Event-Driven

In this briefing:

1. Discovery Management Will Likely Soon Be Helping Narrow the Share Class Spread
2. Satellite Companies Securing Agreements to Sell C-Band Spectrum
3. Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17)
4. The GER Weekly EVENTS Wrap: Anta/Amer, Trade Me, Hengan and API/Sigma
5. API/Sigma Merger: Sigma Shareholders Need a Better Offer

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

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

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

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

3. Discover HK Connect: Mainlanders Are Buying Shandong Gold, and Pharmaceuticals (2018-12-17)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainlanders in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: those with a market capitalization of above USD 5 billion, those with a market capitalization between USD 1 billion and USD 5 billion, and those with a market capitalization between USD 500 million and USD 1 billion.

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

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

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

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

5. API/Sigma Merger: Sigma Shareholders Need a Better Offer

Australian Pharma Indus (API AU), a pharmaceutical wholesaler, has lobbed an indicative cash-scrip proposal for its competitor, Sigma Healthcare (SIG AU). Under the proposal, Sigma shareholders would receive 0.31 API shares and A$0.23 cash for each Sigma share, implying $0.686 per Sigma share. If the proposal is successful, API/Sigma shareholders would own 63%/37% of the merged API-Sigma.

In this briefing:

1. Japan Display: Squeezing Up 36% As Chinese Investment Could Solve Balance Sheet Troubles
2. Hyundai Motor Share Class: Time for 1P to Catch Up
3. Wonik Merger Swap: Div-Adjusted Yield Is Now at 4.17% – Cancellation Risk Is Slim
4. Share Classifications: Mid-December 2018 Snapshot
5. Hengan Intl. (1044 HK): Our Analysis Suggests that Bonitas’ Allegations Have Some Substance

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

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

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

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

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

3. Wonik Merger Swap: Div-Adjusted Yield Is Now at 4.17% – Cancellation Risk Is Slim

• Wonik IPS (240810 KS) / Wonik Tera Semicon (123100 KS) merger got shareholder approval yesterday. Spread now stands at 4.28%. Spread peaked at 5.12% on Dec 12. Dividend-adjusted spread is 4.17%.
• Tera Semicon is a bit of a concern. Its stock purchase price is 1.38% higher than current price. Worst case would be half of the minority shareholders claiming rights. Even if so, this would be less than ₩60bil. The company is liquid enough to absorb it.
• Local institutional arb traders have been seen doing this trade, at least partly. I’d make this trade when spread widens to 5~6%. I expect it to get to this level very soon. 

4. Share Classifications: Mid-December 2018 Snapshot

This weekly share class summary is a companion insight to Travis Lundy‘s H/A Spread & Southbound Monitor – most recently discussed in H/A Spread & Southbound Monitor – Going Into Year End.   

This share class monitor provides a snapshot of the premium/discounts for various share classifications around the region, and comprises four sets of data:

1.  82 ADRs
2.  105 Korean Prefs
3.  22 Regional Dual Classes
4.  7 Foreign/Local Thai shares 

The average premium/discount for each set over a one-year period is graphed below.

For a granular breakdown of each set, PDFs are attached at the bottom of this insight.

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

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

In this briefing:

1. Nexen Corp Holdco Trade: Status Update & Recommended Action
2. BGF Holdo Trade: Status Update & Recommended Action
3. HDC Holdings Holdco Trade: Status Update & Recommended Action

1. Nexen Corp Holdco Trade: Status Update & Recommended Action

• Nexen Corp (005720 KS) / Nexen Tire Corp (002350 KS) stub trade yield is 6.07%. Price ratio is now at 20D MA. Holdco discount now stands at 41.57% to NAV.
• Shorting on Tire has softened in the last two trading days. No yearend dividend boosting effect is expected on Holdco. Holdco discount isn’t particularly high. Price ratio is well above yearly avg. I’d close this position now at a 6.07% yield.

2. BGF Holdo Trade: Status Update & Recommended Action

• BGF Co Ltd (027410 KS) / Bgf Retail (282330 KS) stub trade is at a 4.38% loss. Price ratio is still well below -1 σ. It is actually at a new yearly low. Holdco discount now stands at 48.55% to NAV.
• Holdco price discount is too harsh. It’d be too tempting to pass up. An estimated 1.5~2%p difference in dividend yield must be pushing up price ratio soon.
• I still believe below -1 σ wouldn’t last for as long as it used to. I’d hold onto this position a bit longer with a 10% loss cut.

3. HDC Holdings Holdco Trade: Status Update & Recommended Action

• HDC Holdings (012630 KS) / HDC-OP (294870 KS) stub trade yield is now 0.38%. Price ratio is still below -1 σ. It is close to yearly low. Holdco discount now stands at 47.92% to NAV.
• The major shareholder Chung Mong-kyu bought an additional 0.63% stake for ₩16.1bil from Dec 6~10. I didn’t expect it. But it now seems that the owner buying factor is truly over.
• I’d wait a bit longer to capitalize on this newly developed situation. Price ratio is close to yearly low. Yearend dividend factor should be helping the situation.

In this briefing:

1. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare
2. Red Hat Sets January 16, 2019 Special Meeting Date to Vote on IBM Deal.
3. Trade Me (TMZ NZ): Hellman & Friedman Could Again Counter-Bid Apax, but Modestly
4. Macq Media In The Crosshairs As Fairfax Merger Completes
5. TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave

1. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare

• I initiated a pair trade (short Celltrion / long Healthcare) on Oct 22. Yield peaked at 16.66% on Nov 22. It now stays at 8.75%.
• The ongoing FSS investigation is hammering both. Healthcare is hurting a bit more because it is more directly exposed. The market is overreacting to it. Given what has happened to Samsung Biologics Co., (207940 KS), it is very unlikely that this will be a serious risk.
• I’d hold onto this position longer to regain a mid-teen yield. Current ratio is slightly above 20D MA, but still below yearly median. 
• Healthcare’s KOSPI move is still lurking. Temasek’s Healthcare selling was done lately. Celltrion merger is also rising to the surface. We have more factors pushing up the ratio in favor of Healthcare.

2. Red Hat Sets January 16, 2019 Special Meeting Date to Vote on IBM Deal.

As discussed in my previous research piece,  Red Hat (RHT US) Files Preliminary Merger Proxy for Its Acquisition by IBM (IBM US) , the timing of the shareholder vote to approve the merger with IBM would depend on the SEC’s review of the draft merger proxy filed on November 30, 2018. Red Hat has now set a meeting date of January 16, 2018. In this update I discuss the latest implications.

3. Trade Me (TMZ NZ): Hellman & Friedman Could Again Counter-Bid Apax, but Modestly

Trade Me (TME NZ), the largest online auction platform operating in New Zealand, has entered into a scheme implementation agreement with Apax Partners. Apax Partners has upped its bid for Trade Me from NZ$6.40 to $6.45 a share, to match Hellman & Friedman’s bid.

4. Macq Media In The Crosshairs As Fairfax Merger Completes

Late last week, Australian media reported that preliminary discussions were underway between Nine Entertainment Co Holdings (NEC AU) and Macquarie Radio Network (MRN AU)’s second-largest shareholder, John Singleton. This development is not entirely unsurprising, just that formal discussions were deferred until the Nine/Fairfax Media (FXJ AU) merger was formally completed. 

In July, Nine and Fairfax entered into a Scheme Implementation Agreement in which the two companies would merge (albeit a Nine takeover) via a cash/scrip structure, in an A$4bn deal, creating Australia’s largest integrated media player. This included the acquisition of Fairfax’s 54.5% stake in MRN. The scheme was implemented on the 7 December. I discussed the merger in my insight Nine & Fairfax – Integrated Advertising.

In an interview with The Daily Telegraph last month (paywalled), John Singleton confirmed that he was ready to sell his 32% stake in MRN as he was not interested in being a small player in a big operation.

The Australian (paywalled) is reporting that Nine has offered $2/share (a 9.3% premium to the closing price of A$1.83 on December 4^th), with Singleton believed to be holding out for $2.15/share. In a further twist, Alan Jones, with 1.27% of MRN, is understood to have certain conditions/clauses attached to that stake should Singleton sell, which may make an offer tabled by Nine potentially untenable.  

For its part, Nine has confirmed it has held preliminary discussions regarding the outstanding shares, and further announcements will be made by Nine should these discussions progress to a transaction. MRN is currently trading at ~$1.90/share. 

5. TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave

If ever there was a stub business that is poised to capitalize on global trends of factory automation, automated logistics handling and electric vehicle prevalence, it is that of Toyota Industries (6201 JP). In August, I took an in-depth look at the major businesses of Toyota Industries and concluded that the market was not giving the company credit for the global leadership it has established in the forklifts and automobile A/C compressor businesses, nor for the progress it has made in the logistics equipment business. While the market’s oversight appeared to have corrected in September and October as the discount to NAV contracted from 34% to 25%, the trend has since reversed and the discount is back at trough levels of 35%. In August, I implied that this would be a good trading opportunity. Today, I explicitly recommend going long the stub.

In this insight I will cover:

• A market-neutral trade setup 
• A review of the core unlisted businesses
• Alternative data used to gauge performance in the core business
• Risks of the trade
• A recap of ALL my stub trade ideas on Smartkarma, including track record of performance