Event-Driven

In this briefing:

1. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover
2. China Power New Energy To Be Delisted After SOE Injection Abandoned
3. Scout24 Tender Offer Launched: Price Still Not Quite Full
4. Denso Continues to Strengthen Its Investment CASE with Acquisitions
5. Xenith Is Running Out Of Excuses

1. Hankook Tire Stub Trade: Sub Clearly Oversold Relative to Holdco on Hanon Takeover

• Hankook Tire Holdco/Sub are at +2σ for 5 consecutive days now. It was reported on Mar 25 that Sub (Hankook Tire) was on the verge of taking over Hanon Systems at a hefty 70% premium. Hankook Tire pays ₩5tril for Hahn & Co’s 50% stake.
• ₩5tril is really a lot for the Group. Holdco will also have to be heavily involved in funding. Whatever suffering Sub will have to endure should also be nearly equally applied to Holdco.
• Only long-term oriented local public offering funds had heavily dumped Sub shares. In contrast, highly short-term oriented local hedge funds (PEs) had rather shorted Holdco in the same time span. Sub disappoints and alienates a lot of long-term investors but it was Holdco who attracted the attention of short-term traders.
• Current +2σ divergence stayed for several days now. Considering where local short sellers are, I don’t think it will last much longer. I’d join local short-sellers. Just for a safer setup, I’d do pair trades, go long Sub and short Holdco.

2. China Power New Energy To Be Delisted After SOE Injection Abandoned

SOE State Power Investment Corporation (SPIC) is seeking to privatise China Power New Energy Development Co (735 HK) by way of a Scheme at $5.45/share, a 41.9% premium to last close and a 78.1% premium to the 30-day average.

A scrip alternative (6 New shares for one Scheme shares) into an unlisted vehicle under SPIC is also available.

China Three Gorges, CPNED’s largest shareholder with 27.10%, have given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

However, China Three Gorges is presumably required to abstain from voting at the court meeting, as it is deemed to be acting in concert with the SPIC under class (1) of the definition of the acting in concert in the Takeovers Code. The announcement does not make this clear.

Assuming China Three Gorges does abstain, a 10% blocking stake at the court meeting is equivalent to 4.48% of shares out or 53mn shares.

This looks like a pretty clean deal. It is priced above the highest close since its listing by way of introduction on the 18 July 2017, while the excitement over the potential injection of all nuclear power assets and businesses from State Nuclear Power Technology Company has been removed after the restructuring was cancelled in July last year.

The stock is currently trading at an attractive gross/annualised spread of 8.3%/28.9% conservatively assuming a late July completion, and inclusive of the final dividend. 

3. Scout24 Tender Offer Launched: Price Still Not Quite Full

In December (13 Dec after trading hours), the FT had an article noting that Germany’s leading property classifieds firm Scout24 AG (G24 GR) (also known for auto classifieds across Europe) was possibly looking to sell itself and that PE firms were lining up to bid. Silver Lake, which had bought British player ZPG (which operates property portals Zoopla and PrimeLocation) for $2.8bn in July 2018, was mentioned as a bidder. Once owned by Deutsche Telekom, control of Scout24 was sold to Blackstone and Hellman & Friedman LLC in 2013-14 (H&F spent €1.5 billion to take a 70% stake in 2013, and Blackstone bought a stake of undisclosed size in 2014), and they listed the company in 2015 with an initial market cap of €3.2 billion. The IPO was €1.16 billion and both sold down, with H&F fully exiting in a placement in 2016.

The share price had been doing well until Q3 last year when German lawmakers, anxious with skyrocketing property prices, started looking at revamping the structure of real estate transaction costs so that they were borne by sellers rather than loaded onto buyers. The shares fell.

A combination of Blackstone and Hellman & Friedman LLC launched an non-LBO LBO for Scout24 AG (G24 GR) in mid-January at €43.50/share (€4.7 billion) which was about an 8% premium to the then-current market price, which had already been juiced because of speculation starting after the FT article in late December. The company rejected the Offer saying it was too low. 

The two buyers came back in mid-February with a Takeover Offer priced at €46.00/share, 5.7% higher than January’s foray and 27% higher than the level pre-FT article; that was about 25x earnings and 28x 2019e cashflow, which is a bit lower than Silver Lake’s ZPG buy multiple. Both Scout24’s Management Board and Supervisory Board agreed to support the offer and said they believed that the transaction is in the best interest of the Company, and an Investment Agreement was signed between the three companies.

The unusual thing about this deal is that the two PE firms are looking to buy a minimum of 50% plus one share, and leave the company listed. The shares jumped to €46 and have been trading at just below to slightly through, leaving many to think that this was a setup for a strategic buyer or possibly Silver Lake to come in over the top. 

The New News

Yesterday, the BidCo officially launched its Tender Offer at €46, due to run through 9th May.

More discussion below.

4. Denso Continues to Strengthen Its Investment CASE with Acquisitions

Denso Corp (6902 JP) announced this month that it has invested in the Seattle-based connected vehicle services pioneer- Airbiquity Inc. Airbiquity is one of the leading companies in the connected vehicle services sector and has been one of the companies that has continuously developed automotive telematics technology. This investment made by Denso follows its investment made in Quadric.io this year ( Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims). As we previously mentioned, Denso is in full swing in its development in the autonomous driving field and next-generation technologies development. Thus, it wouldn’t be a surprise to see Denso emerge as the first mover in next-generation technologies such as AD and connectivity solutions. According to Denso, its investment worth $5m in Airbiquity is expected to accelerate the development of over-the-air (OTA) systems for wirelessly updating automotive software from a remote location. OTA systems are methods of distributing new software, configuration settings, and providing updates to the electronic device in use, for instance, a car navigation system in a vehicle. These OTA systems which have been increasingly used to update the software of such multimedia products in a vehicle are now gaining more prominence given the emergence of next-generation technologies such as electrification, EV and connectivity. We also believe that Denso’s Stake in Airbiquity is likely to accelerate Denso’s transition in its business model to be a leading software solution provider. Thus, its series of investments such as in Tohoku Pioneer EG, JOLED, ThinCI, Quadric, and now Airbiquity are indicative of the decisiveness of its change in business model and moves towards achieving next-generation technology leadership.

5. Xenith Is Running Out Of Excuses

When IPH Ltd (IPH AU) gate-crashed Xenith Ip (XIP AU)/Qantm Intellectual Property (QIP AU)‘s marriage of equals, submitting a scheme proposal comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, versus QANTM’s all-cash offer (1.22 QANTM), the key risk to IPH’s Offer was ACCC opposing its Offer. As announced today, ACCC will not oppose.

This decision was largely expected and previously discussed here. Although IPH, QANTM, and Xenith are the only three ASX-listed intellectual property companies, privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. The ACCC agrees and signed off on an IPH/XIP tie-up as it did on the 21 March, by not opposing the merger of XIP and QANTM.

XIP acknowledged the ACCC decision resolves a major uncertainty, but stops short of supporting IPH’s offer as there still exists a number of concerns as detailed in its 19 March announcement. IPH responded to those concerns on the 20 March. These include:

1. Shareholders of Xenith will hold an immaterial % of the merged IPH entity compared to QANTM.
   • IPH’s scrip portion accounted for (then) 35% of its Offer (now ~37%), shares which have superior liquidity versus QANTM given IPH’s position in the ASX200. 
   • The cash portion also provides added certainty on value into the Offer compared to QANTM’s all scrip offer.
2. The control premium as at 11 March is insufficient.
   • Probably the most contentious concern. QANTM’s all-scrip offer on the 27 November backed out an indicative offer price of $1.598/share or a 28.4% premium to last close.
   • IPH’s $1.97/share indicative offer (a 60% premium to XIP’s undisturbed price, and a 31% premium to the independent expert’s mid-point fair value (page 55)) compared to QANTM’s indicative offer of $2.03 immediately before IPH’s announcement.
   • Circumstances have changed materially since, with IPH’s cash/scrip offer now worth $2.02 as I type, versus $1.67 for QANTM.
     

     

     Source: CapIQ
3. The increased execution risk concerning ACCC. Now a non-issue.
4. It is questionable whether employees, controlling 40% of Xenith, would support the offer.
   • Employees are free to decide on what they consider to be the most compelling Offer. IPH has offered to hold discussions with XIP employees. 
5. CGT rollover will likely be lower via the large cash element under IPH’s offer vs. QANTM’s all scrip offer.
   • Maybe. Possibly. An all-scrip offer typically affords greater rollover relief. Nevertheless, Xenith is trading below its 2015 IPO price of $2.72/share.

With IPH’s 19.9% blocking stake, the QANTM/Xenith scheme is a non-starter. Xenith still should engage with IPH. The scheme meeting to decide on the QANTM Offer is scheduled for the 3 April.

In this briefing:

1. Summit Ascent’s Slippery Slope
2. Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer
3. TRADE IDEA – Melco (200 HK) Stub: Lose a Little Sleep in Macau
4. China Three Gorges’ Rebuttable Presumption
5. Severgroup Puts in a Cheeky Bid for Lenta – TPG and EBRD Bail

1. Summit Ascent’s Slippery Slope

Back in September 2017, Lawrence Ho, Summit Ascent Holdings (102 HK)‘s major shareholder, reduced his stake to 18.75% from 27.06% (at between $1.13-$1.60/share, but mainly at the low end of this range), according to Hong Kong Exchange disclosure of interest filings. The share price of this Russian integrated gaming play declined 34% to $1.06/share in the following five trading days. Who bought those shares was not disclosed – CCASS shows these shares moving out of VC Brokerage into at least 10 different brokerage accounts.

Shortly after, Howard Klein quoted one insider in his insight Melco Resorts: A Gem Hiding in Plain Sight Offers an Entry Point After a Recent Dip that the sell-down wasn’t likely a sign “Ho has lost confidence in the area.“

On the 15 December, Ho announced a complete exit from Summit, selling 17.37% of shares out. Concurrently Ho resigned from his NED and chairman positions. Those shares moved from VC Brokerage to Sun Hung Kai Investments on the 20 December 2017. Shares traded unchanged on the news. 

At the same time, First Steamship (2601 TT) disclosed it held 12.67% on the 18 December 2017. Concurrently, Kuo Jen Hao was appointed as NED and Chairman of the Board, with effect from 28 December 2017.  Kuo is also the chairman and the general manager of First Steamship. First Steamship gradually increased its stake to 19.11% as at 24 October 2018.

The New News

Yesterday, Summit Ascent announced it has been informed that First Steamship and Kuo are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 24%.

With increased liquidity surrounding the news, this looks like a great opportunity to exit.

2. Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer

Originally I had thought KKR’s offer could go higher. Instead, it came in lower at A$3.40 and KKR gave MYOB Group Ltd (MYO AU) management all of a couple of days to think about it.

The title to my subsequent piece was MYOB Caves And Agrees To KKR’s Reduced Offer.

Manikay Partners started buying up shares and by early March had reached a position of 11%. They made noise. The Scheme Booklet came out on the 14th of March. Four days later Manikay announced their position was now 13.61% and the following day Mawer announced re-upped its stake from the mid 8s to high 9% level.

The 20th saw a Scheme Update from MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them.

Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.

On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.

Today we have new news.

Manikay Caves and Agrees to KKR’s Reduced (Now Final) Offer

Earlier today a Reuters story about Manikay accepting the offer popped up and MYOB shares popped from A$3.34 to A$3.38-39 area where they closed. Partway through the day MYOB released a document on the ASX feed saying that Manikay had sent a letter saying…

In order avoid speculation regarding our voting intentions in respect of the Scheme, we are writing to inform you that we, Manikay Partners, intend to vote all the MYOB shares that we own or control FOR the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote.

We remain very disappointed that, despite our repeated efforts to convince you otherwise, you failed to change your recommendation in light of the material improvement in market conditions since announcement of the Scheme, among other factors. We are also disappointed that the disclosures to MYOB shareholders did not fully explain the impact of such improved market conditions on the value of MYOB.
excerpt of the letter.

3. TRADE IDEA – Melco (200 HK) Stub: Lose a Little Sleep in Macau

Visitors to Macao will notice the gaudy designs of new properties like Studio City and the City of Dreams owned by Melco. Few will know that the Melco of today traces its roots back almost 100 years when it was named The Macau Electric Lighting Company. Melco was listed in Hong Kong in 1927 when it was still managing the electricity supply service for the island of Macau, which it had done since 1906. After the CEM was established in 1972 to supply power in Macau, Melco changed its name to Melco International Development Limited and became a subsidiary of Stanley Ho’s real estate holding company, Shun Tak Holdings (242 HK). With the burden of supplying electricity off its shoulders, the company did what any logical Hong Kong firm would do when its business disappears, it bought real estate.

To this day, Melco International Development (200 HK) still maintains ownership of one of these classic Hong Kong destinations which I will take a closer look at in my note. In the rest of this insight I will:

• finish the historical overview of Melco
• present my trade idea and rationale
• give a detailed overview of the business units of Melco International
• recap ALL of my stub trades on Smartkarma and the performance of each 

4. China Three Gorges’ Rebuttable Presumption

In my initial insight on China Power New Energy Development Co (735 HK, “CPNED”)‘s privatisation by China Power New Energy Limited (the Offeror) by way of a Scheme, I concluded China Three Gorges, CPNED’s largest shareholder with 27.10%, will likely be required to abstain at the Court Meeting as it is presumed to be a connected party to the Offeror as per the Takeovers Code.

But the announcement states that CTG has given an irrevocable undertaking to vote for the Scheme and to elect the share alternative.

It seems illogical to mention in the irrevocable CTG will vote for the Scheme when in actuality it cannot vote. So, which one is it?

The short answer is: CTG cannot currently vote. 

But understanding this requires diving into the minutiae of Hong Kong’s Takeovers Code. So I do.

5. Severgroup Puts in a Cheeky Bid for Lenta – TPG and EBRD Bail

In the middle of last week, Russia’s largest chain of hypermarkets Lenta Ltd (LNTA LI)  announced that it was aware that there were ongoing discussions between Luna (TPG’s holding entity, which owns 34.13% of Lenta’s capital) and Alexey Mordashov’s Severgroup, for Luna to sell its stake in Lenta to the Russian conglomerate. A day later, Lenta announced the company was aware of discussions between Severgroup and the EBRD (7.40% holder). 

Reuters reported last night that Severgroup had reached an agreement to buy a 41.9% stake, excluding treasury shares, in Lenta from those two sellers, for a total of US$721mm, or US$18 per share or US$3.60 per GDR. That implies a price of US$1.75bn for the whole company. 

Later last night, Lenta announced on its website (full press release here) a cash offer for all the shares had been proposed. The Offer has a pre-condition dealing with the above-mentioned transactions being approved by those who need to approve.

The Offer Price is an 8.11% premium to the last trade on 26 March – the undisturbed price, and a premium of 9.76% to the 6mo average price of US$3.28 for the GDRs. 

There may be something interesting to do here.

In this briefing:

1. Everbright Mandatory Offer for Ying Li Intl Real Estate – Going Cheap
2. Nexon Sale: Key Questions at This Point & Most Realistic Answers
3. Newmark Group Inc (NMRK US): Valuation/Fundamentals Mismatch, Stock Trades At Bargain Levels
4. ALTABA UNWINDING – Not Much Juice, and Considerably Different Skew
5. StubWorld: Naspers’ Restructuring Update

1. Everbright Mandatory Offer for Ying Li Intl Real Estate – Going Cheap

On 3 April 2019, China Everbright (165 HK)‘s wholly owned subsidiary, State Alpha Limited, purchased 767,052,161 shares representing approximately 30.00% of the Shares in Singapore-listed property developer, Ying Li International Real Estate Ltd (YINGLI SP), from Newest Luck Holdings Limited (the vehicle of Executive Chairman and CEO Mr. Fang Ming) at a share price of SGD 0.140.

Following this transaction, the combined stake of China Everbright and parties acting in concert with it reached 58.91% triggering an obligation to make a mandatory offer for all the shares of Ying Li, a transaction which was announced after the close.

The offer price of SGD 0.140 translates to a premium of 5.9% and 10.9% to Ying Li’s 1-month and 3-month VWAP, respectively but less than a 1% premium to last trade – the company’s shares closed at SGD 0.139 on 3rd April before the announcement. The company asked for a trading halt the next morning and the shares have not traded yet as the large shareholder disclosures have come trickling in on the 4th and the 5th.

The acquirer has stated that it is their present intention to maintain the listing status of the company. However, the acquirer also reserves the right to reevaluate this position if the free float falls below the 10% requirement specified in the listing rules following the completion of the offer. 

This is something like a free put for investors and a very low-priced call option for Everbright. The situation raises obvious questions, and despite the “intention” to maintain the listing status, there are reasons why they would not want to. The details are worth a look.

Quiddity’s new Quiddity Singapore M&A Guide 2019 is now published with guidelines to the relevant rules, regulations, documentation, and pointers to the Singapore M&A landscape. Watch for more in the series to be published shortly.

2. Nexon Sale: Key Questions at This Point & Most Realistic Answers

This post discusses the key questions on Nexon sale at this point. It then provides the most realistic answers to these questions from various circumstantial aspects. This post is based on the recent news reports and also various local sources.

3. Newmark Group Inc (NMRK US): Valuation/Fundamentals Mismatch, Stock Trades At Bargain Levels

Having gained ~30% in a little more than two months following its full separation from BGC Partners (BGCP US) at the end of November 2018 after a dismal share price performance since coming to the market in a partial IPO at the end of December 2017,  the shares of commercial real estate services company, Newmark Group (NMRK US)  have experienced another slide over the past several weeks despite its cheap valuation which belies its positive fundanmental drivers and peer group comparisons.

Notwithstanding its robust fundamentals, notice of alterations it plans to make to its Non-GAAP earnings presentations to bring them more into line with many other US-listed companies, has brought the company into the headlights of the ongoing controversy caused by this topic,  and in particular with respect to the treatement of stock-based compensation in Non-GAAP earnings. While Newmark follows many other companies by excluding it from Adjusted Earnings, its heavy use of stock-based compensation, which it intends to lessen going forward, makes it an easy target for critique of its earnings presentations. Nevertheless, we assess that Newmark is at least 35%  undervalued relative to its peers after incorparting stock compensation expenses in its earnings-based valuation metrics. It is also noteworthy that Newmark is currently paying shareholders a yield of ~4% against barely any dividend being paid out by peers

4. ALTABA UNWINDING – Not Much Juice, and Considerably Different Skew

On February 27th of this year, Altaba Inc (AABA US) held a “Strategic and Financial Update Conference Call.” In that call the company led by CEO Thomas McInerney said that effectively it was going to deal with its two major remaining assets (2.03bn shares of Yahoo Japan Corp (4689 JP) and 383.56mm shares of Alibaba Group Holding Ltd (BABA US)) in two stages, saying at the time they were “moving to an active monetization mode on [our] Yahoo Japan stake.”

That Yahoo Japan stake took longer, but the company worked to sell $20+bn of Alibaba last summer through a tender offer and selldown to generate cash for corporate liabilities and taxes, and then the company sold its Yahoo Japan stake in early September. 

Since then, there has been a period of watchful waiting. Some have been expecting a period with an acceptable amount of carry and then possible significant upside. I haven’t seen the upside but agree there has been some baseline carry. And if you can get lots of leverage on this and ride the volatility, it could produce an OK return from A to Z if you ignore the indignities and volatility of passing through stops B to Y.

The New News

Yesterday, Altaba and CEO McInerney held a conference call after filing a PRE 14A preliminary proxy statement related to the selldown/unwinding of its entire Alibaba stake and the proposed windup/dissolution of Altaba as an entity. 

The company will sell or distribute, in stages, its remaining net assets to shareholders, with a “pre-dissolution liquidating distribution to stockholders (in cash, Alibaba ADSs or a combination thereof), which the Fund currently expects will be made in the fourth quarter of 2019 and estimates will be in an amount between $52.12 and $59.63 per Share in cash and/or Alibaba ADSs (which estimates assume, among other things, an Alibaba Share price realized on sale and, if applicable, an Alibaba Share value at the time of distribution, of $177.00 per Alibaba Share).”

As p55 of the preliminary proxy makes clear (and as discussed in the transcript linked above, which is short and worth reading), based on the same US$177/share assumption of value realized or distributed per Alibaba share held, the total distributed would be in a range of $76.72 and $79.72 based on some other assumptions. A larger portion of the remaining amount could take 12 months to arrive, and there could be other residual portions which will take longer (years), as discussed in the proxy and call transcript.

The figure of $76.72 – $79.72 represents a 5.44-9.56% premium to yesterday’s close of $72.76/share and represents the total of the Pre-Dissolution Liquidating Distribution in Q4 2019, a second distribution in Q4 2020, then residuals thereafter after the court-mandated holdback in the dissolution process pays its claims.

Fair value calculations, parameters, and risk discussion below.

Elaborate fair value calculations using different assumptions of appropriate discount rates for each payment, and exactly how much is in the last bit (and how long it takes to pay out) suggest a group of ranges of fair value, from about 3-4% below the last-traded price, to about 4-5% above. However, for a hedge fund to earn a 10% net return for investors from owning the trade at the close of yesterday, getting there requires a fair bit of leverage and the resulting information ratio may be lower than desirable.

Assuming the approximate time to payment as described in the proxy statement, and amount of payment in the first distribution as described, and a multi-year residual of US$5/share, current borrow rates and an assumption of slightly higher discount rate required for the portion of time the stock is unlisted and even higher when one is receiving residual claims, the current fair value of the stock ranges from about 2% below current price and 4% higher. If you assume a higher Holdback Amount, the range of outcomes shifts lower.

5. StubWorld: Naspers’ Restructuring Update

This week in StubWorld …

• Naspers Ltd (NPN SJ)‘s discount to NAV narrows as it teases out more information on spinning-off and separately listing Tencent Holdings (700 HK).

Preceding my comments on Naspers 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%.

In this briefing:

1. GrainCorp: Demerger Underpins the Share Price but a Second-Best Option
2. APE-AHG Merger: Value Accretive but AHG Shareholders Need Improved Terms
3. Japan Post Insurance – The ToSTNeT-3 Buyback
4. Last Week in Event SPACE: Altaba, Nexon, MYOB, Panalpina, Ezion, Naspers, Melco
5. Kingboard Starts Voluntary Unconditional Offer for 88% Held Sub Kingboard Copper Foil

1. GrainCorp: Demerger Underpins the Share Price but a Second-Best Option

Graincorp Ltd A (GNC AU) said on Thursday it plans to spin off its malting and craft brewing distribution business (MaltCo). The proposed demerger, which will complete at the end of the year, would result in two independent ASX-listed companies – MaltCo and GrainCorp’s Grains and Oils businesses (New GrainCorp).

2. APE-AHG Merger: Value Accretive but AHG Shareholders Need Improved Terms

On 5 April, Ap Eagers Ltd (APE AU) announced that it had lobbed an unsolicited all-scrip takeover for Automotive Holdings (AHG AU)/AHG. Under the proposal, AHG’s shareholders would receive 1 AP Eagers share for every 3.8 AHG share. In a 100% acquisition scenario, AP Eagers shareholders would own 75.5% of the merged AP Eagers-AHG.

3. Japan Post Insurance – The ToSTNeT-3 Buyback

Japan Post Insurance (7181 JP)announced on April 4th after the close that Japan Post Holdings (6178 JP) would offer 168.1mm shares of Japan Post Insurance to the public, with another 16.9mm shares offered in an over-allotment. This is big news as it is almost 31% of the shares outstanding of Japan Post Insurance and will dramatically increase its float. 

One can say it is a big deal – ¥450bn (~US$4bn) of stock and at announcement it was equivalent to the last 477 days of traded volume. More importantly, this ALMOST like an IPO in that the placement is almost 3x the original IPO size (66mm shares) and will get a lot of foreign investor attention. 

In addition, JPI announced it would conduct a buyback for up to 50 million shares (with a spending limit of ¥100 billion) on the ToSTNeT-3 off-hours auction-like trading system on days between April 8th and April 12th. 

In its announcement of the decision to sell shares, Japan Post Holdings said that if JPI did indeed conduct the buyback, it might participate, in which case the size of the offering “may decrease.”

The stock rallied very sharply Friday, rising 3% at the open and ending the morning session up 3% but rising much further in the afternoon to end up 9.9%. 

After the close Friday, JPI announced it would spend ¥100bn to buy up to 37.411mm shares pre-open on ToSTNeT-3 on Monday morning. That is 6.2% of shares outstanding. 

Understanding the dynamics and the rules here AND about the offering may tell you something about how this will work. 

4. Last Week in Event SPACE: Altaba, Nexon, MYOB, Panalpina, Ezion, Naspers, Melco

Last Week in Event SPACE …

• Here it is. The end – the culmination of years of effort and high balance sheet usage by hedge funds. Altaba Inc (AABA US) is going out with a whimper plus a little upside.
• Reportedly plans for the sale of NHC have been abandoned with a focus on selling its Nexon Co Ltd (3659 JP)gaming unit.
• That’s a wrap, as Manikay blinks and concedes to KKR’s Offer for MYOB Group Ltd (MYO AU).
• Ezion Holdings (EZI SP) is tendered a necessary lifeboat from Yinson Holdings (YNS MK).
• We now have an agreed deal for Panalpina Welttransport Holding (PWTN SW) supported by the Ernst Göhner Foundation, the major activist shareholders, and Panalpina management.
• Naspers Ltd (NPN SJ)‘s discount to NAV narrows as it teases out more information on spinning-off and separately listing Tencent Holdings (700 HK).
• Melco International Development (200 HK) is potentially mispriced against Melco Resorts & Entertainment (MLCO US) after the release of FY18 earnings.

• Plus other events, CCASS movements and upcoming key dates for M&A transactions.

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

Altaba Inc (AABA US) (Mkt Cap: $42bn; Liquidity: $452mn)

Altaba will sell or distribute, in stages, its remaining net assets to shareholders, with a “pre-dissolution liquidating distribution to stockholders (in cash, Alibaba ADSs or a combination thereof), which Altaba currently expects will be made in the fourth quarter of 2019 and estimates will be in an amount between $52.12 and $59.63/share in cash and/or Alibaba ADSs (which estimates assume, among other things, an Alibaba Share price realized on sale and, if applicable, an Alibaba share value at the time of distribution, of $177.00/Alibaba share).”

• As p55 of the preliminary proxy makes clear, based on the same US$177/share assumption of value realized or distributed per Alibaba share held, the total distributed would be in a range of $76.72 and $79.72 based on some other assumptions.
• A larger portion of the remaining amount could take 12 months to arrive, and there could be other residual portions which will take longer (years), as discussed in the proxy and call transcript.
• It looks like there is upside as the stock closed at US$72.76 (at the time of the insight). But there is less than you think simply because it will take time to get out of it. And discount rates of the first portion may be low, but discount rates applied to the later payments post-delisting and post court workout for the Holdback Amount could be higher.
• Travis Lundy has opinions on what to do once you start getting into the arb risks. Do read his insight.

(link to Travis’ insight: ALTABA UNWINDING – Not Much Juice, and Considerably Different Skew)

Nexon Co Ltd (3659 JP) (Mkt Cap: $14bn; Liquidity: $50mn)

Sanghyun Park discussed Nexon sale after the FT reported bankers has stopped plans to sell the holding company NXC. The sale of NXC is probably the simplest exit path for Kim Jung-ju as it would be a more attractive tax outcome than selling Nexon Japan outright.

• But there’s a lot of other stuff in NXC that suitors don’t want to, which ideally should be sold before selling NXC. There’s also the issue of whether a tender offer would be required whether the sale of NXC or Nexon – Travis concludes an offer would be required while Sanghyun does not.

• Korean local news outlet reported that Tencent Holdings (700 HK)‘s US$6bn bond issuance may be a fund raising for a Nexon takeover. Still, South Korea would prefer keep Nexon’s ownership domestic, which may favour Kakao Games (1404796D KS) or PE outfit MBK.

(link to Sanghun’s insight: Nexon Sale: Key Questions at This Point & Most Realistic Answers)

Summit Ascent Holdings (102 HK) (Mkt Cap: $270mn; Liquidity: $1mn)

Summit Ascent announced that First Steamship (the major shareholder) and Kuo Jen Hao (chairman) are in talks to sell their entire shareholdings. No numbers were disclosed. This stake sale would not trigger an MGO and there was no reference to the release of an announcement pursuant to the Codes on Takeovers and Mergers and Share Buy-Backs in Hong Kong. Shares are up 35%.

• Summit is trading at a trailing PER of 267x. CapIQ forecasts point to a threefold increase in earnings in FY19, although I would advise caution on those numbers given the tight cluster of target prices; historically, target prices for Summit have been wide of the mark.
• First Steamship bought in at $1.06 in December 2017, around the same price when this announcement was made. Should this sale complete, this would result in the third time the shares of the major shareholder have changed hands. This looks like a great opportunity to exit.

(link to my insight: Summit Ascent’s Slippery Slope)

MYOB Group Ltd (MYO AU) (Mkt Cap: $1.4bn; Liquidity: $10mn)

On the 20th March, MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them. Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.

• On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.
• Mid-week, Manikay caved and said intends to vote all its shares for the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote. This is now MUCH closer to being a done deal. It will trade tight.

• Travis is a trifle surprised Manikay did not wait a little longer. They were able to increase their stake in the low A$3.30s because of the uncertainty of their intentions, and they could probably have gone close to 20% in the low 3.30s before saying “Yes.” That would have been a welcome extra profit.

(link to Travis’ insight: Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer)

Ezion Holdings (EZI SP) (Mkt Cap: $219mn; Liquidity: $2mn)

Lifeboat market play Ezion has received a bail-out from Malaysia’s Yinson Holdings (YNS MK) via a capitalisation of debt and option agreement. Ezion remains suspended.

• On the surface, this looks like a bargain for Yinson which is ostensibly taking over Ezion for US$200mn. However, Yinson said that it is still negotiating with the designated lenders of the US$916mn debt on the terms and conditions..
• Yinson’s business risks include contact risk, oil price fluctuations and the level of activities in the O&G industry. These risks do not change should the Ezion proposal complete.
• And offshore support companies face a raft of challenges: Ezra Holdings (EZRA SP) entered bankruptcy in 2017, Pacific Radiance (PACRA SP) has been voluntarily suspended since 28 Feb 2018 as it seeks a way to complete its debt restructuring; while Swiber Holdings (SWIB SP)recently announced its own US$200mn injection from Seaspan Corp. (SSW US), after the company had laboured in judicial management for the past two years.

(link to my insight: Yinson Tenders a Lifeboat for Ezion)

Kingboard Copper Foil Hldgs (KCF SP) (Mkt Cap: $320mn; Liquidity: <$100k)

For the second time in two years parent Kingboard Laminates Holdings (1888 HK) (ultimate parent being Kingboard Holdings (148 HK)) has launched an Offer to fully privatize KCF. This time at SGD 0.60/share vs SGD 0.40 two years ago.

• The last time came on the heels of a long independent review by EY which found KCF had given up profit to the parent through a series of relatively unfair interested party transaction agreements.
• At the end, the Bermudan Court of Appeals went against a Supreme Court decision which had decided that a replacement counterparty decision was prejudiced against minorities, and despite the April 2017 deal being not fair and not reasonable according to the IFA, the parent acquired ~10% (of the 28% it did not own) bringing their stake to 82.3%. A year later the parent acquired another 5.5% bringing them to almost 88%.
• Now an offer at SGD 0.60/share (compared to the Revalued NTA of SGD 0.7086/share from the IFA report (p36) of two years ago gets closer to the mark, but crucially, it is designed to squeeze out minorities with the threat of delisting. Kingboard Laminates only needs 2.05% to oblige a delisting from the SGX. As far as Travis can tell, it would require more – at least 95% of shares – to oblige a mandatory squeezeout of minorities according to Section 102-103 of Bermuda Companies Act.
• Travis thinks this one gets through.

(link to Travis’ insight: Kingboard Starts Voluntary Unconditional Offer for 88% Held Sub Kingboard Copper Foil)

Ying Li International Real Estate Ltd (YINGLI SP) (Mkt Cap: $260mn; Liquidity: truly tiny)

China Everbright (165 HK) has launched an MGO at SGD 0.14/share for the rest of Ying Li International Real Estate Ltd (YINGLI SP) after last week purchasing the 30.00% stake formerly held by the CEO, bringing its stake to 58.9%.

• The deal is at a negligible premium and is far, far below Tangible Book Value Per Share (which is almost three times the offer price). Given that the acquirer bought a large stake in the company and offered perpetual capital of almost the current market cap at a significant premium to the MGO price, Travis thinks it an unattractive offer.
• It is puzzling as to why the CEO would sell his shares at such a discount, especially when the company and Everbright co-own some of the assets.
• While the stated intention of the Offeror is to keep the stock listed, and the MGO is presented almost as “technical”, it would be enormously to Everbright’s benefit to buy as many shares as they could down at this price level. It will go from being underwater on an equity affiliate stake purchase to having a huge writeup in value if Everbright consolidates the asset post MGO.
• For that, Travis thinks there is a possibility of a bump just to make it more attractive, though the IFA report could come out with a not fair and reasonable result which shows NTA or NAV far, far higher than the Offer Price, which is not yet declared final.

(link to Travis’ insight: Everbright Mandatory Offer for Ying Li Intl Real Estate – Going Cheap)

Briefly …

In a mainly technical piece, I explained why China Three Gorges, China Power New Energy Development Co (735 HK)‘s largest shareholder with 27.1% is currently required to abstain from voting at the forthcoming court meeting, despite the misleading statement in the  announcement that China Three Gorges has given an irrevocable undertaking to vote for the Scheme. (link to my insight: China Three Gorges’ Rebuttable Presumption)

Panalpina Welttransport Holding (PWTN SW) (Mkt Cap: $4.8bn; Liquidity: $27mn)

What was once a tough deal is now an agreed deal. The deal is 2.375 shares of DSV for every share of Panalpina, which as of the previous Friday’s close had a value of CHF 195.80/share which is a 43% premium to the CHF 137/share, where Panalpina was trading the day before DSV’s first bid.

• Panalpina is getting taken out at 28.1x reported 2018 EV/EBITDA multiple (pre-IFRS 16) calculated at a CHF 195.8 price. Panalpina shareholders will own ~23% of DSV shares out if all shares are exchanged and the Ernst Göhner Foundation will be the largest shareholder at ~11%.
• 69.9% of shares have irrevocably agreed to support the Exchange Offer. The customary condition is 80% to make it go through, meaning DSV needs another 10.1% out of the 30% extant (or just over one-third).
• Travis expects there is another 10-15% held by arbitrageurs and 5-7% held by indexers already so this deal looks to me like it is done. He expects the Exchange Offer may settle as early as early-August. If it trades tight, he would get out because DSV is probably priced to a very good level. 

(link to Travis’ insight: DSV Improves Bid and Göhner Foundation and Panalpina Agree)

Lenta Ltd (LNTA LI) (Mkt Cap: $1.7bn; Liquidity: $2mn)

Reuters reported that Alexey Mordashov’s Severgroup had reached an agreement to buy a 41.9% stake, excluding treasury shares, in Lenta from those TPG and European Bank for Reconstruction and Development, for a total of US$721mm, or US$18 per share or US$3.60 per GDR. That implies a price of US$1.75bn for the whole company. This was followed by Lenta announced confirming the cash offer. The Offer Price is an 8.11% premium to the last trade on 26 March – the undisturbed price, and a premium of 9.76% to the 6mo average price of US$3.28 for the GDRs. 

• The first 41.9% are sold conditional on FAS Clearance (presumably Mordashov has cleared this transaction with “the right people”) expected in May 2019, a few easily achieved conditions, and the condition of no sanctions being in play for any of the selling or buying parties. 
• Once cleared – expected in May 2019 – this becomes a straightforward offer with no minimum acceptances meaning that investors can sell shares into the deal or decide not to do so.
• It’s not an attractive offer price, with the possibility of a bump if enough people complain.  If you want to buy and hold, this deal is a put option.

(link to Travis’ insight: Severgroup Puts in a Cheeky Bid for Lenta – TPG and EBRD Bail)

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

Since announcing the intended listing of its international internet assets on Euronext Amsterdam “no earlier than H2 2019” – together with a secondary, inward listing on the Johannesburg Stock Exchange – I calculate Naspers discount to NAV has narrowed to 34.4% from 37.1%, the day before the announcement, placing the current discount a shade below the 12-month average.

• The likelihood of NewCo trading at a tighter discount to where Naspers’ previously (& currently trades) is universally accepted. Naspers will benefit from that reduced discount via its 75% stake; but it is not known where Naspers’ own discount will trade after the spin-off.
• There are indications the management want to see the group discount narrow to 30%, possibly down to the 20% level, which implies a significantly lower discount for Naspers, potentially around 10%. That would seem optimistic as investors focus more on the directly-held Tencent vehicle, and the fact Naspers is a holding company, holding a stake in another holding company.
• Naspers’ discount may drift narrower on the expectation Naspers’ spin-off works its magic. Greater clarity on the option into Naspers or NewCo may provide an additional boost; but conversely, if such an option is limited, there is likely to be disappointment.

(link to my insight: StubWorld: Naspers’ Restructuring Update)

Melco International Development (200 HK) / Melco Resorts & Entertainment (MLCO US)

With Melco trading at a (then) 32% discount to NAV, Curtis Lehnert recommends a set-up trade on a dollar for dollar basis. The current level, as I write, is statistically the most attractive according to the Smartkarma Holdco Tool, sitting at -1.8 standard deviations from the 180 DMA.

• Stub assets are minimal – around 8% of GAV – if excluding gaming licenses, goodwill and trademarks. Net cash is $6.4bn or $4.27/share.
• Those stub assets are still loss-making, after deconsolidating out MLCO, to the tune of $386mn in EBITDA, but that was an improvement on (HK$682mn) figure in FY17.
• Still, Curtis thinks now is the time to enter the trade to take advantage of both the statistical and fundamental supports to the trade. 

(link to Curtis’ insight: TRADE IDEA – Melco (200 HK) Stub: Lose a Little Sleep in Macau)

For the month of March, ten new deals were discussed on Smartkarma with a cumulative deal size of US$22.3bn. This overall number includes Blackstone and Hellman & Friedman’s proposal for Scout24 AG (G24 GR) after the Tender Offer was officially launched in March. This deal was first proposed in mid-January – which was rejected by the board – and subsequently an improved offer was tabled, which was then supported.

The average premium to last close for the new deals announced in March was 18%, while the average for the first quarter of 2019 is 33%.

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

• Delta Electronics Thai (DELTA TB)‘s results of the CVTO have been announced.  42.85% of shares tendered, therefore the offeror held 63.78% of shares at the close of the offer. The MSCI downweight occurred at the close Thursday, however shares popped 17.5%.

• Hanergy Thin Film Power (566 HK)‘s Scheme document has been delayed until the 25 April, from the 2 April.

• The Dairy Crest (DCG LN) takeover by Saputo was approved at the Court Meeting and Scheme Meeting yesterday.

• Ap Eagers Ltd (APE AU), Automotive Holdings (AHG AU)‘s largest shareholder, has proposed an all-scrip merger offer. AHG recommends shareholders take no action at this time.

• Glow Energy Pcl (GLOW TB)‘s IFA recommends shareholders tender into Global Power Synergy Company Ltd (GPSC TB)‘s offer.

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

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

5. Kingboard Starts Voluntary Unconditional Offer for 88% Held Sub Kingboard Copper Foil

April 4th after the close, a wholly-owned subsidiary of Hong Kong-listed Kingboard Laminates Holdings (1888 HK) (which itself is 70.93% owned by Kingboard Holdings (148 HK) (formerly known as “Kingboard Chemical“)) launched a VOLUNTARY UNCONDITIONAL CASH OFFER for Kingboard Copper Foil Hldgs (KCF SP). 

This is a “clean-up” as Kingboard Laminates owns 87.96% of Kingboard Copper Foil already. 

It is unconditional in all respects and the Offeror owns 87.96%. The goal is delisting. If they get 17.03% of the minority, they will be able to engineer a delisting. Squeezeout is a bit further out but is far from impossible. 

This looks like a done deal. This one should trade at shouldn’t trade at a premium UNLESS…

Quiddity’s new Quiddity Singapore M&A Guide 2019 is now published with guidelines to the relevant rules, regulations, documentation, and pointers to the Singapore M&A landscape. Watch for more in the series to be published shortly.

In this briefing:

1. Wynn’s Whale Of A Deal For Crown Off the Hook
2. OUE Commercial REIT & Hospitality Trust Merger Proposed
3. Lynas Investor Briefing – Looks Like More Capex Ahead
4. DHICO Rights Offer: Current Status & Trade Approach
5. Nexon Sale: Nexon Japan Tender Price Estimations

1. Wynn’s Whale Of A Deal For Crown Off the Hook

After a brief pause in trading yesterday morning, Crown Resorts (CWN AU) announced it is in confidential discussions with Wynn Resorts (WYNN US) concerning an acquisition of Crown by way of a Scheme. The announcement states that Wynn has approached Crown on more than one occasion.

But it does not remove the reason for a deal. The Crown commentary clearly indicated that they were not averse to doing a deal. That would suggest James Packer is not either.

The proposal arrived at a unique time for both companies after the CEOs and major shareholders of both companies relinquished their roles in 2018: Packer for health reasons, and Steve Wynn after allegations of sexual harassment.

If Wynn wants to expand its footprint into the hemisphere and James Packer wants to arrange his affairs, a deal somewhere should be in the offing. This deal may just get pushed to the back burner before coming back to the fore. Several years ago, ADM launched a proposal at Graincorp. Months later there had been no apparent communication and the shares drifted off and then, all of a sudden, there was an agreed deal.

Or perhaps this opens up Crown to other suitors.

2. OUE Commercial REIT & Hospitality Trust Merger Proposed

After a WSJ article on Sunday suggesting as much, Monday morning 8 April 2018 saw the announcement of a Proposed Merger between OUE Commercial Real Estate Investment Tr (OUECT SP) and OUE Hospitality Trust (OUEHT SP) whereby OUEHT unitholders would receive a combination of cash and OUECT shares (S$0.04075 + 1.3853 shares of OUECT) for every share of OUEHT held. Investors in each would receive any “permitted distributions” (dividends, etc) declared by the respective managers in respect of the period from 1 Jan 2019 up to the day immediately before the date on which Trust Scheme becomes effective.

This would create a REIT with S$6.8bn of assets, a pro-forma market cap of ~S$2.9bn, and a free-float of S$1.1bn (up by 57%). OUE Group would continue to own 48.3% of the total. 

The benefits to investors would be increased scale (2.2mm square feet of commercial net lettable area, + 1,640 hotel rooms), more borrowing capacity, increased diversification as asset concentration would be lowered, and because the scope of NewREIT would be broader, it would allow REIT managers more flexibility. The above-mentioned points are advertised as being the fodder for a re-rating. The idea of possible index inclusion is mooted as well. 

The OUECT presentation says that the merger is “DPU accretive to unitholders” (+2.1% on a 2018 pro-forma basis) while the OUEHT presentation says that the merger is “value accretive to stapled securityholders” (+18.7% NAV uplift per stapled security). 

Details of how this all works below.

Separately, two other Singapore deals announced at the end of last week include:

• Kingboard Laminates Hldgs (1888 HK) buying out Kingboard Copper Foil (KCF SP) discussed in Kingboard Starts Voluntary Unconditional Offer for 88% Held Sub Kingboard Copper Foil

• China Everbright (165 HK) announces an MGO for Ying Li International Real Estate Ltd (YINGLI SP) as discussed in Everbright Mandatory Offer for Ying Li Intl Real Estate – Going Cheap

• To accompany these, there is a Quiddity Singapore M&A Guide 2019.

3. Lynas Investor Briefing – Looks Like More Capex Ahead

At noon Sydney time Lynas Corp Ltd (LYC AU) held an investor briefing by webcast regarding comments made by the Malaysian Prime Minister in his first cabinet press conference on Friday 5 April 2019. Those comments were noted in the ASX regulatory update. 

4. DHICO Rights Offer: Current Status & Trade Approach

This post looks at the current trading status of DHICO rights offer on each of the major movement days. It still seems that the share price should be kept high to give the Mar 25~26 arb traders an opportunity to short. This explains recent strong prices. It is presumed that shorting hasn’t been fully done. About half is still to be shorted. This suggests that strong prices should be kept a little longer. Once this is done, we will likely see a strong downward pressure until the price hits ₩6,250. This sets the floor price at ₩5,000. This will be good time to do one-way shorting.

5. Nexon Sale: Nexon Japan Tender Price Estimations

This post estimates Nexon Japan tender price. For this, I use the same approach that a local PE named “MBK Partners” would use based on EBITDA multiple and IRR on a 3 year exit. From their position, the only proven value-up path would be KOSPI moving. MBK must try to stay as conservative as possible. Whatever Netmarble value addition should be an extra when deciding on a tender price. So, I base my estimation solely based on KOSPI moving effect. For this, I use NCsoft as a sole valuation comp.

In this briefing:

1. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC
2. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

1. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC

In this report, we provide an analysis of our pair trade idea between Hyosung Corporation (004800 KS) (market cap of 1,612 billion won) and Hyosung TNC Co Ltd (298020 KS) (market cap of 712 billion won). Our strategy will be to be long Hyosung TNC and be short Hyosung Corp. 

In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. We believe this price divergence has been excessive. The four major reasons why Hyosung Corp’s share price has surged in the past six months are mentioned below. There is a case to be made that the market has already factored into Hyosung Corp’s share price many of the positive factors mentioned below. 

• Excellent dividends 
• Corporate activism related stock 
• Strong financial results 
• Timing of the increased insider ownerships/Completion of tender offers

Hyosung TNC has underperformed the market as well as Hyosung Corp in the past six months. However, Hyosung TNC appears to be a turnaround story driven by the following factors: 

• Decline in raw material prices 
• Aggressive spandex investment in India 
• Stabilization of spandex prices in 2H19 
• Consolidation of the global spandex industry

2. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

• Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
• Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
• Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.

In this briefing:

1. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC
2. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ
3. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding

1. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC

In this report, we provide an analysis of our pair trade idea between Hyosung Corporation (004800 KS) (market cap of 1,612 billion won) and Hyosung TNC Co Ltd (298020 KS) (market cap of 712 billion won). Our strategy will be to be long Hyosung TNC and be short Hyosung Corp. 

In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. We believe this price divergence has been excessive. The four major reasons why Hyosung Corp’s share price has surged in the past six months are mentioned below. There is a case to be made that the market has already factored into Hyosung Corp’s share price many of the positive factors mentioned below. 

• Excellent dividends 
• Corporate activism related stock 
• Strong financial results 
• Timing of the increased insider ownerships/Completion of tender offers

Hyosung TNC has underperformed the market as well as Hyosung Corp in the past six months. However, Hyosung TNC appears to be a turnaround story driven by the following factors: 

• Decline in raw material prices 
• Aggressive spandex investment in India 
• Stabilization of spandex prices in 2H19 
• Consolidation of the global spandex industry

2. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

• Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
• Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
• Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.

3. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding

In this version of the GER weekly EVENTS research wrap, we contend that investors should cash out on the MYOB Group Ltd (MYO AU) deal and assess the NAV discount potential for Rakuten Inc (4755 JP) post the IPO launch of Lyft Inc (0812823D US) – of which Rakuten has a 13% stake. Moreover, we dig into the deals for Delta Electronics Thai (DELTA TB) , Graincorp Ltd A (GNC AU) and Hopewell Holdings (54 HK)

More details can be found below. 

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

In this briefing:

1. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC
2. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ
3. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding
4. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required

1. Korean Stubs Spotlight: A Pair Trade Between Hyosung Corp and Hyosung TNC

In this report, we provide an analysis of our pair trade idea between Hyosung Corporation (004800 KS) (market cap of 1,612 billion won) and Hyosung TNC Co Ltd (298020 KS) (market cap of 712 billion won). Our strategy will be to be long Hyosung TNC and be short Hyosung Corp. 

In the past six months, Hyosung Corp is up 62% while Hyosung TNC is down 12%. We believe this price divergence has been excessive. The four major reasons why Hyosung Corp’s share price has surged in the past six months are mentioned below. There is a case to be made that the market has already factored into Hyosung Corp’s share price many of the positive factors mentioned below. 

• Excellent dividends 
• Corporate activism related stock 
• Strong financial results 
• Timing of the increased insider ownerships/Completion of tender offers

Hyosung TNC has underperformed the market as well as Hyosung Corp in the past six months. However, Hyosung TNC appears to be a turnaround story driven by the following factors: 

• Decline in raw material prices 
• Aggressive spandex investment in India 
• Stabilization of spandex prices in 2H19 
• Consolidation of the global spandex industry

2. Nongshim Stub Trade: Sub Moving Up on New Hit Product, Now at Near -2σ

• Shin Ramyun non-frying noodle dramatically reversed Sub’s fortune. Local street starts believing Sub will hit a ₩100bil OP milestone this year. Local institutions began to scoop up Sub shares since a week ago. Yesterday, local pension/foreign money came in. This led to the largest Sub pushing in many weeks. Holdco/Sub are not at near -2σ.
• Street consensus on Sub’s FY19e OP is already upwardly adjusted to ₩106bil. On this, Sub is already at a 17x earnings. ₩106bil OP is immaturely aggressive. 17x isn’t particularly cheap given Sub’s FY18 year-end PER (18.4x).
• Valuation wise, Sub price should be pressed down at this level until more dramatic and tangible sales data come out. Holdco discount is still hovering at 50% to NAV. I’d make a stub trade here. Holdco liquidity can be an issue.

3. Last Week in GER Event-Driven Research: Myob, Rakuten, Delta, Graincorp and Hopewell Holding

In this version of the GER weekly EVENTS research wrap, we contend that investors should cash out on the MYOB Group Ltd (MYO AU) deal and assess the NAV discount potential for Rakuten Inc (4755 JP) post the IPO launch of Lyft Inc (0812823D US) – of which Rakuten has a 13% stake. Moreover, we dig into the deals for Delta Electronics Thai (DELTA TB) , Graincorp Ltd A (GNC AU) and Hopewell Holdings (54 HK)

More details can be found below. 

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

4. Meituan Dianping (3690 HK): Lock-Up Expiry – Good 4Q18 Required

Meituan Dianping (3690 HK)‘s shares currently trade 18% below its IPO price of HK$69.00 per share. Meituan will announce its 4Q18 results on Monday, 11 March 2019, after market close. Notably, Meituan’s six-month lock-up period expires on 19 March 2019.

In this briefing:

1. Omron into the Nikkei 225, Pioneer Out

1. Omron into the Nikkei 225, Pioneer Out

Friday 8 March after the close, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP)  had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). Omron Corp (6645 JP) will replace Pioneer in the Nikkei 225 Average, with a deemed par value of 50 yen per share.

The date for this index deletion and inclusion event is the 15th of March, as per the schedule of the February 19th announcement as to how the Pioneer event would be treated. 

This affords special sits/events followers a couple of different events to look at. 

In this briefing:

1. Omron into the Nikkei 225, Pioneer Out
2. Another MGO For HKICIM As HNA Sells Stake Back To Blackstone

1. Omron into the Nikkei 225, Pioneer Out

Friday 8 March after the close, the Nikkei announced that because the third party share sale of Pioneer Corp (6773 JP)  had been completed, it would be deleted from the Nikkei 225 Average (and the Nikkei 500 Index). Omron Corp (6645 JP) will replace Pioneer in the Nikkei 225 Average, with a deemed par value of 50 yen per share.

The date for this index deletion and inclusion event is the 15th of March, as per the schedule of the February 19th announcement as to how the Pioneer event would be treated. 

This affords special sits/events followers a couple of different events to look at. 

2. Another MGO For HKICIM As HNA Sells Stake Back To Blackstone

Late Friday night, Hong Kong International Construction Investment Management Group Co., (687 HK) (“HKICIM”) announced HNA Finance had entered into a SPA in which Times Holdings, a Blackstone-controlled vehicle, had conditionally agreed to buy 69.54% of HKICIM’s issued shares for HK$3/share in an HK$7bn transaction. Should the SPA complete, Times will make a mandatory unconditional offer – also at $3.00/share (14.5% premium to last close) – for the remaining 30.46% of shares out.

This proposal arrives nearly three years after HNA bought a 66% in Tysan Holdings  – as HKICIM was previously known – from Blackstone for HK$4.53 per share, triggering an MGO.

This share sale underlines HNA Group’s ongoing strategy to ease its debt burden and align its core business focus towards aviation, not construction and property.

HKICIM made headlines in the past not just for its eye-watering property acquisitions at Kai Tak (up to HK$13.5k/sqft in March 2017), the former site of Hong Kong’s international airport; but that HNA was also oddly motivated to acquire these parcels of land at record breaking prices to “snatch land and pricing power from the city’s real estate cartel“.

HKICIM sold its last Kai Tak site to Wheelock & (20 HK) last month (for a loss of $740mn), leaving the company with an estimated net cash position of ~$6.0bn (using FY18 interim numbers) or ~$1.80/share, it’s foundation piling operations, a development site in Hong Kong and a residential and commercial property development project in Shenyang.

The closing of the SPA is subject to the satisfaction or waiver of various conditions. However, the short time frame (13 business days from this announcement) in which to secure, fulfill or waive these conditions suggest minimal deal risk.

This will trade tight to, if not through terms, with an anticipated completion late April. There will be no bump to the Offer. Times does not intend to avail itself to compulsory acquisition and intends to maintain HKICIM’s listing; while both Times and HKICIM will take appropriate steps to maintain a sufficient public float after the close of the Offer.