Category

Event-Driven

Event-Driven: SK Telecom, F&F, Afterpay Touch, KMW Co Ltd and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Did Passive Rebalancing Trading on SKT Start Last Friday?
  • KOSPI200 Index Rebalance Preview: Two Changes in September; Five in December
  • Afterpay (APT AU) – Square Is Buying Now in an All Stock Deal
  • K-Stop Movement: Round 2 on August 10th – What Are the Targets?

Did Passive Rebalancing Trading on SKT Start Last Friday?

By Sanghyun Park

As of last Friday’s closing price, SK Telecom’s foreign ownership burnout rate was 94.93%.

So, the foreign room is 5.07%, a level where the MSCI foreign inclusion factor should be reduced from the current 1.0 to 0.25. It is now almost certain that SKT’s index weight will decrease by 75% in this August QIR.

Post review adjustment factorForeign room (1-FOL burnout)
Current adjustment factor≥ 25%15~25%7.5~15%3.75~7.5%< 3.75%
1.001.001.000.500.250.00
0.501.000.500.500.250.00
0.251.000.500.250.250.00
Source: MSCI

Now, the key question is when will SKT’s passive rebalancing trading start reflecting this situation. In this regard, a fairly significant trade movement was detected last Friday.

Of course, the stock market overall was down last Friday. The KOSPI 200 fell 1.15%. However, SK Telecom declined more significantly than KOSPI 200, and its decline was also visibly larger than its direct peers, KT and LG U+.

What we need to pay more attention to here is the selling trend of foreign investors.

Considering that most of the passive funds that follow MSCI Standard Korea are foreign institutions, the most reasonable indicator that can determine whether rebalancing trading occurs should be overseas investors’ trading patterns.

Then last Friday, net foreign trade became negative for the first time in almost a month, and in particular, this level of net foreign trade (-83,058 shares representing 0.12% of the SO) is the highest since December 10 of last year.


KOSPI200 Index Rebalance Preview: Two Changes in September; Five in December

By Brian Freitas

There could be two changes to the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) at the September index futures expiry with KakaoBank (1349010D KS) and Krafton Inc (259960 KS) getting Fast Entry and replacing Lock&Lock (115390 KS) and Jw Pharmaceutical (001060 KS) at the close of trading on 9 September.

Then, the Korea Exchange (KRX) will announce the results of the December 2021 review of the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) in November. The constituent changes will be effective after the close of trading on 9 December.

We see 5 potential changes at the December rebalance with F&F (383220 KS), SL Corp (005850 KS), GeneOne Life Science Inc. (011000 KS), Myoung Shin Industrial Co.,Ltd (009900 KS) and Hyosung Chemical Corp (298000 KS) replacing F&F Co Ltd (007700 KS), Samyang Foods (003230 KS), Ilyang Pharmaceutical Co., (007570 KS), LX Holdings (383800 KS) and Dongwon F&B (049770 KS).

The potential inclusions have been outperforming the potential exclusions and this could continue as short selling is only permitted on index constituents and as active funds position for the rebalance following excellent returns at the June rebalance.


Afterpay (APT AU) – Square Is Buying Now in an All Stock Deal

By Brian Freitas

The Afterpay Touch (APT AU) stock has taken a beating recently following a lot of negative press about the Buy Now Pay Later (BNPL) industry. This included a Rebel Wilson ad pulled from Australian TV after complaints from consumer protection groups for playing down the risks of taking on debt. Here in New Zealand, there have been calls for greater regulation of BNPL with families struggling to afford basics while paying off the BNPL loans.

Now, Square Inc (SQ US) has announced that it plans to acquire Afterpay Touch (APT AU) in an all-stock deal that values Afterpay at a 30% premium to its last close. Afterpay Touch (APT AU) shareholders will receive 0.375 shares of Square Inc (SQ US) Class A common stock for each Afterpay share they hold on the record date. Square Inc (SQ US) may elect to pay 1% of total consideration in cash. The transaction values Afterpay Touch (APT AU) at A$39bn.

The transaction is expected to close in the first quarter of 2022 subject to shareholder approval, receipt of regulatory approvals and no material adverse effect in relation to Afterpay Touch (APT AU) or Square Inc (SQ US).

Square Inc (SQ US) intends to establish a secondary listing on the ASX to allow Afterpay Touch (APT AU) shareholders to trade Square Inc (SQ US) shares via CHESS Depositary Interests (CDIs) on the ASX. We expect the Square CDIs to be included in the S&P/ASX 200 (AS51 INDEX) replacing Afterpay Touch (APT AU), though the free float on the CDIs will be lower. 


K-Stop Movement: Round 2 on August 10th – What Are the Targets?

By Douglas Kim

The “K-Stop movement” made its first real move on HLB Inc (028300 KS) on July 15th. The K-Stop movement refers to “Korean Game Stop movement,” where many Korean retail investors have gathered together to actively protest and trade against the institutional investors that have put short positions on various Korean stocks. There are lots of interesting developments with the K-Stop movement so we will update on these key issues in this insight. 

Korea Stock Investors Association (한국주식투자자연합회) (KSIA) is the main sponsoring entity of this K-Stop Movement. On 1 August, KSIA mentioned that it will once again pool the resources of the retail investors to target a specific company to buy on August 10th. The date was originally scheduled on August 15th but they decided to use August 10th instead due to the latter date being on a Sunday. 


Before it’s here, it’s on Smartkarma

Event-Driven: Soho China Ltd, Hyundai Engineering & Const, National Australia Bank, Beijing Huafeng Test & Control Technology-A and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Last Week in Event SPACE: SOHO China, Invesco Office, Iress, WH Group, PCCW
  • Hyundai E&C’s Unusual 1P Offering with a Shocking 45% Discount
  • Aussie Bank Buyback Season Starts – Expect A$12-15bn and Funky Flows
  • Index Rebalance & ETF Flow Recap: MSCI, LQ45, STAR50, Li Auto, Intouch, Krafton, Kakao Bank

Last Week in Event SPACE: SOHO China, Invesco Office, Iress, WH Group, PCCW

By David Blennerhassett

Last Week in Event SPACE …

  •  SOHO China Ltd (410 HK)‘s shares were utterly cremated, ostensibly in response to a media report the pre-conditional Offer from the Blackstone Group faces regulatory obstacles. Yet that media article was vague in context, and ultimately stopped short of saying the deal would be blocked. 
  • The Invesco Office J Reit (3298 JP) deal is done. The bidders have 65.07%. This is close enough to win an EGM to consolidate. The bidders could buy more shares on market to get to just under two-thirds, or perhaps even go much higher. There will be index sells first though.
  • The bidding for Australia’s tech companies continues as Iress Ltd (IRE AU) receives an indicative proposal from EQT Fund Management.
  • The Seven Group Holdings (SVW AU) Offer for Boral Ltd (BLD AU) closed late this past week with Seven gaining 69.6%. This prompted some movement on the Board and the close of the Offer will lead to index changes.  
  • The MBO for Sakai Ovex (3408 JP) launched in February and failed in March has now been re-launched, with the activist who effectively blocked the old deal at ¥3000/share now participating in the buyout at ¥3810. It was far from fair the first time around and it is far from fair this time (the activist isn’t selling).
  • WH Group (288 HK)‘s Offer Doc is out. There are things to do here for hedge funds and arbitrageurs. There are things to do here for long-only funds who love the stock. 
  • PCCW Ltd (8 HK) further slims down after entering into a SPA with DigitalBridge Group (DBRG US) to sell its Hong Kong and Malaysian data center businesses for US$750mn. 
  • The Allcargo Logistics (AGLL IN) Delisting Proposal is now “re-initiated” after a SEBI Delistings Regulation change which went into effect last month, not grandfathering in the promoters’ pre-existing Delisting Proposal process. The stock has rallied hard on that news.
  • 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)

M&A – ASIA

Soho China Ltd (410 HK) (Mkt Cap: $2.0bn; Liquidity: $7mn)

Following a media article, shares were down 31% at one stage, or 48% adrift of the $5.00/share offer price, and 13% below the undisturbed price, before recovering to close at $3.02/share. The article mentions the SOHO China/Blackstone deal has the attention of the Chinese government and is unlikely to face a smooth regulatory approval process in China. In addition, “the deal is expected to face obstacles in obtaining approval, but the issues relate more to the founders, than the deal itself.” The source of the article is understood to be “familiar with the situation”, not working on the deal. For context, I’m familiar with the situation.

  • Apparently, according to the article, Zhang Xin and Pan Shiyi are in the US. We don’t know for how long, or whether this is a recent development. Moreover, there is a question as to whether they need to be in China to be “interviewed” for the deal to complete. One interpretation of this article is the founders need to offer up “something” to get this deal over the line.
  • The current environment is unquestionably one of general risk aversion given all that has happened with Chinese regulators and internet names. SOHO China is a crowded trade and short-term investors are being stopped out, further exacerbating a difficult situation. And being month-end, this is awful timing for many players.
  • Short interest is my biggest concern on the deal. Aggregate short interest on the 9th July was 98.5m shares, with Bloomberg, implying at the time, an additional ~35m short sold since then, or an increase of 35% in the last 2 weeks.  Short sell volume, as a % of total volume, appeared to be ~20-40%. You don’t short something which could be 30% (before yesterday’s move) in your face instantly unless you are certain. Or know something. 
  • This is adding up to one of those “circumstantial evidence” issues. The whole lot could be a circular reference – rumour begets rumour etc. But on balance, this deal should get up. There was clear adding/buying on the big fall day on the pretext this article was weak. The downside to a deal break is now less hairy. If this deal was blocked, for whatever reason, the downside is unlikely to be the undisturbed price, but probably closer to $2.30-ish or 24% down, compared to 66% up to the Offer price. That suggests a 2.75 upside:downside ratio, though where “downside” is can be tricky.

(link to my insight: SOHO China (410 HK): In For a Penny …. )

Invesco Office J Reit (3298 JP) (Mkt Cap: $1.8bn; Liquidity: $24mn)

The bid by the Invesco parent company (Invesco Real Estate and affiliates) for Invesco Office turned out successful, and the bidders gained 5,727,676 units out of the 8,802,650 units out in the float. They now own 65.07% (having started with 6%) so this will end up going to an EGM. Travis Lundy expect cash-out will be received sometime between early December 2021 and late January 2022 but there are weird things which happen. There could be a short squeeze. 

  • There will be index deletions of MSCI, FTSE, and S&P DJI Global in the next several trading days. That should mean a sale of say $180-250mm of stock, though some of it will already be sold in the tender. Some announcements may show up tonight.  There will be a TSEREIT Index deletion which could be US$350-500mm which will happen at the close of the third business day after the EGM decides to consolidate units and delist. 
  • When the deletions happen, there will be buying of the other names in their respective indices.  For the international indices, it is diverse, and non-impactful. For the TSEREIT Index, it should be $350-500mm to buy at the close, which is about 0.7-1.0x ADV of the collective constituents. 
  • Now that this is done, Travis expects the “right” trade is to buy the shares at a decent spread expecting to be able to get one’s JPY 22,750/unit by end of year or early January.  I would want to see a wider spread than where we closed, because there are lots of very wide spreads right now in Asia and risk capital can be better allocated elsewhere.
  • UPDATE:  the TSE announced a hybrid treatment whereby the weight in the TSE REIT Index would be lowered as the FFW dropped from 1.0 to 0.35, effective 31 August 2021. This means a likely index tracking sell of 1.1-1.4mm units at the close of 30 August 2021. The FTSE released their treatment of the downweight which is for unchanged shares in issue total of 8,802,650 and a decreased investability weighting from 97.52559% to 32.4579569576774%. That is a float reduction of 5.73mm shares. That selldown will take place 2 August at the close.

(link to Ttavis insight: Invesco Real Estate Deal for Invesco Office (3298) Successful – Now For the Aftermath)

Iress Ltd (IRE AU) (Mkt Cap: $2.0bn; Liquidity: $6mn)

Trading and wealth management software provider Iress announced it had received a confidential, unsolicited, non-binding, and indicative proposal from Swedish PE outfit EQT Fund Management via a Scheme of Arrangement at a price range of between A$15.30 and A$15.50 cash per share. EQT had previously fielded an Offer of A$14.80/share on the 18 June. Iress’ board unanimously concluded that the Proposal was “conditional and did not represent compelling value for Iress shareholders”. But the board was “prepared to provide it with access to limited non-public information so EQT can develop a proposal that is capable of being recommended to shareholders.”

  • After announcing on the 10 June it had not received any direct approaches, the following day Iress (unprompted it appeared at the time) announced a strategic review, including the divestment of its British mortgage and sales origination business, or MSO; accelerating earnings through M&A, and taking on more debt to buy back shares.  The forward target. In a more detailed strategic review announced today, Iress forecasts an NPAT of ~A$120mn by FY25, up from A$59.1mn in FY20, via “building scale in large addressable market with a focus on the UK, superannuation and investment infrastructure”. 
  • The offer is pitched at a forward EV/EBITDA of 22.4x. This compares to Iress’ five-year forward EV/EBITDA average of 17x. The five-year opener average is 11x, and Iress has traded at a 54% premium to peers over the past five years. 
  • Although the board concluded EQT’s offer did not represent compelling value, it remains engaged with EQT and has provided limited DD.  What price? Roger Sharp took over as Chairman in February and he is known to be a canny dealmaker and wants to leave behind a legacy, and he and the board have a clear intention to building out the business. But a A$17/share bid – 10% above the high-end of EQT’s range – probably garners board support. Even 5% – ~A$16.30 – may get the job done. As it is, EQT’s proposal is already at a life-time high. 

(link to my insight: Iress (ASX AU) Bats Away EQT – For Now)

WH Group (288 HK) (Mkt Cap: $11.8bn; Liquidity: $34mn)

On 6 June 2021, WH Group (288 HK) announced a proposal for a Voluntary Buyback Offer. The company decided it had enough cash and excess capital given its investment requirements and decided to return the excess to shareholders by buying up to 13% of shares outstanding. Then peers fell. DRAMATICALLY. The 7 names in a HK- or China-listed basket of peers have fallen 23% as live hog prices have fallen and the hog/feed ratio has also fallen, indicating hog producers are making even less than before (or, according to the NDRC, losing more than before).

  • WH Group has now released its Offer Document whereby it launches the Conditional Voluntary Cash Offer for 13% of its own shares at HK$7.80/share.  This will need to be approved by Shareholders – both the Offer and the Whitewash Waiver.  The Record Date for the EGM is 19 August 2021, the EGM is 16 August, and if approved, the Offer will become Unconditional on 16 August and will close on 30 August. Cheques will be sent no later than 8 Sep. Shares not bought back will be returned no later than 9 Sep.  The minimum pro-ration is 19.7%. This remains an interesting situation. 
  • Travis is bullish, but too strong a jump post the Offer doc would be a good reason to unwind unless you are VERY bullish the back end vs Peers. 10% higher and the stock is still reasonable to peers on an accretion-adjusted basis, but Peers have fallen a LONG way and they are volatile.  If you are short Peers against WH and hog prices start to go up, then watch out! The Peers came down faster, they can go up faster.  Long-Only investors who like WH Group at the current level should buy 25-30% “extra” of their position using cash and own 125-130% of their position size. At yesterday’s close, that extra 25% position will earn 26%.
  • At the then current price (HK$6.21) Travis liked it outright long and against a Global Basket of Peers. He would shrink the size of the hedge against HK/CH-listed Peers. He would track the Implied Participation Rate levels.  If you are LONG ONLY and you like the stock, there is a great trade to do here. If you are a delta-neutral ARB with no borrow, there is another 5-8% in outperformance before this starts becoming substantially less interesting. If you are a delta-neutral ARB who has oodles of GTNA borrow, you should already be in this with both feet, and you should not get out until the stock goes up a lot.

(link to Travis’ insight: WH Group Offer Doc Out – This Little Piggy Went To Market)

Spark Infrastructure (SKI AU)  (Mkt Cap: $3.5bn; Liquidity: $7mn)

After rejecting two take-private proposals from PR outfit firm KKR and Ontario Teachers’ Pension Plan Board (OTPPB), Aussie poles and wires company Spark has ostensibly supported the Consortium’s improved tilt of $2.95/share. The Consortium (KKR/OTPPB)’s latest proposal, up from the initial Offer of $2.70/share, was considered by Spark’s board to be in the interest of its shareholders to engage further. As such, Spark has provided the Consortium with due diligence on a non-exclusive basis. This Offer remains pre-conditional, and is subject to satisfactory DD, together with board approval from both KKR and OTPPB. A firm Offer, should one unfold, would be subject to FIRB approval, and the approval from Spark’s shareholders at a Scheme Meeting. Yet this looks like a full (er) Offer than the one rejected on the 15 July.

  • The assets held by Spark are regulated. You could go further and say Spark simply collects dividends from its minority stakes. Electricity assets are designated critical assets by the FIRB-affiliate Critical Infrastructure Center. But these minority holdings should help facilitate the FIRB application. The trickier aspect of the application is that 100% of SA Power/Victoria Power Networks would be controlled by foreign investors if this deal get up.
  •  The Offer is pitched at ~1.6x regulatory asset base. The RAB multiple for the failed APA Group (APA AU) tilt from CK Infrastructure Holdings (1038 HK) was also estimated at 1.6x. DUET Group (DUE AU) was taken out by CKI in 2017 at ~1.4x.
  • An interloper is possible. . APA remains close with CKI, despite the failed bid in 2018. Plus, this would keep the minority interest stakes in Australian hands.  But again, given Spark’s minority stakes, any successful suitor will not have unfettered control over these utilities.

Sakai Ovex (3408 JP)  (Mkt Cap: $0.2bn; Liquidity: $1mn)

In early February 2021, the CEO of Sakai Ovex (3408 JP), who owned very few shares, and an activist investor decided to launch an MBO for the company at ¥2,850/share.  The stock had been trading cheap, and the price was “high” but the price was wrong. It needed to be 40% higher – at a minimum – in my opinion. Not long after that, the bidders offered a very weak bump to ¥3,000/share, discussed in Savai Ovex MBO – A Very Weak Bump. This was not enough. The shares traded above terms and revised terms, only falling below when the Tender Offer went ex-. 

  • The Bidders are back. And now City Index Eleventh is joining them. It pays to be the fulcrum investor.  And now they are bidding ¥3,810. Which is still cheap.  The president, who holds almost no shares, and a value/activist investor have proposed to take the company private at a discount to book, with considerable non-operating assets and earnings.  There is a lot of value hidden in the details.  This deal was short by probably ¥1,200/share the first time which would have taken it to ¥4,000/share. I personally think it is still short. Perhaps another ¥800-1000/share would be better. 
  • The insiders have about 50% of the shares locked up with Murakami-san. They need about a third of the rest.  This will be incrementally tougher to block, but those who do more digging and decide they too would like to become an equity partner in the takeout, there is actually a possible role for you.
  • Travis would buy at or just below tender offer price. He thinks this gets done. If someone shows up BIGLY there could still be a small bump.

(link to Travis’ insight: Sakai Ovex MBO Reloaded – Up 27% from Last Weak Bump But Still Cheap)

After wood flooring manufacturer Nature Home Holding Company (2083 HK) was suspended on the 19 July, in Nature Home (2083 HK): Possible Takeover Target I concluded if an Offer was to be tabled, it would likely be via a Scheme and at ~HK$1.70/share. And this is exactly what transpired. Nature Home announced an Offer from its founding shareholders, by way of a Scheme, at HK$1.70/share. The Offer Price will not be increased. Dehua Tb New Decoration A (002043 CH) has given an irrevocable rollover undertaking for its 19.6% stake. Standard Scheme conditions apply. On account of the Rollover Agreement, Dehua does not form part of the independent shareholders who will vote on the merits of the Scheme. This Offer looks done. Link to my insight: Nature Home (2083 HK)’s Full Offer.

Advantest Corp (6857 JP) had a good Q1 and revised up its full year. The company also announced a buyback of up to 10mm shares and up to ¥70bn through March next year. Given the current share price, that would only get ~7 million shares bought back but while that is only 3.5% of shares out ex-Treasury, it is 10+% of Real World Float. In Breaking Down Advantest’s Big Buyback, Travis expects that this buyback will contribute to positive/better/high-quality momentum (price and outperformance) on a stock which already has decent momentum both on stock price and fundamentals. 

On the 30 April, aged-care Australian listed operator Japara Healthcare (JHC AU) announced it had received an unsolicited, indicative, conditional, and non-binding Offer from Little Company of Mary Health Care – otherwise known as Calvary – by way of a Scheme, at A$1.04/share. On the 5 June, Calvary increased the indicative Offer price to A$1.20/share.  On the 15 June, the Bolton Clarke Group made a conditional, non-binding indicative proposal by way of a Scheme, at A$1.22/share. JHC has now announced that it has entered into a Scheme Implementation Deed (SID) with Calvary, by way of a Scheme at A$1.40/share. The consideration will be reduced by any dividends paid.  JHC’s board of directors have unanimously recommended the Scheme, in the absence of a superior proposal and subject to an independent expert concluding the Scheme is fair & reasonable. This looks done. Link to my insight: Japara Healthcare (JHC): Calvary Takes Charge.

India-based integrated logistics company Allcargo Logistics (AGLL IN) received a “Delisting Proposal” from its Promoter Group (Shashi Kiran Shetty and Talentos Entertainment Private Limited) in August 2020. Since then, the stock has gained more than 70%. Despite the rally since the Initial Delisting Proposal, Allcargo is not too expensive strictly from a fundamental angle. Going by LTM numbers, Allcargo is trading at a EV/EBITDA of 9.5x which looks cheap when considering that EBITDA CAGR for FY21A-FY23E is ~26% according to Capital IQ consensus.  In Allcargo (AGLL IN): Process Reinitiated! 70%+ Up Now. Should You Still Chase?. Read more: https://skr.ma/xDxmq, Janaghan Jeyakumar expects the Deal to complete. He would be cautious about chasing. However, he would expect dips are good to be bought.  

On the 18 May, Yue Xiu (the investment arm of the Guangzhou municipal government) made an Offer, by way of a Scheme, for Chong Hing Bank (1111 HK) shares not owned, at HK$20.80/share, a 51.2% premium to last close, and a 97% premium to the day preceding the last trading day. The Cancellation Price, which was a 10.1% discount to the NAV, would NOT be increased. Standard Scheme conditions apply. Chong Hing is Hong Kong incorporated, therefore there is no headcount test. The Scheme Document is now out.  The Scheme Meeting will be held on the 30 August with expected payment (assuming the Scheme resolutions are approved by independent shareholders) on the 7 October. The IFA considers the Offer to be fair and reasonable, although that report covered the bare minimum. Link to my insight: Chong Hing Bank (1111 HK): Scheme Doc Out. IFA Says Fair.

STUBS

PCCW Ltd (8 HK) / HKT Ltd (6823 HK) 

At the time of my insight, I had the discount to NAV at ~23%, compared to the 12-month average of 17%. The implied stub of (HK$1.20/share) compares to the (HK$1.05/share) average since PCCW reduced its take in HKT back in February 2017.  The simple ratio (PCCW/HKT) of 0.4x compares to the 0.42x average since the February 2017 reduction. 

  • PCCW Solutions operates 9 data center locations in Hong Kong, China, and Malaysia. The portfolio comprises ~75+ megawatts of power capacity, across 1.3mn sqft of GFA.  This portfolio of data centers made a net profit of US$2.6mn in FY20, up from US$0.02mn in FY19. Net assets are ~US$258.3mn, therefore DigitalBridge is paying  288x trailing earnings, and 2.9x book. PCCW appears to have paid 1.9x P/B for the Malaysian ops last year.
  • I think one of two events will ultimately transpire from hereon – either HKT is taken over – not by PCCW – but by a PRC telecommunication company such as China United Network A (600050 CH), which already holds 18.5% – HK media assets have gradually been snapped up by PRC buyers; or Richard Li attempts another privatisation of PCCW.
  • That’s not to say Richard wants to continue in his dad’s footsteps by holding or acquiring telco assets. I think he wants the cash from the sale of PCCW’s stake in HKT. Following the sale of the data centers, PCCW would be net cash, or thereabouts, at the parent level. Richard has been in the news lately concerning Southeast Asian online realty company PropertyGuru agreeing to go public through a merger with a blank-check firm backed by Richard and Peter Thiel. But Richard’s passion in recent years appears to evolve around insurance, especially the soon (expected)-to-be listed FWD.
  • I would be inclined to be invested where Richard is – and therefore be Long PCCW, short HKT here. I expect the NAV discount to narrow towards its one-year average. 

(link to my insight: StubWorld: The Trimming Of PCCW

Zhen Zhou, Toh is not particularly excited about Del Monte Philippines (1575316D PM)’s business because revenue growth will likely taper off as COVID-19 situation eases and further margin expansion too seems unlikely. In Del Monte Pacific HoldCo Trade Update – A Better Play for Del Monte PH IPO, he thinks that the better way to trade the IPO is to buy DMPL with the expectation that the IPO will go through. And even though liquidity isn’t great, which could mean that Del Monte Pacific (DELM SP) will trade at a deeper holdco discount, there is still potential upside to be realized at those levels.

EVENTS

JAPAN PASSIVE: Who Owns What 2021?

Passive holdings in Japan are approximately equal to 30-34% of the “float” as calculated by index providers such as MSCI, FTSE, and the TSE float calculations (which are generally smaller than MSCI and FTSE) PLUS 28-31,000 baskets worth of Nikkei 225 holdings. Longer-term, this fluctuates in the range of 26-30 million shares. This really matters with names with low share count. But among TOPIX 1000 names which are members, it is a weighted average of just over 4%.

  • That puts Fanuc Corp (6954 JP) and Tokyo Electron Ltd (8035 JP) in the 38-45% range of float, if not a little higher. TDK Corp (6762 JP)Cyberagent Inc (4751 JP)Nissan Chemical Industries (4021 JP), and Kikkoman Corp (2801 JP) are in the 42-50+% range. Konami Holdings Corp (9766 JP) and Hitachi Construction Machinery (6305 JP) are close to or above 50%. Fast Retailing Co Ltd (9983 JP) is likely well above 70%.
  • Last year Travis said “The BOJ may change its ETF allocations.” It did. It stopped buying Nikkei 225 and JPX Nikkei 400 ETFs.
  • As the world moves more and more to passive, expect float to decrease. As companies continue buying back stock, pay attention as to whether it is being repurchased from the market or from designated non-float sellers.
  • Changes to the TSE Market Structure may introduce significant changes to index constituency impact on smallcap shares within the TSE First Section. It will likely not mean much at all for large cap shares.  Many companies are looking at optimising their shareholding structure to make it possible for them to be TSE Prime members.
  • In many cases, there are efforts to reduce cross-holdings because of increased emphasis on that factor exercised by the revised Corporate Governance Code and by new voting policies implemented this year by Glass Lewis and ISS which will recommend votes against directors where more than 10% or 20% of equity value is locked up in cross-holdings. 

(link to Travis’ insight: JAPAN PASSIVE: Who Owns What 2021?)

In China’s New After-School Tutoring Policy Is Out – The End of the Line For Many?, Travis reckons the operating businesses for after-school edcuati0n stocks are likely to be worth almost nothing. The only way they survive as economic entities is to pivot to other training, or to pivot to supporting the national cause. Spin off the teachers and the organizational structure of what they do into an Opinion-compliant construct. Provide it with a little seed capital. Then keep whatever online tech one has and make the tech a fee-earning business.  If it were him, in their shoes, he would be making plans to pivot today.  If any of these tycoons end up with any remaining wealth, that is good for them. He thinks the stocks are a really, really tough thing to own other than for break-up value. Osbert Tang also discussed this situation in China Private Education: How to Position After the Regulatory Crackdown? 

Full Circulation Of H-Shares: July 2021 Update was latest update in a series dating back to Legend’s Conversion of Domestic Shares in June 2018.

  • To date, 28 companies have sought approval to convert their domestic shares and/or unlisted foreign shares into H shares, which would then be eligible to be listed and traded on Hong Kong’s stock exchange.
  • 16 companies have now been given CSRC and Hong Kong listing approval to convert such shares. Five of those have seen various degrees of movement in the converted shares.
  • Sichuan Languang Justbon Service Group (2606 HK) received approval late last year but did not convert – and was subsequently subject to an Offer.
  • To date, two companies have withdrawn their application to convert their domestic shares.  Both of these companies –  Beijing Capital Land Ltd H (2868 HK) and Zhejiang Cangnan Instrument (1743 HK) have now been subject to Offers.

TOPIX INCLUSIONS!

In TOPIX Inclusion Trade Summary: July 2021, Janaghan took a look at the monthly performance of the trading opportunities surrounding TOPIX Index Rebalance events. During the month, we witnessed the Inclusion Events of cloud-based business accounting software company Money Forward (3994 JP), water treatment technology company Nomura Micro Science (6254 JP), and printed circuit board manufacturer Meiko Electronics (6787 JP).  Furthermore, as discussed by Travis in July TOPIX FFW Rebalancing Trade (see above), there were quarterly float adjustments for some constituents of the TOPIX Index which opened up a few trading opportunities. 

M&A – EUROPE

Naturgy Energy Group SA (NTGY SM) is awaiting the decision to be made by the Government on the partial takeover launched by the Australian fund IFM for 22.7% of the capital. The success of IFM’s partial takeover attempt is becoming increasingly difficult due to a delay in the approval of the takeover by the Spanish Government; and Criteria Caixa’s intentions to strengthen its shareholding in Naturgy. Criteria Caixa already holds 25.997%. Assuming it will still purchase up to 29.9%, that is a 3.903% stake pending, some 37.84 mn shares, i.e. approximately €826 mn (at the closing price of 29 July) almost worth the volume of 50 trading sessions (at the last three months average daily volume). Link to Jesus Rodriguez Aguilar‘s insight: IFM/Naturgy: New Developments.
Unicaja Banco SA (UNI SM) and Liberbank SA (LBK SM) will soon finalize their merger after receiving all the authorisations. On 19 July, the Spanish Government gave the green-light to the integration, which is expected to close on 30 July. Liberbank’s shares are trading at a 0.8% discount (adjusted for the merger ratio). Although liquidity is thin, in Unicaja/Liberbank: Final Stretch Jesus recommends a short UNI SM/long LBK SM. The effective merger is highly likely to happen on 30 July.
On 21 July, Bloomberg reported that Canadian Brookfield Asset Management-Cl A (BAM/A CN) was working with advisers as it considers a potential bid for alstria office reit-ag (AOX GR). In Brookfield/Alstria Office REIT: Potential Takeover, Jesus reckons a takeout price could come in at €18.68, a 10% premium over the last reported EPRA NTA and 6.4% premium to the closing price on 23 July. 

M&A – US

In SpinTalk: More Value To Be Had In Now Imminent XPO Logistics Break-Up, Robert Sassoon revisited the proposed break-up of Xpo Logistics (XPO US). This corporate event is now just a few days away and will be executed via  the tax-free spin-off of the logistics business GXO Logistics (GXO US) on August 2, 2021, effected through a 1-for-1 distribution of new GXO shares to XPO shareholders

PAIRS

Roland Corp (7944 JP) Has been shifting production away from China and Japan to concentrate most of the production activities to the Malaysian plant established in 2014 as a part of the business turnaround process that followed a vicious downward spiral in the post-global financial crisis environment. While demand for musical instruments soars across the world, COVID-19 lockdowns in Malaysia continues to affect Roland’s production capabilities. In Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages, Oshadhi Kumarasiri believes Roland may fail to meet demand amidst disruptions to the main production facility in Malaysia while Yamaha Corp (7951 JP) seems to be well placed to outperform the market through capturing Roland’s lost demand.

INDEX REBALS

With Gulf Energy Development Public Company (GULF TB)‘s Offer for Intouch Holdings (INTUCH TB) closing next week, in GULF/INTUCH: Nearing The End of the Offer Period; Passive Selling to Come, Brian Freitas expects FTSE and MSCI to lower Intouch’s investability weight/ FIF over the next week due to a drop in the free float and this will necessitate passive selling on the stock.

In Kakao Bank: Allocations, Lock Ups and Index Fast Entry, Brian sees KakaoBank (1349010D KS) as a high probability inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) with the implementation at the close of trading on 9 September.

At the IPO price, Krafton Inc (259960 KS) should get MSCI Fast Entry if less than 30% of the institutional allocation is locked up, while the stock should get FTSE Fast Entry even with 50% of the institutional allocation locked up. If a higher percentage of shares is locked up, the stock will need to close higher on listing day to get index Fast Entry. Link to Brian’s insight: Krafton IPO: Bookbuilding Results & Index Fast Entry.

STAR50 Index Rebalance Preview. With only 2 trading days left in the review period, Brian sees Shanghai Shen Lian Biomedical (688098 CH)Piesat Information Technology (688066 CH)Guangzhou Fang Bang Electr-A (688020 CH)Shenzhen Lifotronic Techno-A (688389 CH), and Appotronics Corp Ltd (688007 CH) as high probability deletions from the index. Link to Brian’s insight: STAR50 Index Rebalance Preview: Big Turnover in a Volatile Market.

In Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower Brian expects Li Auto Inc. (LI US) to get Fast Entry to the Hang Seng Composite Index (HSCI) though, as a WVR security, the stock will only be eligible for Stock Connect once it has completed 6 months of listing plus 20 trading days. Li Auto could also be included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December review. This will lead to a further drop in the HSCEI 2022 dividend futures since we do not expect Li Auto Inc. (LI US) to pay dividends in the near future, while the potential deletion is a higher dividend-yielding stock.

LQ45 Index Rebalance. The IDX has announced the changes to the LQ45 Index as a part of the August review. Barito Pacific (BRPT IJ) and Timah Persero (TINS IJ) have been added to the index while Bank BTPN Syariah (BTPS IJ) and Ciputra Development (CTRA IJ) have been deleted from the index. In  LQ45 Index Rebalance: BRPT, TINS In; BTPS, CTRA Out, Brian expects the impact of passive funds (and active funds) will be quite high on Barito, Bit Digital (BTBT US), and Ciputra and significantly lower on Timah.

MSCI Aug 2021 Index Rebalance Preview. MSCI is scheduled to announce the results of the August 2021 Quarterly Index Review (QIR) on 11 August (early morning of 12 August Asia time) with the changes implemented after the close of trading on 31 August. In  MSCI Aug 2021 Index Rebalance Preview: Potential Changes After Week 1; Positioning at Work, Brian reckons potential inclusions to the MSCI Standard Index are SITC International (1308 HK)Huabao International Holdings (336 HK)Momo.Com Inc (8454 TT)Chinasoft International (354 HK)China United Network A (600050 CH)Ecopro BM Co Ltd (247540 KS)SK IE Technology (361610 KS)CRRC Corp Ltd A (601766 CH),  Beijing Wantai Biological-A (603392 CH)Beijing Kingsoft Office Software-A (688111 CH)Beijing Roborock Technology-A (688169 CH)Imeik Technology Development (300896 CH)StarPower Semiconductor Ltd (603290 CH)Advanced Micro-Fabrication Equipment-A (688012 CH)Ginlong Technologies Co Ltd (300763 CH) and China Baoan (000009 CH). Potential exclusions are Bangkok Bank PCL (BBL/F TB)Bank of East Asia (23 HK)Taiwan Business Bank (2834 TT)KMW Co Ltd (032500 KS)Perennial Energy Holdings Ltd (2798 HK)Douyu International Holdings (DOYU US) and Gaotu Techedu (GOTU US).

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

Zioncom (8287 HK)30.00%LegoOutside CCASS
Sun King Power Electronics (580 HK) 12.22%CLSAOutside CCASS
China Ecotourism (1371 HK) 19.98%HSBCOutside CCASS
Sheng Ye Capital (6069 HK) 12.78%UBSSinomax
Suncity Group (1383 HK) 74.86%MortonHaitong
Weiye (1570 HK)42.95%HSBCGlory Sun
Niraku Gc Holdings (1245 HK) 31.33%ShenwanOutside CCASS
Source: HKEx

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


Hyundai E&C’s Unusual 1P Offering with a Shocking 45% Discount

By Sanghyun Park

Offering overview

A very unusual rights offering was recently announced in the Korean market.

Hyundai E&C announced this unusual capital increase, saying it would issue 2 million new preferred stocks.

Overview
Shares to be issuedHyundai Engineering & Construction Co. Preference Shares
Ticker000725
TargetA public offering of forfeited shares after offering to stockholders
TransferabilityRenounceable
Volume2,000,000
Preliminary price₩114,500
Preliminary value₩229,000,000,000
Oversubscription privilege20.00%
BankerKIS & Hyundai Motor Securities
Source: DART

Although the capital increase ratio resulting from these 2 million shares remains at 1.79%, the offering volume is 20 times the size of the currently issued preferred stock.

Capital increase rate
Ordinary – before rights offer111,355,765
Pref – before rights offer98,856
Offer volume2,000,000
Capital increase rate1.79%
Total shares after rights offer113,454,621
– Ordinary111,355,765
– Pref2,098,856
Source: DART

And what’s even more shocking is that the discount rate applied when calculating the final offering price is a whopping 45%.

For local rights offerings, a discount rate of 15-20% is usually applied. In contrast, this rights offering applies a discount rate of more than double the usual level.

Pricing
1st roundRP × (1 – 45%) / [1 + (1.79% × 45%)]
– Reference price (RP)Min [Close, Avg (Close, 1W VWAP, 1M VWAP)]
– Reference date2021. 08. 30
Ex-rights base price[RP + (1st × 1.79%)] / (1 + 1.79%)
– Reference price (RP)Previous close
– Reference date2021. 09. 01
2nd roundRP × (1 – 45%)
– Reference price (RP)Min [Close, Avg (Close, 1W VWAP)]
– Reference date2021. 10. 18
FinalMin (1st, 2nd)
– Reference date2021. 10. 18
Discount rate45.00%
Capital increase rate1.79%
Source: DART

In this rights offering, 20% will be allocated to the ESOP, and the remaining 80% will be allocated to shareholders.

Of course, not only shareholders who own preferred stocks but also shareholders who own common stocks are given the same purchase rights. So the allocation ratio per share becomes 0.0143556.

Allocation
Per-share allocation0.0143556
ESOP allocation400,000
– %20.00%
Stockholder allocation1,600,000
– %80.00%
Source: DART

The schedule is as follows. The first-round price is confirmed on Aug. 30, and this becomes the ceiling of the offering price. And since September 1 is the ex-date, the stock must be held by August 31 to be granted the subscription right. After that, the subscription rights will be traded for 5 trading days from October 1 to 8, and the final price will be confirmed on October 18. The new stock listing date is November 5.

Timetable
BOD meeting2021. 07. 23
Preliminary pricing2021. 08. 30
Ex-rights date2021. 09. 01
Record date2021. 09. 02
Subscription rights trade beginning2021. 10. 01
Subscription rights trade ending2021. 10. 08
Final pricing2021. 10. 18
Stockholder subscription2021. 10. 21
Payment2021. 10. 26
Listing2021. 11. 05
Source: DART

Aussie Bank Buyback Season Starts – Expect A$12-15bn and Funky Flows

By Travis Lundy

The SHORT & SWEET

  • Australian banks are seeing or are going to see sharp hikes in H1 dividends this year despite APRA guidance to be prudent with capital decisions. 
  • APRA changed its guidance on 29 July. 
  • ANZ had announced a decent-sized buyback earlier in July and NAB announced one on 30 July. 
  • Others are expected to announce buy-backs in August.

The Longer Introduction

In April 2020 when markets were crashing and there was tremendous uncertainty about what ravages covid might bring to every sector of the economy, National Australia Bank (NAB AU) slashed its dividend and launched a A$3.5bn capital raise. Other companies did the same, but the other major banks avoided a capital raise in 2020 because they had either raised equity earlier (all four majors raised equity in 2015, but Westpac Banking (WBC AU) also raised in Nov 2019) or they cut or eliminated an interim dividend (ANZ and CBA cut theirs, and Westpac eliminated their div for H1 2020 entirely).

For NAB, the capital raise was an institutional share placement of A$3bn and a A$500mm Share Purchase Plan (SPP) targeting individual shareholders. The SPP was well-received, priced at A$14.15/share – the same price as the placement – so when books closed a month later and the market price was 10% higher, demand had been strong enough that the SPP was boosted by A$750mm to A$1.25bn. 

That was probably overly cautious at the time, but it was a huge gift to shareholders. A week after the SPP shares started trading on 2 June, the shares were changing hands above A$20/share. 

Fast forward almost a year later to the 6 May release of H1 earnings and the bank said it had too much capital with its Common Equity Tier 1 ratio at 12.37-12.40%. It noted it intended to take action to lower that but stay above APRA’s Unquestionably Strong benchmark of 10.5%. This came despite APRA’s guidance in early April of 2021 that it expected deposit-taking institutions it expected they (and other financial institutions) “limit discretionary capital distributions in the months ahead, including deferrals or prudent reductions in dividends.” The 7 April letter (pdf) on Capital Management said,

Interestingly, Australia and New Zealand Banking Group (ANZ) (ANZ AU) announced a A$1.5bn buyback – ~2% of market cap – on 19 July and the stock bounced $1/share to A$28/share over a few days. This was obviously discussed with APRA but ANZ CEO Shayne Elliott had said on 5 May when reporting a 126% increase in H1 profit helped by writebacks, and a jump in H1 div,  that the Australian economy was booming and said, “Australia is in really good shape in where we sit today,” and he quite clearly laid out the case for a buyback then.

“We have an embarrassment of riches, if you will, in terms of excess capital.”

“Clearly the only path to get to 10.8, putting aside almost unimaginable growth in our balance sheet, would be some sort of capital management activity,”

ANZ Bank CEO Shayne Elliott (5 May 2021)

ANZ was first off the block.

On 29 July, APRA updated its guidance and the new letter on capital management eliminates the strict requirement but maintains guidance on 50% dividend payout. 

New NAB News

On Friday 30 July 2021, National Australia Bank (NAB AU) filed an announcement with the ASX for an on-market buyback for A$2.5bn of its shares, which is about 3% of current market cap, as part of its effort to move its Common Equity Tier 1 ratio to 10.75-11.25%. 

Under Corporations Act 2001, a company has to announce an on-market buyback to ASIC 14 days before starting. The buyback is expected to start in mid-late August and go through a period as long as end July 2022. That ASIC lodgment was made Friday too. Because it is an on-market buy back under the limits of the 10/12 rule (>10% of shares to be bought back in <12 months), no further details are required to be given out.

The timing and actual number of shares purchased under the buy-back will depend on market conditions, the prevailing share price and other considerations….

In addition to the on-market buy-back announced today, NAB intends to purchase shares on-market to satisfy Dividend Reinvestment Plan requirements over the buy-back period…

The exact nature, amount, and timing of any further capital returns beyond the $2.5 billion on-market buy-back announced today, will be dependent on market conditions and capital outlook.

Despite the still strict-sounding guidance from APRA, the organisation conducted stress tests and released results last December saying even in “severe downside scenario” where growth dropped 15% and unemployment rose 13% and house prices fell 30%, the major banks would all pass the minimum capital requirement with room to spare.

The fact that these two banks have announced buybacks indicates APRA is comfortable with where banks stand, suggesting that the even more capitaltastic Westpac and CBA are likely to announce buybacks next month with earnings. 


Index Rebalance & ETF Flow Recap: MSCI, LQ45, STAR50, Li Auto, Intouch, Krafton, Kakao Bank

By Brian Freitas

In this weeks recap, we look at:

Inflows to KraneShares CSI China Internet Fund (KWEB US) ETF continue even as the constituent stocks sell-off. There have also been large inflows to the Tracker Fund of Hong Kong Ltd (2800 HK) and Hang Seng H Share Index ETF (2828 HK) ETFs.

Events This Week

Click on the link under Detail to go to the Insight

Date

Index

Detail

6 Aug
KOSPI2

Before it’s here, it’s on Smartkarma

Event-Driven: KakaoBank, Tencent, Chong Hing Bank, Money Forward, SK IE Technology, Soho China Ltd and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Kakao Bank: Allocations, Lock Ups and Index Fast Entry
  • Tencent: All Bets Are Off
  • Chong Hing Bank (1111 HK): Scheme Doc Out. IFA Says Fair
  • TOPIX Inclusion Trade Summary: July 2021
  • Chong Hing’s Scheme Document, IFA Opinion
  • Float Confusions for Likely Adds at MSCI Std Korea QIR: SKIET, Ecopro BM, & Kakao Games
  • (Mostly) Asia M&A: July 2021 Roundup

Kakao Bank: Allocations, Lock Ups and Index Fast Entry

By Brian Freitas

KakaoBank (1349010D KS) announced the IPO allocations and voluntary lock-ups on the institutional investor allocation yesterday. The company raised US$2.23bn by selling 65.45m shares at KRW 39,000/share, valuing KakaoBank (1349010D KS) at US$16.21bn.

Due to undersubscription, there was a small reallocation from the ESOP category to institutional and retail investors. 60% of the institutional investor allocation is subject to lock ups.

KakaoBank (1349010D KS) is a high probability inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) with the implementation at the close of trading on 9 September.

With the free float at 6.56%, Fast Entry inclusion in the FTSE All-World and MSCI Standard index will require a big listing pop for the stock. Given the concern on the stock being overvalued at the IPO price, a big jump is unlikely on listing day and we do not expect Fast Entry inclusion for KakaoBank (1349010D KS).

Trading at a big premium to the traditional banks, with a large number of pre-IPO investors able to sell from listing day, and the lack of large passive buying flow, the stock could trade weaker than similar listings in the recent past.


Tencent: All Bets Are Off

By Shifara Samsudeen, ACMA, CGMA

Tencent (700 HK) shares have lost 18% to HK$478.80 by the end of today’s close since the beginning of July 2021 and has lost 35.0% since its peak in February this year. Tencent’s shares continue to slide over regulatory scrutiny over Chinese internet stocks. The Chinese regulators have widened their crackdown on the country’s internet sector with the latest crackdown aimed at the county’s education sector.

Tencent has been making into headlines over the past few days with its music streaming arm Tencent Music (TME US) being ordered to give up exclusive music licensing rights alongside a fine, its investments in online education and tutoring platforms such as Yuanfudao being targeted by Beijing regulators and the company suspending new user registrations on WeChat.

As we have discussed in our previous insights, there is no sign that the Chinese regulators are slowing down with its antitrust crackdown on the country’s tech platforms and though the ongoing regulatory crackdown has already been priced into Tencent’s share price, we would strongly recommend being on the side lines as the ongoing probe could have a material impact on the company’s future earnings.


Chong Hing Bank (1111 HK): Scheme Doc Out. IFA Says Fair

By David Blennerhassett

On the 18 May, Yue Xiu (the investment arm of the Guangzhou municipal government) made an Offer, by way of a Scheme, for Chong Hing Bank (1111 HK) shares not owned, at HK$20.80/share, a 51.2% premium to last close, and a 97% premium to the day preceding the last trading day. The Cancellation Price, which was a 10.1% discount to the NAV, would NOT be increased.

Standard Scheme conditions apply. Chong Hing is Hong Kong incorporated, therefore there is no headcount test.

The Scheme Document is now out.  The Scheme Meeting will be held on the 30 August with expected payment (assuming the Scheme resolutions are approved by independent shareholders) on the 7 October.

The IFA considers the Offer to be fair and reasonable, although that report covered the bare minimum. 

More below the fold.


TOPIX Inclusion Trade Summary: July 2021

By Janaghan Jeyakumar, CFA

In this insight, we take a look at the monthly performance of the trading opportunities surrounding TOPIX Index Rebalance events. During the month, we witnessed the Inclusion Events of cloud-based business accounting software company Money Forward (3994 JP), water treatment technology company Nomura Micro Science (6254 JP), and printed circuit board manufacturer Meiko Electronics (6787 JP)

Furthermore, as discussed by Travis Lundy in July TOPIX FFW Rebalancing Trade, there were quarterly float adjustments for some constituents of the TOPIX Index which opened up a few trading opportunities. 

Below is a closer look at each of these situations. 


Chong Hing’s Scheme Document, IFA Opinion

By Arun George

Chong Hing Bank (1111 HK)/CHB has despatched the scheme document in relation to a privatisation offer from Yuexiu Holdings, the largest shareholder who holds 74.97% of outstanding shares. The offeror will offer HK$20.80 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 privatisation precedent comparison could be improved. 

The key condition is the scheme approved by at least 75% disinterested shareholders (<10% disinterested shareholders rejection). With no shareholder holding a blocking stake, we continue to believe that the substantial premium of the offer price to long-term average share prices and P/B multiples, makes it likely that the offer gains approval at the court meeting on 30 August (cheques dispatched on or before 7 October). At the current price of HK$20.45 per share, the gross spread to the offer price stands at 1.7%.


Float Confusions for Likely Adds at MSCI Std Korea QIR: SKIET, Ecopro BM, & Kakao Games

By Sanghyun Park

In MSCI Standard Korea’s QIR rebalancing, likely candidates are narrowed down to the following three stocks.

Today is the last day of the 10-day review period, so the results are almost all out.

The street consensus for the Interim Cutoff is a bit conservative at US$2.8B. Therefore, the full market cap hurdle is ₩5.76T, and the float-adjusted market cap hurdle is ₩2.88T.

Screening
Interim cutoff

₩3,201.7B (US$2.8B)

Full market cap hurdle₩5,763.1B
Float-adjusted market cap hurdle₩2,881.5B
Source: Clepsydra Capital

The problem is the float estimate. At this point, there are different opinions on the floats estimated by the local street.

In all three stocks, accurate float estimation is important enough to determine whether or not they are included in the MSCI Standard this time.

However, none of these three stocks has reached a clear consensus on the float.

All three stocks have passed the full market hurdle. On the other hand, the situation becomes complicated in the case of a float-adjusted market cap hurdle.

The following is whether or not each candidate passed the float-adjusted market cap hurdle at different float rates. As shown below, SKIET needs at least 20%. Ecopro BM needs 50% at a minimum. Kakao Games has the most desperate situation. It needs at least 45%, a substantial boost from the previous 25%.

Potential addsSK IE TechnologyEcopro BMKakao Games
Float rate15.00%20.00%45.00%50.00%25.00%45.00%
Beat the threshold by % – float-adjusted market cap
7. 19-21.69%4.42%-0.83%10.19%-45.54%-1.98%
7. 20-20.58%5.90%-8.09%2.12%-45.67%-2.21%
7. 21-19.83%6.89%-7.71%2.54%-42.76%3.03%
7. 22-14.45%14.07%-8.98%1.13%-35.12%16.79%
7. 23-12.60%16.54%-6.75%3.61%-34.99%17.02%
7. 26-14.82%13.57%-2.44%8.40%-38.49%10.73%
7. 27-15.19%13.08%-2.96%7.83%-37.51%12.48%
7. 28-14.82%13.57%-4.84%5.74%-39.13%9.56%
7. 29-16.49%11.34%-2.65%8.17%-39.39%9.10%
7. 30-15.94%12.09%-0.18%10.91%-41.98%4.43%
Source: KRX

(Mostly) Asia M&A: July 2021 Roundup

By David Blennerhassett

For the month of July, 13 new deals (firm and non-binding) were discussed on Smartkarma with an overall announced deal size of ~US$34bn.

  • Clicking on the company name in the table below will take you to the entity page where you can read the initial insight(s) written by Smartkarma contributors on these new deals and follow-up discussions, or simply click on the insight link(s) below the name.

New Deals

Industry

Size (US$bn)

Type

Premium

Australia

5G Networks Ltd/Australia (5GN AU) /
Webcentral (WCG AU) 
Telco0.1Schemen.a.
Webcentral – 5GN Merger: A Small-Cap Merger Aimed at ASX300 Status
Australian Pharmaceutical Industries (API AU) Healthcare0.5Scheme20.5%
API AU: The Hunter Turns The Hunted As Wesfarmers Makes A Move
Empired Ltd (EPD AU) Systems0.2Scheme64.6%
Empired (EPD AU): Capgemini’s Full Offer
iCar Asia Ltd (ICQ AU) Auto portal0.2Scheme83%
ICar (ICQ AU): Carsome & Catcha Carpool
Iress Ltd (IRE AU) Software2.3Scheme23%
Iress (ASX AU) Bats Away EQT – For Now
Oil Search Ltd (OSH AU) O&G7.1Scheme12.3%
Santos/Oil Search: Getting Facts Straight
Rhipe Ltd (RHP AU) Software0.1Scheme20%
Rhipe (RHP AU): Crayon Sees Silver in Them Thar Clouds
Spark Infrastructure (SKI AU) Utility3.9Scheme26%

Spark Infra (SKI AU): KKR & OTPPB’s Tilts Falls Short

Spark Infrastructure (SKI AU): KKR & OTPPB Pay Up

Sydney Airport (SYD AU) Airports17.0Scheme42%
Sydney Airports (SYD AU): Opportunistic Tilt Amid Cloudy Future
Youfoodz Holdings (YFZ AU) Home delivery0.1Scheme82.4%
Youfoodz (YFZ AU): HelloFresh’s Lowball Takeover Offer Difficult to Block But Not UnBumbable

Hong Kong

Beijing Capital Land Ltd H (2868 HK) Real Estate0.4Merger by Absorption62.8%
Beijing Capital Land (2868 HK): Delisting Offer From Parent
Nature Home Holding Company (2083 HK) Floorboarding0.1Scheme17.2%
Nature Home (2083 HK): Possible Takeover Target
Nature Home (2083 HK)’s Full Offer

South Korea

Green Cross Cell (031390 KS) / Green Cross LabCell (144510 KS) Biopharmaceutical1.5Mergern.a.
GC Cell – GC LabCell: Korean Biopharma Merger Trading Tight
Source: Smartkarma Insights

The average premium for the new deals announced (or first discussed) in July was ~41%, with a year-to-date average of ~34% (102 deals & total deal size of US$195bn). This compares to the average premium for all deals in 2020 (158 deals) and 2019 (145 deals) of 31% and 31.5% respectively. 

Offer Premium Summary

2019

2020

2021 YTD

Australia33.0%32.4%35.2%
Hong Kong25.2%34.7%34.5%
Japan44.0%35.2%28.5%
ROW29.1%24.2%35.3%
Average31.5%31.1%33.5%
Source: Smartkarma Insights

Summary of News in July of Arb Situations On Smartkarma’s Radar

(Again, click on the company names to take to you to the insights and/or discussion posts for a more comprehensive read-through on each situation)

Australia

Comments (with links to announcements & insights)

20-Jul: Autodesk Inc (ADSK US)‘s early June Offer for Altium Ltd (ALU AU) was terminated.

27-Jul: All resolutions passed at the Scheme Meeting

13-Jul: All resolutions passed at the Scheme Meeting

14-Jul:  Boral’s Bump Earned, Likely to Extend, but THEN WHAT?
19-Jul: Boral (BLD AU): Index Impact from Seven’s Offer
22-Jul: Boral Ltd: Seven’s Done Deal. What Happens Next?

29-Jul: The Seven Group Holdings (SVW AU) Offer for Boral Ltd (BLD AU) was not extended (as announced on 28 Sep). The deal closed yesterday. The resulting ownership is now 69.6%. 

22-Jul: Star Entertainment Group (SGR AU) walks away from its proposal for Crown Resorts (CWN AU). That’s not a good look. 

7-Jul: Scheme Booklet dispatched. The Scheme Meeting will be held on the 6 August.

16-Jul: Co-operation agreement entered into

No July update

No July update

Hong Kong

Comments (with links to announcements & insights)

16-Jul: Scheme Doc pushed out to the 31 August. 

9-Jul: In its monthly update regarding a potential Offer, China Traditional Chinese Medicine (570 HK) says there is no update.

15-Jul: In its monthly update, China Youzan (8083 HK) said in its monthly update, that there is no update.

20-Jul: Kerry Logistics Network (636 HK) announced approval by the Independent Shareholders in respect of the Special Deal Agreements and the Framework Services Agreement had been obtained.

23-Jul: Scheme approved

15-Jul: Desliting conditions met. Last day of trading is the 9 August. 

India

Comments (with links to insights)

23- Jul: After going limit up today, to INR 101.80/share, Adani Power (ADANI IN) is now back above INR 100/share after having fallen from INR 160. The 1-year deadline to file the Delisting Offer to the Exchange is 23 July. The Exchange would respond within 5 business days if they file. 

No July update

No July update

Japan

Comments (with links to announcements & insights)

No July update
9-Jul: The bidder for EPS Holdings (4282 JP) now has 86.97%. This will lead us to an EGM and a squeezeout. 

No July update

14-Jul: City Index Eleventh has raised its bid from ¥960/share to ¥970/share. That forces an extension from expected end date tomorrow to the 30th of July. That’s why it was raised. He doesn’t have enough shares to do what he wants yet. But in raising it, he has gotten the board to agree to recommend his offer, which is something pretty special. 
9-Jul: Kufu (4399 JP) confirmed on 7th July 2021 that shareholders have voted in favour of the Deal. Locoguide (4497 JP) shareholder vote (which was quite straightforward as the top shareholder held more than two-thirds) was also confirmed on 25th June 2021. Both stocks are expected to be delisted on 29th September 2021. The combined NewCo will be listed on 1st October 2021. 
No July update
No July update
No July update

No July update

No July update

Malaysia

Comments 

No July update
No July update
14-Jul: the Offeror has granted the Company an extension of time to no later than 5.00pm on 30 August 2021 for the Company to respond to the Offeror with its decision as to whether or not to implement and to recommend the Proposed SCR to the Entitled Shareholders for their consideration, based on the terms set out in the SCR Offer Letter.

New Zealand

Comments (& link to insight)

15-Jul: At the Scheme Meeting,  shareholders representing 91.84% of all Tilt Renewables’ shares on issue, voted by proxy or at the meeting. Over 75% of the votes of shareholders in each interest class who were entitled to vote and who voted, were cast in favour of the Scheme. Further, of all the votes cast, 99.94% of votes were in favour of the Scheme.

Singapore

Comments (& link to insight)

15-Jul: Offer price revised to $0.435/share. Offer closes on the 2 August.


Before it’s here, it’s on Smartkarma

Event-Driven: Advantest Corp, Krafton Inc, Iress Ltd, Allcargo Logistics, Soho China Ltd, Myoung Shin Industrial Co.,Ltd, WH Group, Intouch Holdings, Xpo Logistics, Naturgy Energy Group SA and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Breaking Down Advantest’s Big Buyback
  • Krafton IPO: Bookbuilding Results & Index Fast Entry
  • Iress (ASX AU) Bats Away EQT – For Now
  • Allcargo (AGLL IN): Process Reinitiated! 70%+ Up Now. Should You Still Chase?
  • SOHO China (410 HK): In For a Penny …
  • KRX Autos Rebalancing on September 9: Watch Myoungshin Industrial as a New Add
  • WH Group Offer Doc Out – This Little Piggy Went To Market
  • GULF/INTUCH: Nearing The End of the Offer Period; Passive Selling to Come
  • SpinTalk: More Value To Be Had In Now Imminent XPO Logistics Break-Up
  • IFM/Naturgy: New Developments

Breaking Down Advantest’s Big Buyback

By Travis Lundy

On 28 July after the close, semiconductor & components test systems manufacturer Advantest Corp (6857 JP) reported Q1 results (with slides), revised its earnings forecast for the full year (revenues +10% vs end-April forecast for the year to 31 March 2022, OP and NP +17% and change), revised its “forecast” for its dividends, raising the H1 div from ¥38 to ¥50/share. This increase, even if the regular portion of the H2 div is kept flat, would raise the annual dividend to above the level of last year’s (which included a ¥10 commemorative dividend in H2). 

It also announced a plan to buy back shares – with a buyback program of up to 10 million shares (5.1% of shares out ex-treasury stock), spending up to ¥70 billion, with the program scheduled to run from 2 August 2021 through 24 March 2022. 

The reasoning is that in the Second Mid-Term Management Plan announced 24 May 2021, the total shareholder return ratio including treasury stock acquisition was targeted at a base rate of 50% or higher. The revision of the earnings forecast along with expected stronger operating cashflow prods the company to launch a buyback.  

So they have, and the dynamics are interesting because despite MSCI suggesting the company has 100% float, I see a Real World Float far, far below that. 


Krafton IPO: Bookbuilding Results & Index Fast Entry

By Brian Freitas

A short while ago, Krafton Inc (259960 KS) disclosed the results of its institutional book building and confirmed that the offer price has been set at KRW 498,000/share, the high end of the IPO range.

Bids came in for 1.157bn shares resulting in an oversubscription of 243 times the shares offered to institutions with domestics outbidding foreign investors in terms of number of shares. Bids at or above KRW 498,000 came from 95% of the shares that were bid for.

78% of the shares that were bid for came with a no lock-up commitment. Allocations that match the results of the bookbuilding will increase the free float of the stock making it easier for index Fast Entry. At the same time, there could be a lot of selling pressure as retail, institutions and pre-IPO investors all try to exit in the first few trading days.

Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) Fast Entry at the September futures expiry should be easy. At the IPO price, Krafton Inc (259960 KS) should get MSCI Fast Entry if less than 30% of the institutional allocation is locked up, while the stock should get FTSE Fast Entry even with 50% of the institutional allocation locked up. If a higher percentage of shares is locked up, the stock will need to close higher on listing day to get index Fast Entry.

With a large number of shares not subject to lock-ups, there could be selling on listing day. The stock should then stabilize and move higher on expectation of passive buying from FTSE and MSCI trackers. The stock could then drift lower before picking up ahead of the inclusion in the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX)


Iress (ASX AU) Bats Away EQT – For Now

By David Blennerhassett

The bidding for companies in Australia’s technology sector continues.

Trading and wealth management software provider Iress Ltd (IRE AU) announced this morning it had received a confidential, unsolicited, non-binding, and indicative proposal from Swedish PE outfit EQT Fund Management via a Scheme of Arrangement at a price range of between A$15.30 and A$15.50 cash per share.

EQT had previously fielded an Offer of A$14.80/share on the 18 June.

Iress’ board unanimously concluded that the Proposal was “conditional and did not represent compelling value for Iress shareholders“. But the board was:

prepared to provide it with access to limited non-public information so EQT can develop a proposal that is capable of being recommended to shareholders.

Iress closed up 15% today, but still 7% below the mid-point of the Indicative Offer price range.

As always, more below the fold.


Allcargo (AGLL IN): Process Reinitiated! 70%+ Up Now. Should You Still Chase?

By Janaghan Jeyakumar, CFA

India-based integrated logistics company Allcargo Logistics (AGLL IN) received a “Delisting Proposal” from its Promoter Group (Shashi Kiran Shetty and Talentos Entertainment Private Limited) in August 2020. Since then, the stock has gained more than 70%. 

Source: Smartkarma

I have covered this situation three times since the Deal was announced (as indicated by the “①” markers in the figure above) taking a Bullish stance on all three occasions as I believed the stock was fundamentally undervalued on a growth-adjusted basis. 

Last week, the company announced that the Delisting Process has been “reinitiated” causing the share price to rise sharply.

So what does this mean and how does this affect the timeline and the upside potential of the event?

Read below to find out.  


SOHO China (410 HK): In For a Penny …

By David Blennerhassett

Yesterday, SOHO China Ltd (410 HK)‘s shares were utterly cremated, ostensibly in response to a media report the pre-conditional Offer from the Blackstone Group faces regulatory obstacles.

At one stage, shares were down 31%, or 48% adrift of the $5.00/share offer price, and 13% below the undisturbed price, before recovering to close at $3.02/share.

Yet that media article was vague in context, and ultimately stopped short of saying the deal would be blocked. 

As they say, “In for a penny, in for a pound.”

More thoughts below the fold.


KRX Autos Rebalancing on September 9: Watch Myoungshin Industrial as a New Add

By Sanghyun Park

Myungshin Industries is running again. Myungshin Industrial is considered a Tesla-related stock because Tesla is a major customer. As Tesla recently announced surprise earnings, the stock price of Myungshin Industrial is also moving up.

In the past five trading days alone, the share price has risen more than 8%. Its current market cap has exceeded 1.7 trillion won.

So this stock appears to offer some opportunities from an index rebalancing trading perspective as well.

The first thing to consider is the inclusion of the KOSPI 200. In the rebalancing of last June, the stock price did not meet the market cap threshold due to the share price being drifted sideways for several months. However, in this December’s rebalancing, if the current share price uptrend continues, the possibility of inclusion seems quite high.

However, we can find trading opportunities in the KRX Autos sector index rebalancing, which takes place ahead of the KOSPI 200 rebalancing in December.

As for KRX Autos, KODEX currently manages an ETF that tracks it, and it has recently been showing good returns, resulting in a large inflow of funds. The AUM now amounts to ₩649.0B, which isn’t bad for an index containing only 17 constituents.

This is a float-adjusted market cap-weighted index with a 20% cap. Rebalancing takes place annually in September. The implementation date is the first trading day of the week following the last trading day for KOSPI 200 futures contracts. So, September 10 will be the implementation date for this year, meaning that we will see rebalancing trading at the close on September 9.

Index summary
Index nameKRX Autos
ETF
Samsung Kodex Autos ETF
Ticker091180
AUM₩649.0B
Price₩23,305
SO27,850,000
Number of constituents17
Weight type
Float-adjusted market cap
Cap20.00%
Rebalancing cycleAnnually
Rebalancing monthSeptember
Announcement date
One week ahead of implementation
Implementation date
The first trading day of the week following the last trading day for KOSPI 200 futures contracts
Next implementation date
September 10, 2021
Rebalancing trading
At the close on September 9, 2021
Screening base date
The last trading day of the month preceding the date of regular rebalancing
Screening period
The three months preceding the screening base date
Source: KRX & KODEX ETF

WH Group Offer Doc Out – This Little Piggy Went To Market

By Travis Lundy

On 6 June 2021, WH Group (288 HK) announced a proposal for a Voluntary Buyback Offer. The company decided it had enough cash and excess capital given its investment requirements and decided to return the excess to shareholders by buying up to 13% of shares outstanding. The Controlling Group would not tender, so they would see their stake increase and the minimum pro-ration would reach nearly 20%. 

The shares popped, then fell. Then they kept on falling. Yesterday and today they hit the level which has been a low point in the oscillator cycle for the last few years at HK$6.00/share.

I wrote about the situation that very day in WH Group Buyback Offer Announced – Strong Accretion Creates Accretion Risk. I wrote that based on then-current pricing, expectations, and the trading levels of its peers, it would not be considered expensive at prices higher than the previous close (which had, to be fair, seen a nice pop on news). 

But markets gonna market. 

The peers fell. DRAMATICALLY. The 7 names in a HK- or China-listed basket of peers have fallen 23% as live hog prices have fallen and the hog/feed ratio has also fallen, indicating hog producers are making even less than before (or, according to the NDRC, losing more than before).

The NEW News – The Offer Doc is Out

Last night, late-ish, WH Group (288 HK) released its Offer Document whereby it launches the Conditional Voluntary Cash Offer for 13% of its own shares at HK$7.80/share. 

  • This will need to be approved by Shareholders – both the Offer and the Whitewash Waiver (the Executive has indicated its intention to approve the WW subject to 50+% of Independent Shareholder votes cast supporting the Offer and 75% of Independent Shareholder votes). 
  • The Record Date for the EGM is 19 August 2021, the EGM is 16 August, and if approved, the Offer will become Unconditional on 16 August and will close on 30 August.
  • Cheques will be sent no later than 8 Sep. Shares not bought back will be returned no later than 9 Sep. 
  • Minimum pro-ration is 19.7%. 

There are things to do here for hedge funds and arbitrageurs.

There are things to do here for long-only funds who love the stock. 

This remains an interesting situation. 

Read on below.


GULF/INTUCH: Nearing The End of the Offer Period; Passive Selling to Come

By Brian Freitas

On 19 April, Gulf Energy Development Public Company (GULF TB) made a conditional voluntary tender offer for all shares in Intouch Holdings (INTUCH TB) that it did not hold at THB 65/share. The Offer Period commenced on 29 June and will end on 4 August at 4pm.

Post market close yesterday, Gulf Energy Development Public Company (GULF TB) announced that 318.154m shares (9.92% of the issued shares) of Intouch Holdings (INTUCH TB) have been tendered as of 27 July taking their holding in the company up to 28.85%. This could move higher by the close of trading on 4 August.

We expect FTSE and MSCI to lower Intouch Holdings (INTUCH TB)‘s investability weight/ FIF over the next week due to a drop in the free float and this will necessitate passive selling on the stock. 


SpinTalk: More Value To Be Had In Now Imminent XPO Logistics Break-Up

By Robert Sassoon

Back on January 5, 2021, we published an insight highlighting the proposed break-up of Xpo Logistics (XPO US) SpinTalk: Multiple Envy Propels XPO Logistics’ Break-Up Move To Get Its Mojo Back – via the separation of its logistics operations from its transportation business. This corporate event is now just a few days away and will be executed via  the tax-free spin-off of the logistics business GXO Logistics (GXO US) on August 2, 2021, effected through a 1-for-1 distribution of new GXO shares to XPO shareholders. With the separating companies having begun When-Issued trading as of July 22, 2021,  we believe this to be an opportune to review and update our value assessment of the upcoming  event. 

On a pre-spin basis , our updated assessment values  XPO at $163-$197, not too far from our first stab of $169-$186 made in January. This represents  an increase of 16% to 40% on the prevailing share price of $141.03,  which itself represents an 19% accretion from the $118.92 price printed in our January insight. However, with only one trading left before the separation becomes effective, the focus should be on the post-spin entities when they begin trading regular on Monday. While the XPO share price has reacted well to the break-up strategy, we believe there is still more value to be had in both sides of the spin-off as we lay out our thesis below.


IFM/Naturgy: New Developments

By Jesus Rodriguez Aguilar

Naturgy Energy Group SA (NTGY SM) is awaiting the decision made by the Government on the partial takeover launched by the Australian fund IFM for 22.7% of the capital. Meanwhile, Naturgy has published H1 2021 results and launched a new strategic plan (€14 bn in Capex and a €5.9 bn dividend payout) without awaiting the outcome of IFM’s takeover. According to Francisco Reynés, president of the company, Naturgy is going to focus on “organic” growth.

Naturgy has approved the payment of a first 2021 interim dividend of €0.3/share (payable on August 4), the new offer price will be €22.07/share.

The success of IFM’s partial takeover attempt is becoming increasingly difficult due to:

  • Delay in the approval of the takeover by the Spanish Government.

  • Economic outlook improvement, and sharp rise in commodities since takeover announcement on 26 January.

  • Criteria Caixa’s intentions to strengthen its shareholding in Naturgy.

  • New strategic plan and alliance with Sonatrach.

According to the last communication to the CNMV, CriteriaCaixa already holds a 25.997% stake in Naturgy. Assuming it will still purchase up to 29.9%, that is a 3.903% stake pending, some 37.84 mn shares, i.e. approximately €826 mn (at the closing price of 29 July) almost worth the volume of 50 trading sessions (at the last three months average daily volume). Therefore, the shares should be sustained for a while just on Criteria’s purchases.

At the closing price of 29 July, the gross spread to the new adjusted takeover price is c. 1.1% and to Capital IQ median consensus TP is 2.7%. The shares are highly likely to increase over the adjusted offer price on account of Criteria’s purchases. From an event-driven perspective, I recommend selling into strength.


Before it’s here, it’s on Smartkarma

Event-Driven: PropertyGuru , Nature Home Holding Company, Invesco Office J Reit, Del Monte Pacific, Spark Infrastructure, Beijing Huafeng Test & Control Technology-A, E Mart Inc and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • PropertyGuru/Bridgetown 2 SPAC Listing/Merger – Second Time Lucky – Some Food for Thought
  • Nature Home (2083 HK)’s Full Offer
  • Invesco Real Estate Deal for Invesco Office (3298) Successful – Now For the Aftermath
  • Del Monte Pacific HoldCo Trade Update – A Better Play for Del Monte PH IPO
  • Spark Infrastructure (SKI AU): KKR & OTPPB Pay Up
  • STAR50 Index Rebalance Preview: Big Turnover in a Volatile Market
  • Starbucks Korea – Emart Takes Ownership Control & Prepares for an IPO

PropertyGuru/Bridgetown 2 SPAC Listing/Merger – Second Time Lucky – Some Food for Thought

By Sumeet Singh

PropertyGuru and Bridgetown 2 announced, on 23rd Jul 2021, that they have entered into a business combination agreement which will see PropertyGuru go public in the US. The transaction will value PropertyGuru at an EV of US$1.35bn and equity value of US$1.78bn.

We have looked at the company’s prior listing attempt when it tried to list in Australia in 2019. In this note, we will comment on the current listing arrangement.

Link to our previous notes:


Nature Home (2083 HK)’s Full Offer

By David Blennerhassett

After wood flooring manufacturer Nature Home Holding Company (2083 HK) was suspendedpursuant to the Code of Takeovers and Mergers” on the 19 July, in Nature Home (2083 HK): Possible Takeover Target I concluded if an Offer was to be tabled, it would likely be via a Scheme and at ~HK$1.70/share.

And this is exactly what transpired. 

Late last night, Nature Home announced an Offer from its founding shareholders, by way of a Scheme, at HK$1.70/share. The Offer Price will not be increased. Nature Home does not intend to declare any dividends during the Offer period. 

Dehua Tb New Decoration A (002043 CH) has given an irrevocable rollover undertaking for its 19.6% stake. 

Standard Scheme conditions apply. On account of the Rollover Agreement, Dehua does not form part of the independent shareholders who will vote on the merits of the Scheme.

This Offer looks done.

More below the fold.


Invesco Real Estate Deal for Invesco Office (3298) Successful – Now For the Aftermath

By Travis Lundy

The bid by the Invesco parent company (Invesco Real Estate and affiliates) for Invesco Office J Reit (3298 JP) turned out successful, and the bidders gained 5,727,676 units out of the 8,802,650 units out in the float. They now own 65.07% (having started with 6%) so this will end up going to an EGM.

As described in the original Notice concerning the Statement of Opinion (Support) on Tender Offer by Invesco Group released by IOR on 17 June and in line with my earlier insights, there will be an EGM which will aim to squeeze out minorities. That would theoretically require a two-thirds vote to change the Articles of Incorporation. 

The key date is 31 October 2021 because that is the end of the current (15th) fiscal period. The buyer should try to get the squeezeout accomplished by the end of that period, and if possible, to push it onward to a new fund on or before that date which can be declared to be distributed so that the tax conduit remains in place. 

The language in the Opinion says… 

Additionally, the Tender Offerors intend to request the Investment Corporation to convene an extraordinary unitholders’ meeting before the end of October 2021, which is the end of the 15th fiscal period of the Investment Corporation (meaning the last day of the fiscal period, hereinafter the same), and amend its articles of incorporation to change the end of the 15th fiscal period from October 31, 2021 to April 30, 2022.

There is separate language which says there will be no more dividends for the period ended 31 October 2021. Investors who hold on to the other 34.93% are now long a thing which will not earn anything in future for them. 

Who still owns units? What does that mean? Is there an arb? Are there index trades? 

The answers to this and more below the fold. 


Del Monte Pacific HoldCo Trade Update – A Better Play for Del Monte PH IPO

By Zhen Zhou, Toh

Del Monte Pacific (DELM SP) (DMPL) owns 87% of Del Monte Philippines (1575316D PM) (DMPI) which is looking to IPO this year. 

DMPL’s Consumer Foods division, Del Monte Foods (DMFL) hasn’t been doing well since DMPL acquired it in 2014. The IPO of DMPI will help to deleverage DMPL which could lead to a much needed catalyst for further re-rating. Despite DMPL’s recent share price rally, there is still still room for further now that the IPO seems well underway.

We looked at DMPI’s IPO in:


Spark Infrastructure (SKI AU): KKR & OTPPB Pay Up

By David Blennerhassett

After rejecting two take-private proposals from PR outfit firm KKR and Ontario Teachers’ Pension Plan Board (OTPPB), Aussie poles and wires company Spark Infrastructure (SKI AU) has ostensibly supported the Consortium’s improved tilt of $2.95/share.

The Consortium (KKR/OTPPB)’s latest proposal, up from the initial Offer of $2.70/share, was considered by Spark’s board to be in the interest of its shareholders to engage further. As such, Spark has provided the Consortium with due diligence on a non-exclusive basis.

This Offer remains pre-conditional, and is subject to satisfactory DD, together with board approval from both KKR and OTPPB.

A firm Offer, should one unfold, would be subject to FIRB approval, and the approval from Spark’s shareholders at a Scheme Meeting.

Yet this looks like a full (er) Offer than the one rejected on the 15 July.

More below the fold.


STAR50 Index Rebalance Preview: Big Turnover in a Volatile Market

By Brian Freitas

The SSE STAR 50 (STAR50 INDEX) is a free float market cap weighted and is made up of the 50 largest stocks based on full market cap that are listed on the STAR Market.

The review period for the September rebalance ends on 31 July, the results of the rebalance will be announced towards the end of August and the changes will be implemented at the close of trading on 10 September.

With only 2 trading days left in the review period, we see Shanghai Shen Lian Biomedical (688098 CH)Piesat Information Technology (688066 CH)Guangzhou Fang Bang Electr-A (688020 CH)Shenzhen Lifotronic Techno-A (688389 CH) and Appotronics Corp Ltd (688007 CH) as high probability deletions from the index.

Coming up with a definitive list of inclusions is tougher given the subjectivity of the index rules for this review. The subjectivity comes from the whether the index committee uses a minimum listing history period of 12 months or 6 months.

Higher probability inclusions (if a 12 month minimum listing history is used) are Eyebright Medical Technology Beijing (688050 CH), Sinocelltech Group (688520 CH), Beijing Huafeng Test & Control Technology-A (688200 CH), Zhejiang Orient Gene Biotech-A (688298 CH) and Tinavi Medical Technologies (688277 CH).

Lower probability inclusions (if a 6 month minimum listing history is used) are Zhejiang Supcon Technology (688777 CH), Tianneng Battery Group (688819 CH), Bestechnic Shanghai (688608 CH), 3peak (688536 CH) and Pylon Technologies Co Ltd (688063 CH).

The inclusions, exclusions and capping changes will result in a one-way turnover of 8.45% and result in a one-way trade of CNY3.3bn.


Starbucks Korea – Emart Takes Ownership Control & Prepares for an IPO

By Douglas Kim

On 27 July, E Mart Inc (139480 KS) announced that it will take over the control of Starbucks Korea. Prior to this announcement, Emart and Starbucks Corp (SBUX US) owned 50% of Starbucks Korea, respectively. In this transaction, Emart will purchase an additional 17.5% stake in Starbucks Korea for 474.3 billion won (US$421 million) and GIC (Singapore) will purchase the remaining 32.5% stake in Starbucks Korea.

The implied valuation of 2.7 trillion won for Starbucks Korea in the acquisition of the additional 17.5% stake from Starbucks Corp (SBUX US) by Emart suggests a P/E of 23.5x, using the average annual net profit of Starbucks Korea in the past three years. Hence, this M&A deal for Starbucks Korea was completed at nearly 50% discount to the valuation of Starbucks Corp (SBUX US).

IPO of Starbucks Korea & SSG.com/Ebay Korea in the Next 3 Years – In the next three years, Emart is likely to IPO its key affiliates including Starbucks Korea (67.5% ownership) and SSG.com/Ebay Korea. Emart has agreed to acquire an 80% in Ebay Korea. We believe that these IPOs are likely to have a positive impact on the Emart shares as more investors try to value them on their potential market values, rather than book values. 


Before it’s here, it’s on Smartkarma

Event-Driven: BYJU’S, Hansoh Pharmaceutical, Li Auto Inc., Sakai Ovex, Japara Healthcare, Nature Home Holding Company and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Can After Tremors of the China Tutoring Sector Shakeup Impact India EdTech?
  • As The Dust Settles – Potential Index Changes to the FTSE China 50/A50 & HSCEI
  • Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower
  • Sakai Ovex MBO Reloaded – Up 27% from Last Weak Bump But Still Cheap
  • Japara Healthcare (JHC): Calvary Takes Charge
  • Nature Home’s Privatisation Bid

Can After Tremors of the China Tutoring Sector Shakeup Impact India EdTech?

By Devi Subhakesan

China-based after-school tutoring stocks saw the bulk of their equity value evaporate as authorities decided to turn the regulatory heat on this sector and also requiring the players to operate as non-profits. As the after-tremors of this move reverberate across the investment space, are the multibillion-dollar valuations of India’s rapidly growing edtech players at risk? Well-known private equity players ranging from Sequoia Capital to Tiger Global have invested in India’s fast-growing online education players – notably, BYJU’S (1391510D IN)  (valued at USD16.5 Bn) and Unacademy (valued at USD 2Bn) amongst others.

In this insight, we discuss if India’s rapidly growing online education sector is vulnerable to regulatory risks similar to that faced by after-school tutoring companies in China and how this could potentially affect large online tutoring players like Byju’s and Unacademy. We also look at leading investors in this space – and how they could be impacted.


As The Dust Settles – Potential Index Changes to the FTSE China 50/A50 & HSCEI

By Brian Freitas

As regulations have changed in China, and as the market positions for regulations that could be changed in China, the fallout has resulted in markets selling off with a few sectors firmly in the crosshairs.

What started off with the ‘three red lines’ for real estate companies, the pulled IPO of Ant Financial Services Group (6688 HK) in November 2020 and regulating monopolies in big-tech has spread to the online education industry, food delivery industry, property service companies and the market is bracing for regulation of the medical and pharmaceutical industry.

The rampant selling of stocks that are affected by the regulations or could be affected will have an impact on the upcoming September index rebalances for the FTSE China 50 Index and FTSE China A50 Index (XIN9I INDEX) and the December rebalance for the Hang Seng China Enterprises Index (HSCEI INDEX).

In addition, there will be a lot more mainland China companies that will list in Hong Kong since they will not need to (or will find it easier to) get approval from the Cyberspace Administration of China. That will also have implications for these indices.

In this Insight, we look at the potential changes to the FTSE China 50, FTSE China A50 Index (XIN9I INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX) in the upcoming reviews based on the close of trading on 27 July.


Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower

By Brian Freitas

Li Auto Inc. (LI US) has got approval from the HKEX (388 HK) for a dual primary listing. Media reports indicate that the company could raise between US$1bn-2bn in the offering. Based on the XPeng (9868 HK) timeline, Li Auto could list around 6-9 August.

Xpeng (XPEV US) / XPeng (9868 HK) raised US$1.8bn via a dual primary listing earlier this month and Li Auto Inc. (LI US) is following closely behind. Maybe NIO Inc (NIO US) comes next.

We expect Li Auto Inc. (LI US) to get Fast Entry to the Hang Seng Composite Index (HSCI) though, as a WVR security, the stock will only be eligible for Stock Connect once it has completed 6 months of listing plus 20 trading days.

Li Auto could also be included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December review. This will lead to a further drop in the HSCEI 2022 dividend futures since we do not expect Li Auto Inc. (LI US) to pay dividends in the near future, while the potential deletion is a higher dividend yielding stock.


Sakai Ovex MBO Reloaded – Up 27% from Last Weak Bump But Still Cheap

By Travis Lundy

In early February 2021, the CEO of Sakai Ovex (3408 JP), who owned very few shares, and an activist investor decided to launch an MBO for the company at ¥2,850/share. 

The stock had been trading cheap, and the price was “high” but the price was wrong. It needed to be 40% higher – at a minimum – in my opinion. I wrote a detailed breakdown of why I thought so in Sakai Ovex MBO – Wrong Price (And the Bidder Knows It). The management forecasts had been low-balled and I called that out, and the equity affiliate earnings somewhat ignored. Get rid of the financial assets and the Offer Price was at negative enterprise value.  

My conclusions on 9 February were as follows:

Not long after that, the bidders offered a very weak bump to ¥3,000/share, discussed in Savai Ovex MBO – A Very Weak Bump. This was not enough. The shares traded above terms and revised terms, only falling below when the Tender Offer went ex-. 

In the end, the bid was not successful. They ended up missing by 3% of the shares. BUT…. in the process, they gained an activist in Murakami-san, who did indeed pop in to own 6.9%, through City Index Eleventh, discussed in Sakai Ovex Tender Offer Fails But The Stock Gains an Activistafter the Tender failed. CIE later revised their position to 7.93% which meant they were the fulcrum investor to get this deal over the line the next time, and now they own 8.33% according to today’s document.

Since Then…

The shares have traded at or around ¥3,000/share ± ¥100/share for the past three months, trading in lower-than-pre-announcement volumes.

Earnings were decent when reported in May. And the forecast for the year to March 2022 turned out to be substantially higher (revenues nearly 10% higher than the management forecast included in the Tender Offer documentation, and OP 35% higher).

And today we have new news.

The Bidders are back. And now City Index Eleventh is joining them. It pays to be the fulcrum investor. 

And now they are bidding ¥3,810. Which is still cheap. 

Much more below the fold. 


Japara Healthcare (JHC): Calvary Takes Charge

By David Blennerhassett

On the 30 April, aged-care Australian listed operator Japara Healthcare (JHC AU) announced it had received an unsolicited, indicative, conditional, and non-binding Offer from Little Company of Mary Health Care – otherwise known as Calvary – by way of a Scheme, at A$1.04/share.

On the 5 June, Calvary increased the indicative Offer price to A$1.20/share.  JHC’s board concluded it was appropriate to grant Calvary due diligence access.

On the 15 June, the Bolton Clarke Group made a conditional, non-binding indicative proposal by way of a Scheme, at A$1.22/share. The Offer was subject to due diligence, financing, unanimous support from JHC’s directors, and final approval from the Bolton Clarke board. 

Due diligence access, consistent with that afforded to Calvary, was also provided.

JHC has now announced that it has entered into a Scheme Implementation Deed (SID) with Calvary, by way of a Scheme at A$1.40/share. The consideration will be reduced by any dividends paid. 

JHC’s board of directors have unanimously recommended the Scheme, in the absence of a superior proposal and subject to an independent expert concluding the Scheme is fair & reasonable. 

This looks done & dusted. 


Nature Home’s Privatisation Bid

By Arun George

Nature Home Holding Company (2083 HK) manufactures and sells flooring products and customised home decoration products. After market close on Tuesday, it announced a privatisation offer by way of a scheme of arrangement from New Modern Home Limited. The offeror will offer HK$1.70 cash per scheme share. The bid represents a premium of 39.3% over the closing price of HK$1.22 per share on the last full trading day (16 July 2021 prior to the trading halt). 

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. As disinterested scheme shareholders represent 292.1 million shares or 21.20% of shares outstanding, the 10% blocking stake is 29.2 million shares or 2.12% of shares outstanding. No shareholder holds a blocking stake. 

Post-privatisation, the offeror plans to re-list all or part of its businesses in the PRC which while refreshingly honest, may not sit well with some shareholders. Overall, we think the offer price is attractive and that the privatisation bid will be successful. 


Before it’s here, it’s on Smartkarma

Event-Driven: New Oriental Education, Softbank Group, Gaotu Techedu, SK IE Technology, Nongfu Spring, Barito Pacific, Roland Corp, alstria office reit-ag and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • China’s New After-School Tutoring Policy Is Out – The End of the Line For Many?
  • JAPAN PASSIVE: Who Owns What 2021?
  • As China EduTech Goes Not-For-Profit Will India’s Promising Alternatives Fill Their Wake?
  • MSCI Standard Korea QIR Adds: SKIET & Ecopro BM Exit Points
  • Full Circulation Of H-Shares: July 2021 Update
  • LQ45 Index Rebalance: BRPT, TINS In; BTPS, CTRA Out
  • Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages
  • Brookfield/Alstria Office REIT: Potential Takeover

China’s New After-School Tutoring Policy Is Out – The End of the Line For Many?

By Travis Lundy

On Friday 23 July, the 21st Century Business Herald and Bloomberg followed up one stories which had come out a couple of days earlier (which suggested much more regulation on after-school tutoring businesses), suggesting that China would possibly ban for-profit businesses which tutored China’s K-12 students on school curriculum subjects. The same articles Friday suggested no listed businesses would be able to purchase or invest in such businesses, and foreign capital would not be allowed to invest in the businesses.

This was discussed pre-US open in China After School Tutoring Online Education Stocks Crushed – Investors Schooled. This seemed dramatic, and possibly dire. Stocks in the K-12 education sector in Hong Kong fell dramatically. Stocks listed in the US fell even more. A custom index of 16 names fell nearly 30%. An index of just the three major US-listed names – TAL Education (TAL US), Gaotu Techedu (GOTU US), and New Oriental Education (EDU US) – was down 60% pre-open.

That wasn’t enough as the basket closed 6% lower from there. 

It looks like even that may not have been enough.

The NEW News

On Saturday, the State Council followed up with a document“Opinions on Further Reducing the Workload of Students and The Burden of Out-of-School Training in the Compulsory Education Stage”

The Opinion is a wide-ranging polemic with instructions to local governments, school systems, educational authorities, etc to deal with the reduction of “double burden” on kids and parents of school system and after-school tutoring system on the same subjects as taught in the school system. There is lots of content suggesting significant detail on things like homework in regular school, who is to be given how much, how much they are not to do, what school administrators in the public school system should do to organise after-school and summer programs. 

There are, of course, the sections about the after-school tutoring businesses – strictly enforcing regulations, ensuring proper qualifications, and severely punishing those institutions which fall short, especially those with a profit incentive. 

If I were in that business, I would stop making a profit immediately. I would refund payments for currently in-progress classes so that the only payments related to teacher payments and bare minimum support costs are done. I would provide refunds to anyone who would take them so as to immediately cease the business. 

Some businesses may be able to pivot. Some may be liquidation candidates. Some will simply be shut down to take the loss. 

But this is a big change, and it has been out there. And it looks like when people did not see it quickly enough, it was decided Something Must Be Done. Now it is going to be done.


JAPAN PASSIVE: Who Owns What 2021?

By Travis Lundy

A few years ago I started this series, and I updated it last year. Since last year, it has been a top 10 insight in terms of views. 

I personally think it is important for investors of all types to understand WHO OWNS WHAT. 

Many fundamental investors are reticent to spend any time on this but there are many reasons why active investors in Japan should be interested in understanding the ownership and shareholder dynamics of passive investors in Japan.

Some of the places active investors will see their influence are:

  • Stories intermittently published about the BOJ’s presence in Japanese ETFs (especially the fact that it owns 85+% of the outstanding ETF market),
  • Relatively constant interest in Nikkei 225 rebalances like the one we saw in July 2020, which helped push up Japan Exchange Group (8697 JP) by 30+% from May to July, then helped it slide 13% in a week, or the changes in the Nikkei 225 review rules published earlier this year which may change what happens this September to a few large caps, and the announcement of the BOJ that it would no longer buy Nikkei 225 ETFs which started a long slide in Fast Retailing (9983 JP) shares against comps and the Nikkei itself. Long “held up” by ‘market inventory’ and Nikkei 225 ETF buying, when the BOJ stopped, it removed the cushion and existing inventory holders had to sell out. 
  • Then if you look at the shareholder structure of Fast Retailing today, you will see that it is STILL fundamentally a serious problem for large foreign active investors who would actually wish to take an active (but not activist) position. Real World Float on the stock is, by my calculation, less than 15% of shares outstanding. 
  • The relatively recent policy of increased stewardship regarding the passive management portion of the GPIF (the Government Pension Investment Fund) – an investing heavyweight in Japan.
  • The timing and quantum of after-event support or overhang on corporate actions such as buybacks, secondary offerings, primary offerings, mergers, etc. 
  • Index inclusions mean big flows. If you follow the insights on TOPIX Inclusions by Janaghan Jeyakumar, CFA and myself, you will often see big moves. Sometimes these stocks move 50% between when we write about them and when they go into the index. If you own them and are considering an exit, you need to know when to take profits, and the dynamic of the liquidity. If you are thinking about getting in for fundamental reasons, it pays to know early so you can get ahead of the major flow.
  • The return of Toshiba Corp (6502 JP) to the TSE First Section in Q1 this year changed the foreign shareholder percentage ownership, lowering it by 10%. Smartkarma readers knew this last year and in January, which prepared them for the June AGM when the shareholder category ownership was released.
  • The changes to the TSE’s market structure, which will affect TOPIX membership, which will affect many companies’ issuance, buyback, share cancellation, etc decisions over the next several months. They are doing this because of the TSE Prime listing rules which will effectively also determine whether or not they will be included in TOPIX in future, or whether they will fall out of TSE Prime and will see constant selling over late 2022 to early 2025. 

Of course, TOPIX is just over half of the passive tracking AUM in Japan. There’s more. 

Find out WHO OWNS WHAT in Japan Passive below the fold. 


As China EduTech Goes Not-For-Profit Will India’s Promising Alternatives Fill Their Wake?

By Shifara Samsudeen, ACMA, CGMA

China’s new rules and regulations in private tutoring have triggered a massive sell-off in the education companies including Gaotu Techedu (GOTU US) , New Oriental Education (EDU US) and TAL Education (TAL US) . The new rules announced by Beijing include turning after-school tutoring companies (tutoring on school curriculum) into not-for-profit which would prevent online tutoring platforms from raising foreign capital and at the same time seeking public listing. After-school tutoring is in huge demand in China and soaring tuition fees have become a huge burden on parents and the government of China is attempting to reduce the cost of education in order to encourage couples to have more kids as education accounts for a large share of childcare in China.

Similarly, private tutoring in India is in huge demand as a large majority of K-12 school students in the country attend after-school tutoring. Known as tuition culture, it has been prevalent in India for decades which supplements the school education of children. In this insight, we examine the private tutoring market in India (including online) and the likelihood of similar directives (to that of China) and how it could impact the fundamentals and valuations of online education platforms in the country.


MSCI Standard Korea QIR Adds: SKIET & Ecopro BM Exit Points

By Sanghyun Park

SKIET and Ecopro BM, two stocks most likely to be included in MSCI Standard Korea’s August QIR, are continuing to rise. Today alone, SKIET is up 4.25%, and Ecopro BM is up by a whopping 7.56%.

Today is day 6 of our 10-day review period. Assuming the market cap cutoff of this QIR is US$2.8B, both stocks have exceeded the full market cap and float-adjusted market cap thresholds on all 6 trading days.

AdditionsSK IE Technology Co LtdEcopro BM Co Ltd
Float rate20.00%50.00%
Beat the threshold by % – full market cap
7. 19159.55%9.56%
7. 20163.24%1.54%
7. 21165.70%1.95%
7. 22183.53%0.56%
7. 23189.68%3.01%
7. 26203.21%9.29%
Beat the threshold by % – float-adjusted market cap
7. 193.82%9.56%
7. 205.29%1.54%
7. 216.28%1.95%
7. 2213.41%0.56%
7. 2315.87%3.01%
7. 2621.29%10.54%
Source: KRX & Clepsydra Capital

Although there remains an uncertainty risk for Ecopro BM’s float rate (estimated at 50%), it is likely that these two stocks will be included in the MSCI Standard this time.

The passive impact wouldn’t be small. SKIET should expect 1.51x its ADTV with an estimated index weight of 0.27%. Ecopro BM will likely see an even more substantial passive inflow, estimated at 1.81 times the ADTV, with an estimated index weight of 0.23%.

Passive inflowSK IE Technology Co LtdEcopro BM Co Ltd
30-day average daily trading volume717,466396,180
– Value₩145.0B₩99.8B
Total estimated passive funds mirroring MSCI Korea₩80,000.0B₩80,000.0B
Float-adjusted market cap₩3,493.6B₩2,882.3B
Estimated weight in MSCI Korea0.27%0.23%
Estimated passive inflow₩218.3B₩180.1B
Estimated passive inflow/ADTV1.51x1.81x
Source: KRX & Clepsydra Capital

Full Circulation Of H-Shares: July 2021 Update

By David Blennerhassett

This is the latest update in a series dating back to Legend’s Conversion of Domestic Shares in June 2018.

To date, 28 companies have sought approval to convert their domestic shares and/or unlisted foreign shares into H shares, which would then be eligible to be listed and traded on Hong Kong’s stock exchange.

16 companies have now been given CSRC and Hong Kong listing approval to convert such shares. Five of those have seen various degrees of movement in the converted shares.

Sichuan Languang Justbon Service Group (2606 HK) received approval late last year but did not convert – and was subsequently subject to an Offer. 

To date, two companies have withdrawn their application to convert their domestic shares.  Both of these companies have now been subject to Offers.

As always, more below the fold. 


LQ45 Index Rebalance: BRPT, TINS In; BTPS, CTRA Out

By Brian Freitas

The LQ45 Index is a market cap weighted index of the 45 most liquid stocks listed on the Indonesia Stock Exchange (IDX). The LQ45 Index covers at least 70% of the stock market capitalization and transaction values in the Indonesia Stock Market.

The IDX has announced the changes to the LQ45 Index as a part of the August review. Barito Pacific (BRPT IJ) and Timah Persero (TINS IJ) have been added to the index while Bank BTPN Syariah (BTPS IJ) and Ciputra Development (CTRA IJ) have been deleted from the index.

We expect the impact of passive funds (and active funds) will be quite high on Barito Pacific (BRPT IJ), Bit Digital (BTBT US) and Ciputra Development (CTRA IJ) and significantly lower on Timah Persero (TINS IJ).

The changes are effective after the close of trading on 30 July, so there are only 4 trading days before passive funds have to rebalance their portfolios. Active funds benchmarked to the LQ45 index will also trade over the next few days so as not to deviate too far from their benchmark.


Short Roland/Long Yamaha as Roland May Fail to Meet Demand Due to Production Shortages

By Oshadhi Kumarasiri

Roland Corp (7944 JP), a global leader in the electronic musical instruments industry, has been shifting production away from China and Japan to concentrate most of the production activities to the Malaysian plant established in 2014 as a part of the business turnaround process that followed a vicious downward spiral in the post-global financial crisis (GFC) environment.

While demand for musical instruments soars across the world, COVID-19 lockdowns in Malaysia continues to affect Roland’s production capabilities. We believe Roland may fail to meet demand amidst disruptions to the main production facility in Malaysia while Yamaha Corp (7951 JP) seems to be well placed to outperform the market through capturing Roland’s lost demand.


Brookfield/Alstria Office REIT: Potential Takeover

By Jesus Rodriguez Aguilar

On 21 July, Bloomberg reported that Canadian Brookfield Asset Management-Cl A (BAM/A CN) was working with advisers as it considers a potential bid for alstria office reit-ag (AOX GR). alstria office’s shares jumped on the news and closed 9% higher. A buyout of the company would be the biggest take-private deal in Germany in 2021. On the same day, alstria stated it “takes note of the press rumours with respect to a potential takeover offer by Brookfield Asset Management Inc.”.

The interest of Brookfield in alstria is a bet on German office market recovery. The portfolio of alstria should hold well in value vis-à-vis any further waves of the pandemic. Moreover cash flows are stable as alstria is mainly exposed to public sector tenants with long-term leases and it has stable occupancy rates.

Before the pandemic, alstria used to trade at a premium to BV, as of 23 July, it traded at 0.94x, and it is showing a remarkable recovery since the lows of November 2020, driven by vaccination campaigns and the soon-to-happen “back-to-office”.

On 4 March 2021, S&P upgraded Alstria to BBB+ (outlook stable) on sustained low debt leverage (low ratio of debt to debt plus equity of 27.6%), material share of public tenants and long lease maturity profile and robust liquidity profile.

A takeout price could come in at €18.68, 10% premium over the last reported EPRA NTA and 6.4% premium to the closing price on 23 July. My PT is economic-profit based and equates to a 1% discount to EPRA NTA 22e (source Capital IQ consensus). alstria trades at 3.5% FFO yield. and 3% dividend yield.

German property values continue to increase. The ECB does not seem worried about inflation as long as the delta variant is spreading and will not stop its debt purchasing program in the short term, therefore monetary policy will likely remain unchanged.

Recommendation is Long AOX GR, PT €18.68.


Before it’s here, it’s on Smartkarma

Event-Driven: Chinasoft International, Hyundai Construction Equipment, Liberbank SA and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • MSCI Aug 2021 Index Rebalance Preview: Potential Changes After Week 1; Positioning at Work
  • NPS New Benchmarks for Local Stocks: NPS-KR250 (Direct) & KOSPI+KOSDAQ 150 (Consignment)
  • Unicaja/Liberbank: Final Stretch

MSCI Aug 2021 Index Rebalance Preview: Potential Changes After Week 1; Positioning at Work

By Brian Freitas

MSCI is scheduled to announce the results of the August 2021 Quarterly Index Review (QIR) on 11 August (early morning of 12 August Asia time) with the changes implemented after the close of trading on 31 August.

The review period for price cut-off began on 19 July and will run through to 30 July. After the end of week 1 of the review period, most of the changes are expected in China with a few changes for Hong Kong, Taiwan, Korea and Thailand.

Most of the names appear on the add/delete list every day during the review period, while a few names appear/drop out of the list of potential changes. The final list will depend on the day that MSCI chooses. Based on historical data, there is over a 90% probability that MSCI chooses a day from week 1 to compute the market cap for the stocks that will determine the list of inclusions and exclusions.

Post week1 of the review period, potential inclusions to the MSCI Standard Index are SITC International (1308 HK)Huabao International Holdings (336 HK)Momo.Com Inc (8454 TT)Chinasoft International (354 HK)China United Network A (600050 CH)Ecopro BM Co Ltd (247540 KS), SK IE Technology (361610 KS), CRRC Corp Ltd A (601766 CH)Beijing Wantai Biological-A (603392 CH)Beijing Kingsoft Office Software-A (688111 CH)Beijing Roborock Technology-A (688169 CH)Imeik Technology Development (300896 CH)StarPower Semiconductor Ltd (603290 CH)Advanced Micro-Fabrication Equipment-A (688012 CH), Ginlong Technologies Co Ltd (300763 CH) and China Baoan (000009 CH).

Potential exclusions are Bangkok Bank PCL (BBL/F TB), Bank of East Asia (23 HK), Taiwan Business Bank (2834 TT), KMW Co Ltd (032500 KS), Perennial Energy Holdings Ltd (2798 HK), Douyu International Holdings (DOYU US) and Gaotu Techedu (GOTU US).

The August QIR will also implement tranche 2 of Sea Ltd (SE US)‘s inclusion in the MSCI indices and will result in the index inclusion factor increasing from 0.05 to 0.25.

There is also a very high probability of a 75% reduction in the  SK Telecom (017670 KS)‘s Foreign Inclusion Factor (FIF) due to a drop in the availability of foreign room on the stock.


NPS New Benchmarks for Local Stocks: NPS-KR250 (Direct) & KOSPI+KOSDAQ 150 (Consignment)

By Sanghyun Park

New benchmarks for domestic equity

The National Pension Service has disclosed the following reform plan about the direct and consignment management benchmarks for domestic stocks.

  • As for the direct management, the National Pension Plan plans to internally develop and use a new index called NPS-KR250 by adding additional 50 KOSPI stocks to the KOSPI 200 constituents.
  • Regarding the consignment management, the KOSPI + KOSDAQ 100 stocks are currently used as benchmarks. This benchmark is reorganized into KOSPI + KOSDAQ 150, with 50 KOSDAQ stocks added.
BenchmarkPreviousNew
Direct managementKOSPI 200
NPS-KR250 = KOSPI 200 + additional 50 KOSPI stocks
Consignment managementKOSPI + KOSDAQ 100
KOSPI + KOSDAQ 100 + additional 50 KOSDAQ stocks
Source: NPS

NPS size in the local stock market

As of the end of April 2021, the National Pension Service has ₩883.6T in assets under management, of which ₩178T is invested in domestic stocks. Considering that the market capitalization of the KOSPI and KOSDAQ markets is currently around ₩2,800T, the national pension account for 6% of the Korean stock market.

Asset allocation status as of the end-April, 2021
Domestic Equity₩178.1T
Global Equity₩222.4T
Domestic fixed income₩340.5T
Global fixed income₩48.8T
Alternatives₩92.8T
Source: NPS

The proportion of local equity is 20.17%, down slightly from the end of last year, but still far exceeding the target of 16.80% this year.

Direct vs. consignment for local equity

As of the end of April this year, 52.03% of the funds invested in domestic stocks are direct management, then divided into active (19.43%) and passive (32.60%). The proportion of consignment management is 47.97%, and all of it is operated as active.

Direct vs. consignment for local equity2019 yearendWeight2020 yearendWeightApril-end, 2021Weight
Direct management₩71.6T55.15%₩93.4T52.95%₩92.6T52.03%
– Active₩27.0T20.40%₩35.0T19.82%₩34.6T19.43%
– Passive₩44.6T33.75%₩58.4T33.03%₩58.0T32.60%
Consignment management₩60.6T45.85%₩83.3T47.15%₩85.4T47.97%
– Active₩60.6T45.85%₩83.3T47.15%₩85.4T47.97%
– Passive₩0.0T0.00%₩0.0T0.00%₩0.0T0.00%
Total domestic equity₩132.3T100.00%₩176.7T100.00%₩178.0T100.00%
Source: NPS

The passively operated funds (32.60% of the total funds allocated to the domestic equity) are about ₩58T, and the benchmark is KOSPI 200. But not all amounts mechanically track the KOSPI 200. NPS employs various enhanced passive strategies, such as dividends, active quant, and factor model-based, in addition to conventional passive operations. To this end, NPS has developed and used various indices on its own since two years ago.


Unicaja/Liberbank: Final Stretch

By Jesus Rodriguez Aguilar

Unicaja Banco SA (UNI SM) and Liberbank SA (LBK SM) will soon finalize their merger after receiving all the authorisations. On 19 July, the Spanish Government gave the green-light to the integration, which is expected to close on 30 July.

Unicaja, as the purchasing entity, plans to issue around 1,075 million new shares to meet the agreed exchange ratio (2.7705 LBK SM x 1 UNI SM). Unicaja will have a holding of 59.5% in the new bank, while the remaining 40.5% will be distributed among Liberbank shareholders.

Unicaja will become the fifth largest domestic bank, with assets totaling c. €110 bn, 9,000 employees and 1,554 branches (of which 300 will be closed). Unicaja will record a “badwill” of €2,015 mn in the merger with Liberbank (which trades well below its BV), and will use it to cover the cost of reducing the workforce.

Liberbank’s shares are trading at a 0.8% discount (adjusted for the merger ratio).

  • The all-share merger will see Unicaja absorb Liberbank at an exchange ratio of 2.7705 Liberbank shares for 1 Unicaja share.

Although liquidity is thin, recommendation is short UNI SM/long LBK SM. Effective merger is highly likely to happen on 30 July.


Before it’s here, it’s on Smartkarma

Event-Driven: Kuaishou Technology, Capitaland, Samsung Heavy Industries, SK Telecom and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Kuaishou Lock-Up Expiry – Getting Close to IPO Price, with US$18bn+ Lock-Up. CCASS Movement as Well.
  • Last Week in Event SPACE: Capitaland, Boral, Milton/WHSP, Santos/Oil Search, Education Profit Ban
  • Samsung Heavy Industries Passive Flow Trade on Relisting, August 10
  • Index Rebalance & ETF Flow Recap: Capitaland, Boral, Xpeng, SK Tel, MSCI, KRX BBIG

Kuaishou Lock-Up Expiry – Getting Close to IPO Price, with US$18bn+ Lock-Up. CCASS Movement as Well.

By Sumeet Singh


Last Week in Event SPACE: Capitaland, Boral, Milton/WHSP, Santos/Oil Search, Education Profit Ban

By David Blennerhassett

Last Week in Event SPACE …

  • For those buying Capitaland (CAPL SP) because it is cheap and you expect to sell it to someone else once others realise how awesome it is, try to understand what people will get out of it, and the pace at which they will allocate money. 
  • But I wouldn’t short Boral Ltd (BLD AU) here. Not until you have some visibility whether Seven Group Holdings (SVW AU) keeps extending, and/or closes in on 75%. If Seven gets to 75%, walk away – they could theoretically force-delist if they have their paperwork in order.
  • The Milton Corp Ltd (MLT AU) / Washington H. Soul Pattinson and Co. Ltd (SOL AU) merger is complicated. But it still feels like people don’t get it. There’s some really interesting convexity here. Still. And the supply/demand tilt is remarkable.
  • Oil Search Ltd (OSH AU)‘s latest setbacks – MD Kerian Wulff departure, Mubadala’s sell-down, and Rick Lee’s short-term memory loss – add to past failures and staff changes, stoking shareholder frustration. It is arguable whether this loss of confidence in the board plays into Santos Ltd (STO AU)‘s court or not.
  • The initial story is that PRC online education platforms would not be allowed to raise money in capital markets, sell securities, go public. The bigger picture is that they are effectively being pushed out of business. There is a possibility this kills the entire business for some platforms. 
  • Not surprisingly, Intouch Holdings (INTUCH TB)‘s IFA says the Offer from Gulf Energy (GULF TB) is “appropriate”. Equally unsurprising, Advanced Info Service (ADVANC TB)‘s IFA has the opinion that the shareholders should reject the Tender Offer from Gulf.
  • 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)

M&A – ASIA

Capitaland (CAPL SP) (Mkt Cap: $15.5bn; Liquidity: $25mn)

The proposed construct, as discussed in the previous Capitaland (CAPL SP) Restructuring Is Big But Still Vague. Lots of Fine Print to Read, was complicated, and difficult to value, and required reading a lot of fine print, only some of which we had available. The previous Friday, Capitaland announced it had received SGX-ST approval to list Capitaland Investment Management (CAPINVEST SP). Saturday night, Capitaland released its Scheme Document. It is 922 pages of fine print. There is an Introductory Document which is shorter. It is 744 pages. There is also a brief 8-page press release and an Announcement of the Scheme Meeting.
  • When this was announced, there was a trade to be long and buy the dip, but this is not and has not been a very high beta trade. One has had to lever the position using the short CICT hedge for the distribution, and the implied leverage from going long and taking out forward cash (i.e. borrowing S$0.951/share, shorting CICT, and then using “equity” for the remainder to fund one’s Capitaland long position. Going forward, Travis Lundy expects the trade is to sell if it goes too much further.
  • The IFA’s valuation of Pro-Forma CLI is a bit on the aggressive side. The same IFA would most likely suggest that if the parent wanted to buy out minorities of that same entity, paying 0.8x NAV would be quite generous.  Owners of Pro-Forma CLI will get a basket of REITs, private property funds, some properties which could get sold to REITs, etc. The kicker here is uplift. If the buildings can be sold to the REITs that CLI manages at a significant premium to NAV or RNAV, that would be positive for owners of CLI. They would end up buying back 20-40% of the assets in the form of the ownership of REITs in the Listed Fund segment, they would still sell 60-80% at a decent price. The likelihood of getting a price far north of 1.0x RNAV is perhaps debatable.  And this deal has already seen an uplift. 
  • For those who are uber-bullish CAPL here, Travis would urge them to figure out where they expect to get out of the non-listed real estate assets. If there is another 20% vs the mark, because the “fair value” ascribed by the IFA and the independent property valuation experts is, in fact, quite light, then you could see 30% upside on Pro-Forma CLI from here, and that would be 25% upside on CAPL. But think about the timeframe. And think about the buyer of that S$14.5bn of property at 1.2x RNAV and carrying value.

Boral Ltd (BLD AU) (Mkt Cap: $6.0bn; Liquidity: $46mn)

After Boral’s board rejected Seven Group Holdings (SVW AU)‘s $6.50/share Offer in its Target Statement of 9 June, Seven bumped its Offer on the 25 June, stating it would pay $7.30 cash if they get to 29.5%, and up to $7.40 cash if they get to 34.5%. Seven reached 29.5% by July 1, 34.5% less than a week later, then 52.65% on the 15 July. Clearing 50% automatically extended the Offer period (pursuant to s624 of the Corporations Act) to the 29 July – i.e. a two-week extension. Travis Lundy and I have tackled this Offer herehere, and here.

  • Seven now has 59.23%. With the Offer tentatively expected to close this coming week, in Boral Ltd: Seven’s Done Deal. What Happens Next?, I addressed a handful of questions I and other readers have raised on the deal, such as how the creeper rule will apply under certain circumstances, whether Boral remains listed, will Seven extend the Offer. and where will shares trade If Seven holds <75% at the close of the Offer – i.e. no further extension.  
  • Boral is a constituent of the S&P/ASX 200 (AS51 INDEX), FTSE All-World and the MSCI Small Cap indices. FTSE has already reduced the investability weight for the stock earlier this month and could reduce the investability weight further at the September QIR. In Boral (BLD AU): Index Impact from Seven’s Offer, Brian Freitas reckon the Boral’s weight in the S&P/ASX 200 (AS51 INDEX) should also be reduced at the September QIR.

Milton Corp Ltd (MLT AU) (Mkt Cap: $3.1bn; Liquidity: $3mn)

In mid-late June, the two largest Listed Investment Corporations in Australia – Milton and Washington H. Soul Pattinson and Co. Ltd (SOL AU) – announced plans to merge, with SOL (a.k.a. “WHSP”) becoming the surviving entity. Milton had been trading at a discount to NAV, where NAV was 97% or so listed stocks. WHSP had been trading at a premium to NAV. WHSP agreed to pay a premium to NAV for MLT shares, but the construct provided for some really interesting other optionality (some positive, a little negative) for MLT shareholders. 

  • If you want to trade the pure arbitrage, trying to monetise the option but not caring about the tilt to be long because of the index event, then you need to hedge out all the bits. If you are not into complicated things, and you like both WHSP and index risk, AND the upside tilt of the WHSP index inclusion, and you are a LONG ONLY investor… You should replace $100 of S&P/ASX200 exposure with $100.00-108.00 of MLT. You should ride the implied call option long position in WHSP. 
  • The STRAIGHT ARB value without monetizing the option, was (at the time of Travis’ insight) 2.3% for about 2.0-2.5 months. That is a decent annualised rate.  The TRUE ARB value where you hedge out the optionality (long and short) offers about 4.5% net for 2.0-2.5 months. 
  • The SMART ARB value gets you 2.3% of spread plus some portion of the “tilt” from the convexity AND it gets you – currently – about 70% of the delta of 60-100 days of ADV to buy. However, you need to own WHSP borrow (pre-borrow or pay-to-hold) because you will need it when the event comes. If you wait, all the borrow will be gone (a large chunk of it is already gone.

(link to Travis’ insight: Milton’s Marvelous Arb Meanders Along… Marvelously)

Oil Search Ltd (OSH AU)  (Mkt Cap: $6.5bn; Liquidity: $35mn)

When questioned by analysts at an investor briefing on the 19 July as to any takeover offers, OSH’s chairman Rick Lee denied it had received a change-of control approach. That wasn’t entirely incorrect. It wasn’t even close.  The day after that briefing, Santos Ltd (STO AU) confirmed that on 25 June 2021 it had submitted a confidential, non-binding, indicative all-scrip merger proposal to Oil Search’s board. The proposal, to be implemented through a Scheme, would result in Oil Search shareholders receiving 0.589 new Santos shares for each Oil Search share held. Upon completion, Oil Search shareholders would own 37% of the merged group and Santos shareholders 63%.

  • The implied transaction price was A$4.25 per Oil Search share, based on Santos’ closing price on 24 June 2021, or a 12.3% premium to Oil Search’s closing price on the same day. Oil Search agreed there was strategic logic combining with Santos, but that the terms of the combo were “demonstrably not” fair. 
  • There is clearly a lot of value to be unlocked from these two companies merging, and the two should continue to work towards a proposal. Ultimately, I agree with Oil Search here – low premium mergers typically pan out when both parties believe their shares are on par with each other.  Both companies recovered at roughly a similar clip post the Covid-low, yet the ratio (OSH/STO) pre-Covid was considerably higher than where the current proposal is pitched. 
  • I would expect Oil Search to engage at ~0.66x ratio, or ~25% premium to last close using both share prices as 24 June.   That would give a 41%/59% Oil Search/Santos split in the merged entity. 

Green Cross Cell (031390 KS)(“GC Cell”) / Green Cross LabCell (144510 KS) (GC LabCell)

South Korean biopharmaceutical companies GC Cell and GC LabCell announced last Friday they had entered into a definitive merger agreement to combine in an all-stock transaction. Following the completion of the Merger, GC LabCell will be the surviving entity and GC Cell will be the extinct entity.  The exchange ratio is set at 0.4023542 GC LabCell Shares per GC Cell Share. At present, the companies have a combined market cap of KRW1.7tn (~US$1.5bn).  The Deal has been approved by the Boards of both companies. The completion of this Transaction is subject to Shareholder Approvals and Regulatory Approvals and the Transaction is expected to close in 4Q 2021. 

  • Both companies are affiliates of the Green Cross Group which is the largest shareholders in both companies. They hold 38.66% in GC LabCell directly and 9.29% indirectly. They hold 23.08% in GC Cell directly and 4.64% indirectly. Post-merger, they will hold 42.26% in the merged entity. 
  • Janaghan Jeyakumar feels the exchange ratio is more in favour of GC Cell shareholders than GC LabCell shareholders from a fundamental angle (as discussed below) and as a result I expect GC Cell shareholders to vote in favour of the transaction.  For dissenting shareholders considering using the put rights provided under Korean M&A laws, the expected acquisition price is currently set at KRW41,163 per GC Cell share. 
  • Janaghan would tend to want to get in at higher than 10% annualised and get out at low single digits. Because the option is worth more than the spread, at current price, expect GC Cell to drop when the put rights go ex-.  Avoid the Arb Trade at the current spread. However, expect this to trade with some noise until completion. 

(link to Janaghan’s insight: GC Cell – GC LabCell: Korean Biopharma Merger Trading Tight)

Systems integrator Empired Ltd (EPD AU) has entered into a Scheme with Capgemini SE (CGEMY US) at a price of A$1.35/share, a 64.6% premium to last close, and an all-time high. The Offer has the unanimous backing of Empired’s board. In addition, CEO Russell Baskerville with 5.8% of Empired’s outstanding shares intends to vote in favour of the Scheme. In addition to shareholder approval, the Offer is subject to OIO approval. The Offer is not subject to due dili or financing. This looks done. Link to my insight: Empired (EPD AU): Capgemini’s Full Offer.

Australian small-cap Telco company 5G Networks Ltd/Australia (5GN AU) and related company Webcentral (WCG AU) announced on Friday that they have agreed to merge in a Scrip Transaction that will see 5GN shareholders receive 2 WCG shares per 5GN share.  The companies claim that the Merger will “create a larger entity with a single shareholder base propelling the company towards ASX300 status“.  The Deal is conditional on shareholder approvals from both companies and is expected to be completed in late-October 2021. Link to Janaghan’s insight: Webcentral – 5GN Merger: A Small-Cap Merger Aimed at ASX300 Status.

Wood flooring manufacturer Nature Home Holding Company (2083 HK)is currently suspended “pursuant to the Code of Takeovers and Mergers“. On the 13 July, Nature Home announced a positive profit alert, in which it expects 1H21 profit to match or exceed that of 1H19’s. As discussed in Squeeze Box: The Port Congestion Contagion, after the Covid fallout entrenched itself, people stuck at home in the US and elsewhere started buying stuff. Lots of it. Nature Home’s revenue is still predominantly sourced from China. But there has been a noticeable shift since FY18, with exports taking up a larger percentage. Link to my insight: Nature Home (2083 HK): Possible Takeover Target.

EVENTS

China After School Tutoring Online Education Stocks Crushed – Investors Schooled

it was reported by the 21st Century Business Herald that China was going to ban IPOs by educational companies and platforms which tutor on subjects in the public school curriculum and ban investments in such companies by those which are already listed.  Reportedly Beijing might ban tutors from making a profit.  This particular news sent education (especially school curriculum tutoring platforms) stocks dramatically lower in Hong Kong trading, and in the US. This comes on the back of a crackdown starting earlier this spring on after-school tutoring platforms after Xi Jinping said in March at the Two Sessions that the practice was a “social problem” affecting kids social and mental health and he urged “resolute rectification.” Right there, that should have warned everyone this story was not going to have a happy ending. 
  • This followed a scandal in January where four schools, including Yuanfudao, Zuoyebang, and the education unit all hired the same actress to pose as a teacher in ads for their platform, in at least one video laying the guilt on parents saying if parents didn’t sign up for the streaming courses, it could have consequences, “90% of mothers make mistakes” and “it could be parents themselves who ruin their kids [chances].” In one she was an English teacher with 35 years experience. In another, she had been a math teacher all her career. It was not a good look.
  • The media followed Xi Jinping’s comments with polemics on predatory practices and fear-based advertising, which had gone rampant as the VC investees aimed at growth above all. This put an immediate halt to the preparations many of the mega-tech conglomerates invested in China – Alibaba Group (BABA US)Tencent (700 HK)Softbank Group (9984 JP), and others – had made to list their education-related projects.
  • The major issues for regulators appear to be: criticisms of false advertising, where the benefits to such education are promised but not proven, where there are spurious claims using fake claims; criticisms of the structure of the offerings; A number of courses are offered at RMB 1 for the whole course, but then they come back to charge you for extras later; the “burden” placed on children; and an air of get rich quick to the entire industry which is seen to be against the national interest.

  • Evelyn Zhang recently wrote about the change in attitude towards “white collar education” in A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education. It is a good read.  Her advice on 3 July was to short all Chinese online education stocks which had a K-12 offering, and go long all companies which provided vocational training. After today, that will have been a beauty of a trade.

  • There are red flags all over the sector.  Impossibly fast growth through shoddy governance, dodgy hiring practices, truly abhorrent advertising practices, accompanied by numerous accusations of actual fraud, eventually hits a wall. Most of the sponsors of and investors in these companies had hoped it would take longer to get to the wall. In  China After School Tutoring Online Education Stocks Crushed – Investors Schooled, Travis would be wary of anyone who has a K-12 after-school business which makes up a significant portion of revenues. 

Linklogis (9959 HK) debunked the allegations of the short seller Valiant Varriors, stating that the allegations are groundless and contains various misrepresentations, false allegations, and obvious factual errors. However, in Short Seller, Valiant Varriors Says Linklogis Is a Glorified Mortgage Broker & Linklogis Responds to Valiant Varriors: Valiant Effort But Fails to Address the Elephant in the Room, Oshadhi Kumarasiri believes the company’s statement fails to address the main point laid out by the short seller’s report which states that the company is nothing but a glorified mortgage broker trading at tech multiple. Sumeet Singh‘s view on this situation was discussed in Linklogis Short Sheller Report – Some Merit, Some Plain Drama – Mixed Bag.

STUBS

On the 19 April, Gulf Energy Development Public Company (GULF TB) announced a Voluntary Tender Offer (VTO) for shares not held in Intouch at Bt65/share. Bt65/share was bang-in-line with Intouch’s then NAV/share. The Tender Offer has no minimum acceptance condition. On the 28 May, Gulf reduced the downstream offer for AIS to Bt120.93/share from Bt122.86/share originally. Gulf would now commence a voluntary tender offer for all securities in AIS on the same business day that it launches the Tender Offer for Intouch. The offer price for AIS is a takeunder in any event. A more detailed overview of the Offer can be found in my prior insights herehere, and here

  • The VTO doc was despatched on the 28 June, and the Offer opened on the 29 June. The Offer period closes on the 4 August, with an expected payment on the 11 August.  The IFA reports for both Intouch and AIS have now been announced. There is nothing terribly surprising in either. It’s more one of disappointment what is not discussed. There was only a passing reference to Intouch’s InVent –  this would have been a great time to flesh out more detail on these ops.
  • Without the Offer, Intouch should decline 20-25%. Therefore, if you are a long-only investor owning for fundamental purposes, sell here or into the Offer. The weight in indices will go down as float is reduced so investors will have less tracking concern.
  • Gulf has no intention to delist Intouch during the period of 12 months after the end of the Offer Period. But there is nothing to stop Gulf from sitting on the bid at or around Bt65 after the close of the current Offer, which may force short covering. Within six months after the takeover closes, Gulf cannot pay more than Bt65/share.  I would still avoid Intouch here, but I would not short it, or short tender the stock. Best to wait until the close of the Offer to get a clearer idea of what Gulf’s intentions will be. 

(link to my insight: StubWorld: IFAs Say “Yea” For Intouch, “Nay” For AIS)

Indofood Sukses Makmur Tbk P (INDF IJ) / Indofood CBP Sukses (ICBP IJ)

INDF is trading at 8.1x PER – against a long-term average of 8.5x – compared to ICBP’s current and long-term average of 13.8x and 16.8x. INDF continues to provide an inexpensive exposure to ICBP growth prospects. Consensus target prices for both companies are off ~3% YTD. Arguably, a 40% discount to NAV is wide for what is largely a single stock Holdco.  Should ICBP continue to outperform here – say a further 5-10% versus INDF – I’d recommend a long/short on a dollar-neutral basis. But right now, at its 12-month average, this is not an obvious call.

TOPIX INCLUSIONS!

Money Forward (3994 JP)(Mkt Cap: $3bn; Liquidity: $24mn)

Cloud-based business accounting software company Money Forward announced on 7th June 2021 that they had received approval to move from the Mothers Section to the First Section of the Tokyo Stock Exchange which triggers inclusion into the TOPIX Index. Previously, this situation was covered in TOPIX Inclusion: Money Forward (3994 JP).  On 15th July 2021, Money Forward announced earnings for the quarter ending May 2021. In TOPIX Inclusion: Money Forward (3994) Could Outperform Freee (4478) Until End of Month, Janaghan took a closer look at how the stock has traded since the TSE1 promotion was announced and the upside potential for the remainder of the event timeline. 

SHARE CLASS

INDEX REBALS

FTSE EPRA Nareit launched a change in Ground Rules on 24 June. As discussed in FTSE EPRA NAREIT Ground Rule Changes – Impact on J-REITs/Developed Asia Lessors, the big change was a lowering of the hurdle rate for entry within the Asia Pacific sub-index to the global level for DM markets, and that meant a number of REITs and property companies in Asia which had been just too small to get in will now more likely get into the index in September.  The announcement is due 1 September. The inclusion date is 17 September. The Quiddity basket is a total of 38 we-think-likely candidates (there are some slight oddities in the calcs). We are now exactly four weeks in. There are five weeks left. The 38-name Basket has out-performed the FTSE EPRA Nareit AsiaPac index by 6.5% since the close of 24 June and 2.7% since I wrote about it 1 July. Link to Travis’ insight: FTSE EPRA NAREIT Asia ADD Basket – More To Go.

Foreign buying and a cancellation of treasury shares has caused SK Telecom (017670 KS)‘s foreign room to drop from just over 20% in April to just over 5% now. This drop in foreign room will lead to MSCI slashing SK Telecom’s Foreign Inclusion Factor (FIF) by three-quarters at the August QIR, while FTSE will reduce the investability weight of the stock by 5% at the September SAIR. The ADR premium on SK Telecom Co Ltd (Adr) (SKM US) has not moved much over the last few months and the headroom has stayed the same. In SK Telecom (017670 KS): Passive MSCI/FTSE Selling & Trade Ideas, Brian reckons the situation could stay that way unless the foreign room on SK Telecom is exhausted.

XPeng (9868 HK) listed in Hong Kong on 7 July was added to the Hang Seng Composite Index at the close of trading on 20 July. However, being a WVR security, the stock will not be eligible for Southbound Stock Connect till early 2022. Subject to passing the velocity test, Brian sees Xpeng as an inclusion in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December rebalance, replacing Evergrande Real Estate Group (3333 HK). The inclusion of Xpeng ( in the index will push the HSCEI 2022 dividend futures lower. With the recent changes in China to companies looking to list on a foreign exchange, the HFCAA, and other structural changes to the index, in Xpeng (9868 HK): Potential HSCEI Inclusion & Impact on 2022 Dividends, Brian prefers a short position in the HSCEI 2022 dividend futures.

MSCI is scheduled to announce the results of the August 2021 Quarterly Index Review (QIR) on 11 August with the changes implemented after the close of trading on 31 August. In MSCI Aug 2021 Index Rebalance Preview: Changes After Day 1 in the Review Period Brian sees SITC International (1308 HK)Huabao International Holdings (336 HK)Momo.Com Inc (8454 TT)Chinasoft International (354 HK)China United Network A (600050 CH)Ecopro BM Co Ltd (247540 KS)CRRC Corp Ltd A (601766 CH)SK IE Technology (361610 KS)Beijing Wantai Biological-A (603392 CH)Beijing Kingsoft Office Software-A (688111 CH)Beijing Roborock Technology-A (688169 CH)Imeik Technology Development (300896 CH)StarPower Semiconductor Ltd (603290 CH)Advanced Micro-Fabrication Equipment-A (688012 CH) and China Baoan (000009 CH) being added to the Standard index.

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

Remegen Co Ltd (9995 HK) 23.42%FutuOutside CCASS
King Fook (280 HK) 17.46%HSBCOutside CCASS
Jiayuan International (2768 HK) 14.30%HaitongValuable
Starrise (1616 HK)15.03%TargetOutside CCASS
Hebei Yichen Industrial (1596 HK) 12.82%Get NiceGF
Bank Of Jiujiang (6190 HK) 11.30%ChiyuYue Xiu
China Merchants Securities Co Ltd (H) (6099 HK) 34.00%JPMCiti
Antengene (6996 HK) 22.77%St ChartOutside CCASS
China Hanking Holdings (3788 HK) 10.20%ChangjiangUBS
Source: HKEx

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

Name

% chg

Into

Out of

Sanxun (6611 HK)11.48%CCBOutside CCASS
Source: HKEx

Samsung Heavy Industries Passive Flow Trade on Relisting, August 10

By Sanghyun Park

Samsung Heavy Industries has entered a stock trading suspension from July 23 to August 9 due to the 5 to 1 capital reduction without refund.

But this one is a par-value capital reduction without any refund. Only the par-value will be down from ₩5,000 to ₩1,000. So, the number of outstanding shares remains unchanged.

Capital reduction detailsPreviousAfter capital reduction
Ordinary shares630,000,000 630,000,000
Par value₩5,000₩1,000
Capital3,150.6630.1
Trade suspension2021. 07. 23 ~ 08. 09
Source: DART

Why doing it?

Reducing the par value but without any refund simply moves capital to earnings surplus so that Samsung Heavy can avoid capital impairment. But the total shares remain the same.

Capital impairment is when the company lost its asset, so the asset is lower than the stock of a company. One way to avoid capital impairment is a reduction of capital without any compensation. (Wikipedia)

Another reason Samsung Heavy is making capital reduction is that the current law doesn’t allow a company to issue new shares at a price below the par value. If it has to offer new shares below the par value, it will have to obtain special approval from the court.

Samsung Heavy’s last close price is ₩6,540, and the previous par value is ₩5,000. It’d be very tight to offer new shares above ₩5,000, given the usual 20% discount. So, it reduces the par value ahead of new share issuance, which the local street expects to hit the market around November.


Index Rebalance & ETF Flow Recap: Capitaland, Boral, Xpeng, SK Tel, MSCI, KRX BBIG

By Brian Freitas

In this weeks recap, we look at:

Redemptions continue from the ChinaAMC Semiconductor Chips Index ETF (159995 CH) and there have also been large redemptions from the Samsung Kodex Secondary Battery ETF (305720 KS).

Events This Week

Click on the link under Detail to go to the Insight


Before it’s here, it’s on Smartkarma

Event-Driven: TAL Education, Indofood Sukses Makmur Tbk P, GlaxoSmithKline PLC, SK Telecom and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • China After School Tutoring Online Education Stocks Crushed – Investors Schooled
  • StubWorld: Momentum With Indofood CBP
  • GSK (GSK.L/​​​GSK.N): Revisiting Elliott’s Letter and What Remains Unanswered
  • SK Telecom’s Interim Dividends & The Removal of Foreign Ownership Restriction on SKT Investment?

China After School Tutoring Online Education Stocks Crushed – Investors Schooled

By Travis Lundy

Earlier today, it was reported by the 21st Century Business Herald that China was going to ban IPOs by educational companies and platforms which tutor on subjects in the public school curriculum and ban investments in such companies by those which are already listed. 

Bloomberg reported that China was considering asking companies that offer such tutoring – to help students pass the gaokao – the legendarily difficult college entrance exams – to turn into non-profit businesses. 

The initial story is that online education platforms would not be allowed to raise money in capital markets, sell securities, go public. The bigger picture is that they are effectively being pushed out of business. This particular news has sent education (especially school curriculum tutoring platforms) stocks dramatically lower in Hong Kong trading, and in the US pre-open market.

Drops of 30-50% are par for the course so far.

There is a possibility this kills the entire business for some platforms. 

This comes on the back of a crackdown starting earlier this spring on after-school tutoring platforms after Xi Jinping said in March at the Two Sessions that the practice was a “social problem” affecting kids social and mental health and he urged “resolute rectification.”

Right there, that should have warned everyone this story was not going to have a happy ending. 

This followed a scandal in January where four schools, including Yuanfudao, Zuoyebang, and the education unit all hired the same actress to pose as a teacher in ads for their platform, in at least one video laying the guilt on parents saying if parents didn’t sign up for the streaming courses, it could have consequences, “90% of mothers make mistakes” and “it could be parents themselves who ruin their kids [chances].” In one she was an English teacher with 35 years experience. In another she had been a math teacher all her career. It was not a good look.

The media followed Hi Jinping’s comments with polemics on predatory practices and fear-based advertising, which had gone rampant as the VC investees aimed at growth above all. This put an immediate halt to the preparations many of the mega-tech conglomerates invested in China – Alibaba Group (BABA US), Tencent (700 HK), Softbank Group (9984 JP), and others – had made to list their education-related projects such as Zuoyebang (Alibaba) which raised US$2.35bn in two rounds last year, Yuanfudao (Tencent) which raised US$3.5bn in three rounds, VIPKid (Tencent) which does English teaching, Huohua Siwei (Tencent) which specialises in STEM, and others which were either launching (like ByteDance’s newest effort Dali Education after buying Hua Luogeng math school and renaming it Qingbei Online School, and one-on-one tutoring platform GoGoKid), or preparing themselves to start on the road to IPO or at least looking at a 2022 listing. Zhangmen Education (ZME US) actually IPOed in late May at US$11.51/ADR, rising 50% on Day 1, falling back to US$9.54 yesterday and now down 26% in pre-market. 

Such companies had grown dramatically in 2020 as covid restrictions, or precautions, increased the desire for parents to keep their kids at home. Preqin says VC funding in the sector hit a record $10.5bn in 2020. The market is huge, and growing fast. Online tutoring grew 35-40% last year as covid struck according to iResearch in Shanghai, reaching RMB 257bn. Others have higher numbers. And according to Oliver Wyman and the National Institute of Educational Sciences, the overall market for after-school education was RMB 800bn in 2019, expected to rise to RMB 1.4trln in 2025.

The four major problems that regulators appear to have focussed on this spring after Xi Jinping’s comments were:

  • fast-increasing expense on families, which would restrict the incentive to have more kids and also create a significant separation between the chances for kids with well-to-do parents and kids without. The criticism in the 21 May 19th Meeting of Central Comprehensive Deepening Reform Commission, which released a flurry of Opinions* was that children faced a lower burden in school and a greater burden out of school.

*”Guiding Opinions on Improving the Evaluation Mechanism of Scientific and Technological Achievements”, “Opinions on Further Reducing the Burden of Students’ Homework and Off-campus Training in Compulsory Education”, and several others.

  • marketing free-for-all with false or damaging advertising and predatory plan pricing and structuring, including pre-charging for classes which would not be used. 
  • A lack of regulation/strict oversight of teacher/tutor licensing, ensuring proper resource allocation to teachers themselves, 
  • and a get-rich-quick mindset from what Xi Jinping thinks should be a solemn duty to educate the youth of the country. 

As Xinhua put it in reporting about that May 21 meeting…

会议强调,要全面规范管理校外培训机构,坚持从严治理,对存在不符合资质、管理混乱、借机敛财、虚假宣传、与学校勾连牟利等问题的机构,要严肃查处。要明确培训机构收费标准,加强预收费监管,严禁随意资本化运作,不能让良心的行业变成逐利的产业。要完善相关法律,依法管理校外培训机构。各级党委和政府要强化主体责任,做实做细落实方案,科学组织、务求实效,依法规范教学培训秩序,加强权益保护,确保改革稳妥实施。

The meeting emphasized that it is necessary to fully regulate the management of off-campus training institutions, adhere to strict governance, and severely investigate and deal with institutions that have problems such as non-qualification, chaotic management, taking advantage of money, false propaganda, and collusion with schools for profit. It is necessary to clarify the charging standards of training institutions, strengthen the supervision of pre-charging, and strictly prohibit arbitrary capitalization operations, and do not allow conscientious industries to become profit-seeking industries. It is necessary to improve relevant laws and manage off-campus training institutions in accordance with the law. Party committees and governments at all levels must strengthen their main responsibilities, implement the plan in detail, organize scientifically, seek practical results, standardize the order of teaching and training in accordance with the law, strengthen the protection of rights and interests, and ensure the steady implementation of reforms.

In April, the Beijing Administration for Market Regulation fined New Oriental Online RMB 500,000 for pricing violations, and false advertising. Koolearn (1797 HK), TAL Education (TAL US), were also hit.  Shifara Samsudeen, ACMA, CGMA wrote about this in GSX TechEdu: China Fines Online Tutoring Apps for Making Misleading Claims; Is GSX Next? in early May.

In late May, China decided kindergartens and private tutoring schools could no longer teach the elementary school curriculum, starting June 1, as part of a revision of the Minority Protection Law. Gaotu Techedu (GOTU US) immediately announced it was shutting down its Xiao Zao Qi Meng pre-school education business (3-8yrs). On June 1, the government fined another 15 operators a total of RMB 36.5mm for similar violations to New Oriental Online, including pre-IPO unicorns Zuoyebang and Yuanfudao, with both getting hit for RMB 2.5mm which is the maximum legal amount. New Oriental got hit again. TAL, Onesmart Education (ONE US), China BestStudy (3978 HK) and Bright Scholar Education (BEDU US) were also hit for the same reasons by SAMR. And then another 10 were hit by local regulators in Guangdong and Shanghai. It was a coordinated attack on Children’s Day.

In the first week of June, Xi Jinping made a much-touted visit to Qinghai in the southwest and it appears both he and the media talked quite a bit about lifting up the lower income areas and people, as per the 14th Five Year Plan, and also noted the problem of after school tutoring burdening students more and school burdening students less, calling it “putting the cart before the horse.”

The Ministry of Education set up a new department (the Off-Campus Education and Training Department) on 15 June to regulate the off-campus tutoring schools to “reduce students’ academic burden”, etc. It will oversee teachers and curricula. Smartkarma provider Zhen Zhou, Toh wrote about the prospects for companies going forward in late June in China Online Education – Diversified Revenue Stream Wins Here – Balance in All Things

Three weeks ago, the Beijing Municipal Education Commission and at least a half dozen other major cities across the country set up summer after-school programs for elementary school students, effectively taking the business which would normally be taken by private sector schools.

The writing has been on the wall since March. And the authorities have been writing over it in heavier and heavier marker for weeks and months.

The largest businesses out there have been under the cosh, racing against time and competitors with somewhat dodgy numbers and promises. They lose money, and now it looks like they won’t be able to raise more. 

A number of Smartkarma insight providers have published insights which have discussed the opportunities and the red flags in the sector. This includes short reports, pre-IPO reports, updates on legal and regulatory changes, and a huge report on the private education sector by Osbert Tang, CFA a few months ago, called China Private Education: This Is Where the Future Lies which has an enormous amount of detail about the sector.

Issues With the Business

The major issues for regulators appear to be…

  • criticisms of false advertising, where the benefits to such education are promised but not proven, where there are spurious claims using fake claims. 
  • criticisms of the structure of the offerings. A number of courses are offered at RMB 1 for the whole course, but then they come back to charge you for extras later. 
  • the “burden” placed on children
  • an air of get rich quick to the entire industry which is seen to be against the national interest.

For investors, many of the major issues have to do with how companies which promise growth are actually “growing.”

Gaotu, formerly called GSX Techedu, had claimed to be the leading provider of online classes from K-12, was IPOed in 2019 at a $3bn valuation, rose to 10x that, then fell. GSX had been the subject of short seller reports in the first half of 2020 accusing the company of inflating student enrolment numbers using bots, fabricating teachers, falsifying reviews, and falsifying revenues. Multiple reports (as per GMT Research’s Hall of Shame on GSX, Grizzly Research, Muddy Waters, JLWarren who wrote 30 May on Smartkarma in GSX: Minimal Market Share; ~80% Fake Enrollment and Operational Irregularities, GMT itself, and others (links at the bottom of that link) found different former teachers or others who talked about faked reviews, faked parents, faked students, bots/brushing, related party transactions to create expenses, or remove them (depending on the short seller report), boosted to remove the cash that should have been there from the fake revenue, possible fake capital raise, etc. The laundry list of accusations is long, sordid, and painfully similar to situations which have later been determined to be fraud. 

Against the pattern of companies calling out short seller research firms’ reports, GSX was often curiously quiet, and the stock rose anyway, tripling after Muddy Waters released their report from $40/share to $120/share before falling back.

The shares then rallied very sharply in January as part of a short squeeze on “meme stonks” and heavily-shorted names. Archegos apparently owned more than 10% through a variety of PB accounts. Archegos fell. GSX fell with it. And since then it has lost another two thirds of its value to get back to under US$10/share. 

Pre-market, it is apparently indicated at US$3.65/share. Down 62%. 

A Side Problem

Evelyn Zhang recently wrote about the change in attitude towards “white collar education” in A Twist of Fate – China’s Suppression of Secondary Education in Favor of Vocational Education. It is a good read. 

Her advice on 3 July was to short all Chinese online education stocks which had a K-12 offering, and go long all companies which provided vocational training.

After today, that will have been a beauty of a trade. 

Medium-term, the problem authorities will find is that parents don’t necessarily want their kids to not have access to the after-school cram services. They don’t have time to teach them themselves, and because the cutoff to continue later education is harsh and many parents don’t want their kids to go to vocational school to enter the blue collar workforce, lots of parents are actually objecting to the crackdown. They are happy to pay if it gives their kids a better chance. 

The high cost of education is one reason to not have a second (or third) child. The high cost of real estate is another. But education is status and a chance at wealth and intellectual happiness. It has been the case for hundreds of years in China. It is not clear that if the public sector takes on the education and after-school education “burden” from the private sector that it will please the wider public. It is not clear an increased number of qualified teachers will want to get paid public education system wages either. 

The Problem For Investors

Now the chickens are coming home to roost. 

Xi Jinping declared after-school education to be a “social problem” in front of the Two Sessions. Some people did not take him seriously at the time, but regulators have been taking his words seriously and have started cracking down. Legislators have made new legislation. And the Ministry of Education has a new department. 

Now it appears China wants foreign capital out of the business, and it wants those operators (already listed, or unicorns sponsored by China megatech) which have raised capital to not use it grow market share. 

It wants the entire business to support the national interest. Without profit. 

Larry Chen (founder and chairman of Gaotu), once a teacher in an impoverished little village, later become multi-billionaire, may not be able to keep his billions. And I expect this does not bother Xi Jinping.

A basket of names in HK, mainland China, and NYSE (using pre-market prices as of one minute before the open for today’s price) is shown below. It is a heavy hit.

By my count using pre-open prices and the ugly HK closes, that is $18bn in one shot on those 16 names.

More below the fold.


StubWorld: Momentum With Indofood CBP

By David Blennerhassett

A double-dose of StubWorld this week …

Indofood Sukses Makmur Tbk P (INDF IJ)‘s NAV widens as 80.5%-held Indofood CBP Sukses (ICBP IJ) recently outperforms, yet INDF still remains a cheap(er) proxy into ICBP. 

Preceding my comments on Indofood are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

As always, more below the fold.


GSK (GSK.L/​​​GSK.N): Revisiting Elliott’s Letter and What Remains Unanswered

By David Lepper

  • It is three weeks since Elliott’s 1st of July 2021 public letter to GSK and a month on from the 23rd of June briefing on the “New GSK”. The share price remains largely static and in line with the FTSE all-share index. 
  • The Second Quarter results are due to be released on the 28th of July 2021 which should allow GSK another opportunity to address the issues raised as a result of Elliott’s campaign and potentially placate the activists and in particular their concerns around GSK’s de-merger plans.
  • We examine the state of play for GSK and Elliott and discuss several key questions.
    • Is this could be the Calm before the storm?  
    • What are the core areas of the Elliott campaign?
    • What does GSK’s report card look like, post-Elliott’s public letter?
    • Is the announcement of the Consumer Healthcare CEO the right move?
    • What questions should be asked by investors?
    • What should we expect next?

SK Telecom’s Interim Dividends & The Removal of Foreign Ownership Restriction on SKT Investment?

By Douglas Kim

SK Telecom (017670 KS) announced today the interim dividends of 2,500 won per share for 2Q 2021. This would represent 177.9 billion won in amount. The basis date for receiving the interim dividends is 30 June 2021. The dividends are expected to be paid out on or prior to 11 August 2021. At the current price of 305,000 won, the quarterly interim dividend yield would represent 0.8% (annualized rate of 3.3%). 

Once SK Telecom (existing co) and SKT Investment become two separate companies on 29 November, SK Telecom will be treated as a telco while SKT Investment will be treated mainly as an investment company. What this means is that from the regulators’ point of view, there could be an increasing pressure to remove the entire foreign ownership restriction on SKT Investment. 

In conclusion, there have been some concerns about MSCI reducing its weight of SK Telecom in the coming months.

  • This is probably one of the reasons why SK Telecom’s share price has experienced some weakness in the past few weeks, although its share price is still up 28% YTD. 
  • Once SK Telecom (existing co) and SKT Investment become two separate companies on 29 November, SK Telecom will be treated as a telco while SKT Investment will be treated mainly as an investment company.
  • What this means is that from the regulators’ point of view, there could be an increasing pressure to remove the entire foreign ownership restriction on SKT Investment. 

Before it’s here, it’s on Smartkarma