties, Zhu controls 77.81% of shares out, therefore disinterested shareholders hold 22.19%. The headcount test applies as Bestway is Cayman-incorporated.

    This looked done.

    The Scheme Doc was dispatched last night – one day ahead of my earlier estimate. Court Meeting will be held on the 15 September with expected payment on or before the 19 October. 

    Expect the spread to narrow in this morning – say $4.25-4.30 – although this is not a particularly liquid arb situation. The IFA also says the Offer is fair. 


    Morning Views Asia: Tata Motors ADR

    By Charles Macgregor

    Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.


    Before it’s here, it’s on Smartkarma

    Consumer: Koolearn, Naspers, WH Group and more

    By | Consumer, Daily Briefs

    In today’s briefing:

    • HSTECH Index Rebalance: One Change; More at the Next Review
    • FTSE/JSE Rains On Naspers’ Parade
    • Last Week in Event SPACE: BHP, WH Group, Beijing Capital Land, China Life, Macau Gaming Concessions

    HSTECH Index Rebalance: One Change; More at the Next Review

    By Brian Freitas

    The Hang Seng Indexes Company Limited (HSIL) announced the results of its review of the Hang Seng Family of Indexes post market close on 20 August. The constituent changes will be effective after the close of trading on 3 September.

    For the Hang Seng Tech Index (HSTECH INDEX) there is one set of changes with Trip.com (9961 HK) / Trip.com (TCOM US) replacing Koolearn (1797 HK).

    One-way turnover is estimated at 6.29% and will result in a one-way trade of HK$2.12bn.

    There will be over 2 days of ADV to trade on Trip.com while the impact of passive fund selling on Koolearn (1797 HK) will be a lot smaller.

    Hang Seng has also announced that a market review and feedback will result in ‘Autonomous’ being added to the list of eligible technology themes for index inclusion. This means that XPeng (9868 HK) and Li Auto (2015 HK) will be eligible for inclusion in the index at the December rebalance.


    FTSE/JSE Rains On Naspers’ Parade

    By Travis Lundy

    On 6 July, FTSE/JSE – the index provider for most of the major South African indices, reopened a consultation for two weeks into the capping methodology for the major capped weight indices such as the FTSE/JSE Capped SWIX All Share Index and FTSE/JSE Capped SWIX Top 40 Index. 

    Responses to this consultation request indicate that there has been an increased convergence of opinion amongst index users around the most appropriate approach to take to the capping methodology. In particular, a significantly high proportion of index users consider Naspers and Prosus jointly when evaluating concentration risk in their portfolios. However, some arguments require further consideration before a permanent solution can be determined, as well as a careful consideration for unintended consequences.

    On the evening of Friday 20 August, FTSE/JSE announced a “Capping Factor adjustment for Capped SWIX indices” which is an interim step, to be implemented with the September rebalance. 

    By my informal queries with a couple of foreign investors and domestic investors, the attitude is mixed. Some expected a capping move in September. Some did not. Most said “sentiment was mixed.” It makes eminent sense that FTSE/JSE would do this as it limits the amount of rebalance that is necessary in September but I admit I did not expect it, as written in Naspers Deal Done – Flex Participation and Pro-Ration, Misunderstandings, and INDEX CHANGES GALORE! and Naspers/Prosus Initial Index Changes Done, Now To Reverse the Trade I expected a later decision (involving a White Paper to be followed by discussion and comment then a Decision). As it is, we have an Interim Decision, which will be followed shortly by a White Paper, then discussion/comment, and then a Final Decision. 

    It also makes previous trades recommended less attractive. But they are still there.


    Last Week in Event SPACE: BHP, WH Group, Beijing Capital Land, China Life, Macau Gaming Concessions

    By David Blennerhassett

    Last Week in Event SPACE …

    • After 20 years, and change, BHP Group (BHP AU) has announced the unification of its corporate structure to make BHP “simpler and more agile“, thus removing the complexity of managing the DLC.
    • WH Group (288 HK)‘s shares tank as the family’s internal wranglings go very public. “Never wrestle with pigs. You both get dirty and the pig likes it.”
    • Pre-cons satisfied – yet Beijing Capital Land Ltd H (2868 HK) should trade tighter.
    • Using the NT$10/share face value for  China Development Financial (2883 TT) preferred shares, that would mean the current gross spread on China Life Insurance (2823 TT) is 3.9% to terms. That is still pretty good, so you have a decent buffer vs existing subordinated debt.
    • With the clock ticking and less than one year until the Macau gaming concession renewal, a simple extension appears the logical course of action. Yet a Macanese government consultation paper believes the VIP room model is untenable under the SAR’s national security law.
    • If Tencent (700 HK) stands still, the price pressure on both Naspers (NPN SJ) AND Prosus (PRX NA) from here is UP as investors settle into the new post-Offer Circular shareholder structure, deep value buyers buy Tencent really cheap in the form of Naspers and just hold on.
    • Plus, other events, CCASS movements, and Mood Spins.

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

    EVENTS

    BHP Group (BHP AU) (Mkt Cap: $166bn; Liquidity: $205mn)

    On the 29th June 2001, BHP and Billiton merged by way of a dual-headed structure.  Shareholders continued to hold their pre-merger shares in BHP or Billiton, but with the same economic interest in the entire group, and dividends and capital distributions were equalised. This unique structure faced investor criticism over the years.  Most recently, on the 10 April 2017,  Elliott Advisors (HK) Limited issued a number of proposals via an open letter to the board of BHP. This was discussed in greater detail in Elliott’s Proposals Test BHP’s Metal. One of the flawed suggestions from Elliot was unifying the twin entities into a single UK-listed and domiciled company. That was never going to fly with BHP, ostensibly an Aussie company – or the Aussie government. Now BHP has announced the unwinding of the DLC, unifying the two lines under an Aussie domiciled company. 

    • Although returning capital through both dividends and off-market buy-backs are options available to BHP, the DLC structure has limited the release of value from these franking credits. BHP’s commitment to paying both groups of shareholders the same dividend was hampered by the spin-off of South32 in 2015, as there were no longer sufficient assets in the UK company to generate the necessary income required to pay British shareholders’ share, which comprise ~40% of the DLC structure. 
    • The DLC Dividend Share enabled the Aussie company to make an after-tax payment to the British company to fund the UK dividend. But franking credits were attached to the payment which meant the credits were effectively lost. Yet, paying dividends from after-tax profits to Ltd AND Plc shareholders going forward will similarly waste credits.
    • Ultimately the unification costs have come down sufficiently (by ~two-thirds) in recent years to make this unification tenable. Ultimately a unified structure helps facilitate deals such a the Woodside Petroleum (WPL AU) proposal. 
    • As BHP Ltd is acquiring all shares in BHP Plc on a one for one basis, expect the spread between the two lines to collapse (which it has). This transaction is not a sure thing – 75% of shareholders of both lines have to back the DLC unwinding. BHP would not, under the current nationality rules, be eligible for FTSE100 Index, forcing index trackers to sell. And if Aussie shareholders start talking about the inefficiency of delivering franking credits to Australian holders because some will be lost to non-Australian holders of an Australian company, some of the Aussie small-holders of Limited might get upset. On balance, there is sufficient argument here to unify.
    • The index impact?  Both Travis Lundy and Brian Freitas delve into index ramifications in BHP DLC Unification – On Dirt-Diggers and Deckchairs and BHP Group Unification: Massive Passive Index Impact. I urge you to read to both. Travis’ 4,000-word piece, which takes a deep dive on the history behind the DLC, also advocates a SHORT BHP vs Rio Tinto Ltd (RIO AU) – among other trade suggestions. Rio and BHP are not quite the same company, but they are not dramatically different. 
    • Travis and I conducted a joint webinar. The webinar recording is available here. The password is [email protected]

    M&A – ASIA

    WH Group (288 HK)  (Mkt Cap: $10.5bn; Liquidity: $35mn)

    A new letter out by the eldest son, ignominiously dumped from his position as heir apparent two months ago after what appears a semi-violent disagreement with his father has turned into accusations which are ugly – embezzlement and undeclared gifts and transfer of wealth. Some of those accusations appear to be sour grapes because the eldest son did not get the CEO post as perhaps he had wanted, and the long time CFO, who was younger, got the post.  It seems strange that the eldest son, who appears to have known of impropriety for a long time, had no issues prior to June which would have required him speaking publicly. This smells like a personal jealousy problem, but one cannot discount at such a company the idea that there were untoward goings on.

    • What has been a valuation discount because of management and the “weight” of an expensive purchase of Smithfield Foods several years ago is now in danger of becoming a bigger management discount. Travis expects resolution of any large problem where the 81-year-old chairman and the new CEO are found to be “personally unfit” to be positive for the company’s shares (as long as there aren’t worse things under the hood).
    • If WH Group directors do not address this further, the situation will fester somewhat. But it is clear that this is still a battle between two sides shouting their own versions of the truth with the possibility that the real truth lies between, and I could not tell you which way it tilts.
    • For long-only investors who like the company and its prospects because the controlling shareholders are who they are, but the company is at its base, a decent company with decent prospects and it is dirt cheap… If you want to keep your existing position, the way to trade this is to buy 25% of your existing position at today’s price, tender all 125%, and you will earn the difference between today’s price and HK$7.80/share on that 25% which you buy today. Message or call for details. If you want to buy 20% more because you like the stock, then you should buy 50% more, tender 150% of yesterday’s position, you will sell 30 (the difference between buying 50% and 20% more) at HK$7.80 which means your incremental net purchase is somewhere in the low HK$3/share level.
    • If you are an arb, get borrow. If you can get borrow, tender that with your long. Travis personally thinks the back end is cheap here, but expects pro-ration has just gone down dramatically. That said, the back end forward PER is now VERY, VERY low. He finds the current price to be an attractive entry point to buy and tender and get long at the back end. 

    Links to Travis’ insights:
    WH Group – Stock Plummets as Ousted Son Drags Pigs Into The Mud
    WH Group Partial Buyback Offer Now Unconditional

    Beijing Capital Land Ltd H (2868 HK) (Mkt Cap: $1.4bn; Liquidity: $2mn)

    Back on the 9 July, BCL announced a pre-conditional Offer from its controlling shareholder, state-owned Beijing Capital Group, otherwise known as the Capital Group. The Offer price of HK$2.80/share was a 62.79% premium to last close, and a 150% premium to the average closing price over the previous 60 trading days. The Offer price would NOT be increased. No dividends are expected to be declared. A concurrent Offer for BCL’s domestic shares at RMB2.334080/share was also tabled.  The pre-conditions, which cannot be waived, included approvals from NDRC, MoC, SAFE, and if applicable, SASAC. The dispatch of the Composite Doc was, as expected, delayed to the 9 September (officially granted by the SFC on the  2 August) from the 29 July.  BCL has now announced the Pre-Condition has been satisfied. There was no further application to the SFC to extend the dispatch of the Composite Doc.

    • This is a privatisation via a Merger by Absorption – NOT a privatisation via a voluntary offer, followed by a Merger by Absorption. As such this is a statutory process under PRC law and the SFC treats it similarly to a scheme of arrangement.  Therefore, no tender condition. This makes the Offer simpler and cleaner. 
    • $2.80/share is only 0.42x P/B, and a 38.4% discount to the NAV as at  31 December 2020. However, BCL has consistently traded at a low P/B –  0.22x on average over the past three years, and a steep discount to the peer average.
    • Assuming no further delay to the Composite Doc dispatch, expected on the 9 September, I think this could be wrapped up late October, ahead of my earlier “end of November” estimate. Assuming payment late-Oct, I would expect BCL to trade around $2.72 today, or a 3%/15% gross/annualised spread.

    (link to my insight: Beijing Capital Land (2868 HK): Pre-Cons Satisfied. This Should Trade Tight)

    China Life Insurance (2823 TT)  (Mkt Cap: $4.8bn; Liquidity: $15mn)

    Roughly 4 years ago, Taiwan-based financial services group China Development Financial (2883 TT) (“CDFHC”) became the top shareholder of China Life by launching a Tender Offer and acquiring a 25.33% stake for NT$30.8bn. Almost 3 years later, CDFHC made another Tender Offer to acquire an additional 21.1% stake in for NT$23.6bn increasing their direct shareholding to 47.3%. This Offer was completed in February 2021 and together with an 8.66% owned by a fully-owned subsidiary –  KGI securities – CDFHC collectively controlled around 56% in China Life Insurance.  Last week, on 12th August 2021, CDFHC announced a cash and scrip Deal to buy the remaining portion of China Life Insurance to take their ownership to 100% and delist the company from the Taiwan Stock Exchange.  

    • Under this Deal, China Life minority shareholders are expected to receive a combination of 0.80 CDFHC common shares, 0.73 CDFHC preferred shares, and NT$11.5 in cash for each share of China Life Insurance they own. The Deal is conditional on receiving shareholder approvals and regulatory approvals and is expected to complete by the end of this year. 
    • This is a friendly Deal. The transaction has been unanimously approved by the Boards of Directors of both companies. Last fall, the Financial Supervisory Commission indicated that it would welcome the merger of financial holding companies, allowing a bit more concentration. The first deal to go through was Fubon for Jih Sun Financial. This deal is a situation where CDFHC already owns 47.3% directly and 56% including indirect holdings so the control aspect is clearly there already. This has been de facto approved in the past. Expect no great regulatory opposition to the deal
    • The financial advisors of both the Target Co and the Acquirer have concluded the Terms are fair. The Target Advisor estimated a fair value range of NT$26.90-30.80 and estimated the value implied by the consideration to be NT$28.60-29.70. On the other hand, the Acquirer advisor estimated a fair value range of NT$28.01-31.20 and estimated the value implied by the consideration to be NT$28.41-30.44. Going by cash-equivalent numbers based on undisturbed prices, Janaghan Jeyakumar estimates the implied value of the consideration to be around NT$29.88. This translates to a PBV of 0.89x which is 27% higher than the 1y-average PBV of 0.70x for China Life Insurance. 

    Sydney Airport (SYD AU) (Mkt Cap: $15.2bn; Liquidity: $41mn)

    SYD announced it had received a revised offer of $8.45 from the consortium. The Board also concluded the proposal was low-balled. That rejection comes as no surprise – this is just a 2.4% bump in terms. The revised bid arrives amid a surge in Covid cases, with New South Wales recording 478 new cases yesterday and seven deaths. 

    • Some recent numbers. Normalised traffic volume at Sydney Airport comprises ~60%/40% domestic/international passengers. Those numbers are currently at 92%/8% as at June 2021. Domestic numbers are at ~38% of Dec 2019 figures and international is at 5%.
    • SYD is currently facing its worst Covid outbreak. I agree with SYD’s board that the revised proposal is opportunistic in light of the pandemic. The conditions of the consortium’s Offer include UniSuper, which holds 15% of SYD’s shares out, reinvesting its equity interest in the consortium’s holding vehicle. Its intention to remain invested is illustrative of the back-end value. 
    • Trading at an 8.9% gross spread to terms. It was ~7% around the time of the initial approach.  A full Offer probably needs tat $9+ handle.  Even then, neither ACCC nor FIRB approval is a certainty.  I’m still disinclined to chase it here. I still think there is a chance of a “no deal”. 

    (link to my insight: Sydney Airports (SYD AU) Reject’s Consortium’s Revised Offer)

    After a downturn in the price of the battery commodities and a reduction in tonnes exported, mining consolidations are back in vogue as miners take big bets on electric vehicles, as demand and prices increase for battery minerals. Nickel miner Western Areas (WSA AU) has now confirmed media reports it is in preliminary discussions with IGO Ltd (IGO AU) in relation to a change of control proposal. Western Areas has generally underperformed peers over the past year. It is clearly in play, and if not from IGO, there’s no reason another suitor doesn’t emerge. Link to my insight: IGO/Western Areas: Battery Mineral Grab

    Daiwa House Reit Investment (8984 JP) announced a follow-on equity offering after the close on 18th August 2021 to fund part of their recent property acquisition. The primary offer quantity is 115,000 units. In addition, there will also be an over-allotment quantity of 9,000 units. The total size of this offering could be roughly ¥37.7bn (~US$343mn) which is slightly larger than some of the recent offerings by other JREITs.  The Offer Price will be determined between 25th August 2021 and 27th August 2021 (typically it has been the first day of this window for most JREIT offerings) and the two business days following the Offer Price Determination Day (“Pricing Date”) will be the Application Date. Link to Janaghan’s insight: IGO/Western Areas: Battery Mineral Grab

    Back on the 28 June, Hong Kong fire service installation contactor Windmill Group (1850 HK) announced its major shareholder with 60% had entered into an MOU with two third parties to sell its shares, the completion of which would likely trigger an MGO.  The share price, which had gained 150%+ ahead of the announcement in the preceding week, promptly gained another 72% in the following two trading sessions to close at HK$2.73 on the 30th of June. Shares rolled over around the time of the positive profit alert on the 16 July, before closing at $1.34 on the 12 August, a level below that ahead of the MOU announcement. After shares were halted pursuant to the Hong Kong Code on Takeovers and Mergers, an Offer was announced. No surprises – it’s a takeunder at $0.3334/share. This is a MGO – just like the one in 2020. Barry Ma is selling his entire 75% stake. Link to my insight: Windmill (1850 HK): Where There’s Smoke

    STUBS

    Macau Gaming Counters

    On the 15 March 2019, the Macau Government extended SJM’s (and in turn MGM’s) 18-year gaming concession up to 26 June 2022 to coincide with the expiry date of other concessionaires. According to current law, the Macao government is required to organise a public tender to select the new concessionaires when the current concessions expire. There is currently no alternative approach to renew their concessions. To muddy matters, Macau’s Legislative Assembly (AL) Land and Public Concessions Follow-up Committee concluded in its final report earlier this month: The entry into force, on March 1st of 2021, of the proposal to revise the penal code of the PRC … the control of money outflows and the fight against organising the participation in gaming activities outside the country, is of great alarm to the gaming sector of Southeast Asia and the whole world, … (indicating that the rules)  will make it difficult for VIP rooms to continue their operating methods.”

    • According to a senior official at the Ministry of Public Security, at least RMB1tn (US$145bn) leaves the country yearly to illegal gambling and casino platforms. Yet shutting down Macau casinos, and turning the SAR into a ghost town will not stop these outflows. Keeping them operating and taking a “commission”  appears the appropriate status quo. For now, given time constraints to conduct a consultation, an extension of 1-2 years for the concessions appears the logical course of action, an outcome backed by the CEO’s of Melco International Development (200 HK) and SJM Holdings (880 HK).
    • But whether foreign investment is still welcome in such enterprises is becoming increasingly murky. Siding with local owners (SJM, Galaxy & Melco) is arguably a more prudent investment choice. Given all of the above, Wynn Macau Ltd (1128 HK) and MGM China Holdings (2282 HK) have massively underperformed their US parent. In contrast, Sands China Ltd (1928 HK) has (modestly) outperformed its parent recently. Las Vegas Sands (LVS US) is seeking to sell its US ops, and this is disrupting future earnings. On balance, I’d look to set up a Long LVS, short Sands China.
    • Melco looks rich here versus its MLCO.  If you had set-up Melco – Long Melco and Short MLCO – I’d unwind that trade. I’d be inclined to reverse the stub here – Short Melco and Long MLCO.

    (link to my insight: StubWorld: Gambling On Macau’s Gaming Concession Renewal

    Naspers (NPN SJ) / Prosus (PRX NA) / Tencent (700 HK) 

    The Prosus Exchange Offer to buy 45.33% of Naspers closed the previous Friday with pro-ration coming in at 64% for those who participated on an uncapped basis.  Based on the settled borrowed shares on STRATE, which to Travis’ understanding came out at 45mm shares, and based on the idea that some ADRs would have been borrowed, converted, and synthetically short-tendered, he expects that the roughly 60-70% of active and passive LOs participated at 47.6% (some lent their shares so arbs could participate, some left shares un-tendered so they could sell them in the index rebalance tomorrow 17 Aug at the close). This past Monday, Travis recommended shortiing Naspers and buying Prosus. This is a short-term trade. He expects the index demand on Tuesday was larger than the naked arb demand. And expects the EM funds who sold their Naspers to buy Prosus did not go as large as they might have while the All-World funds may have participated to a much higher degree. That trade turned out ok. 

    • I expect the September rebalance is not well understood. There is a LOT of Naspers to buy and there will be quite a bit of Prosus to sell. I expect people haven’t looked that far forward. I would not want to be short Naspers past end-August. I would want to be long Naspers vs index and long Naspers vs Prosus by 30 August.  The big risk is the Joint Capping Consultation and any resulting announcement.  The best way to trade that given the flows of the next several weeks is to be long Naspers and short Prosus. BOTH would suffer but Naspers has local index buying and Prosus appears to have local index selling to do in September. 
    • Longer-term, there is a risk of combined Naspers/Prosus capping as put forth under the FTSE/JSE consultation. If executed, I expect that comes in Dec 2021 or later. I don’t expect that in Sep (though it would be a good idea). Longer-term, there is now NOTHING TO DO for Naspers shares as far as I can tell. Prosus will see a buyback of $5bn post-offer. Naspers will see nothing. 
    • Travis believes that if Tencent stands still, the price pressure on both Naspers AND Prosus from here is UP as investors settle into the new post-Offer Circular shareholder structure, deep value buyers buy Tencent REALLY cheap in the form of Naspers and just hold on. And the Naspers vs Prosus spread is still VERY VERY wide.

    Links to Travis’ insights:
    Naspers Deal Done – Flex Participation and Pro-Ration, Misunderstandings, and INDEX CHANGES GALORE!
    Naspers/Prosus Initial Index Changes Done, Now To Reverse the Trade

    M&A – EUROPE

    On 14 August, Faurecia (EO FP) signed an agreement to acquire a 60% stake in Hella GmbH & Co KGaA (HLE GR) from the Hueck family for €60/share. Under the terms, Faurecia will pay €3.4 billion in cash and will issue 13.57 million shares (based on a reference price of €42.06/share, with a floor of €37.85/share), financed through 85% debt / 15% rights issue. The Huecks will retain an up to 9% stake in the listed parent. Following the agreement with the Huecks, Faurecia has made an offer to acquire the remaining 40% stake in HELLA. In Faurecia/Hella, Jesus Rodriguez Aguilar believe the deal has a high probability to close.
    On 16 August, Cobham Limited reached agreement on the T&Cs of a recommended all cash acquisition of Ultra Electronics Holdings (ULE LN), for 3500p/share to be effected via a scheme of arrangement. Ultra shareholders would also be entitled to the interim dividend of 16.2p/share announced by Ultra on 19 July, payable on 17 on September to shareholders on the register at 27 August. In Cobham/Ultra Electronics: Another Raid on UK Defence, Jesus believes the deal has a high probability to close.

    TOPIX INCLUSIONS!

    Obic Business Consultants (4733 JP) (Mkt Cap: $3.7bn; Liquidity: $4mn)

    Japan-based business system package software maker Obic anounced a Secondary Offering of Shares for a total quantity of 9,714,000 shares which, at the current trading price, translates to a total offering size of ~¥52bn (US$470mn). 

    • In this announcement, the company mentioned that they had received a notification from the Tokyo Stock Exchange on 9th July 2021 stating that their “Tradable Shares” ratio did not satisfy the criteria for maintaining a listing on the “Prime Market”.
    • The Company is currently listed on the First Section of the Tokyo Stock Exchange and they intend to transition to the “Prime Market”. In order to do so, the company must be able to improve their “Tradable Shares” ratio above 35%. This deal is an attempt to rectify the situation.

    M&A RISK ARB WEEKLY ROUND-UP

    • Another arrow in the quiver with a weekly risk arb summary. 33 arbs in total, mostly firm deals.

    INDEX REBALS

    OTHER M&A & EVENT UPDATES

    CCASS

    My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  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, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

    Name

    % chg

    Into

    Out of

    Alpha (8406 HK)22.47%Grand ChinaOutside CCASS
    China Yuhua Education (6169 HK) 10.64%CitiDB
    Peking University Resources (618 HK) 19.89%VMSDBS
    Singasia (8293 HK)16.67%EasyOutside CCASS
    Tiangong Intl (826 HK) 10.83%CitiBNP
    Microport Scientific (853 HK) 10.20%St ChartOutside CCASS
    Alpha (8406 HK)53.47%Grand SecOutside CCASS
    Ausupreme (2031 HK)18.00%UpbestOutside CCASS
    Hao Tian (1341 HK)12.17%Hao Tian CCB
    Source: HKEx

    The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

    Name

    % chg

    Into

    Out of

    Jinke Smart Services (9666 HK) 12.54%CitiDB
    Sino International (6969 HK) 40.08%ZhongtaiOutside CCASS
    Kuaishou Technology (1024 HK) 16.33%GSSt Chart
    Source: HKEx

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