Event-Driven

Nikkei has just announced the changes to the Nikkei 225 (NKY INDEX) as part of its periodic review. The changes will be made prior to the open of the market on 1 October, so passive funds will trade at the closing auction on 30 September.

There are 3 changes to the index with Keyence Corp (6861 JP), Murata Manufacturing (6981 JP) and Nintendo Co Ltd (7974 JP) replacing Nisshinbo Holdings (3105 JP), Toyo Seikan Group Holdings L (5901 JP) and Sky Perfect Jsat (9412 JP).

While the inclusion of Nintendo Co Ltd (7974 JP) and the deletion of Sky Perfect Jsat (9412 JP) was expected, the other names are relative surprises.

The impact on the inclusions is not very high in terms of days of ADV to buy and in terms of the real float to buy, but the impact on the deletions is a lot higher. The selling on Nisshinbo Holdings (3105 JP) and Toyo Seikan Group Holdings L (5901 JP) will result in around 18% of the free float of the stock being sold and the stocks could drop a lot before investors start to get involved.

This is the first review post the market consultation that was announced in May and the conclusions of which were published in July.

As usual, Nikkei have ignored the sector balance that is spoken about so much in the index methodology. Apparently its easier to write the index methodology than to follow it!

Every year (usually in the beginning of September), the Nikkei Inc Index team conducts an annual review of the major price-weighted Nikkei indices – the most important being the Nikkei 225 Average – and adds and subtracts constituents according to the Rules.

Today, they announced the 2021 version of the changes (announcement, PAF changes).

Below is Some Background. If you want to skip ahead to the juicy analysis, you can jump ahead to the Changes Announced section just below, and then more below the fold.

Some Background

The Nikkei 225, well-known globally as “the Nikkei” is a price-weighted index, originally started nearly 70 years ago as an average of a selected number of stocks listed on the TSE First Section. Later, it became 225 members. 

Because it is price-weighted, and because for a long time it made no divisor adjustments for stock splits (so when a stock split 2:1 its weight fell by half because price fell by half and trackers had to sell half their shares in that stock), and the price multiplier was determined by the par value of a company, then they later they started adjusting for splits, stocks which are old, never split, AND have a high price end up having a high weight in the index. 

There was a huge reshuffle in April 2000 when the Nikkei decided that the system needed rebalancing to include more tech, so they changed the Rules. They pushed 30 names out and 30 names in, and the 30 names added were 50% of the new index. 

Twenty one years after the prior change in methodology, this past May 10 the Nikkei Inc Index Team announced new changes to the Rules. There was a proposal, with an FAQ, and supplemental data. On 5 July, the Nikkei confirmed the proposal with a new Guidebook.

When I wrote about this on 10 May in After 20yrs, Nikkei 225 Proposes Minor Impact Rule Changes (Nintendo Disappointment?) I said I thought the changes disappointing. There are real problems with the index and this did not do much; the changes are evolutionary rather than revolutionary, with the only interesting change being that constituents are added with a weight no greater than 1%. If the normal price adjustment factor would allow a constituent to enter at a weight greater than 1%, the Price Adjustment Factor (base 1) is lowered in increments of 0.1 so that the deemed inclusion weight on Base Date (end of July) is no more than 1%. There is no change to the idea that the Nikkei Index Team can override their rankings at any time as they see fit.

Because the Nikkei Index Team had let the sector balances and rankings slide quite a bit over the years (not adding “obvious” names and not deleting names which should probably have been deleted, and not rebalancing the sectors as the rules say they should), the possibility was that some names like Nintendo Co Ltd (7974 JP) and similar high-price-low-share-count names which “deserved” to be included were not simply because their very high price would create undue impact (it was undue impact and the lack of incremental float for high-weight low-share-count names which caused the BOJ to lower, then eventually cease their buying of Nikkei 225 ETFs). This rule on capping inclusions at 1% would go a ways to mitigating that problem so that would allow the Nikkei to add previously un-addable names. Expectations were high on a group of names, with Nintendo Co Ltd (7974 JP), Keyence Corp (6861 JP), ZOZO Inc (3092 JP), and probably Oriental Land (4661 JP), with the latter two likely to create some real froth if actually selected. 

The Changes Announced

Today after the close, the Nikkei Index Team announced the following changes to the Nikkei 225 Average as a result of the Annual Review:

The changes will be made on the last trading day of September, at the close. I expect to see $10bn trade on that day.

The new rules allow the Nikkei Index team to not do a lot to the sector mix if the additions are made because of “High Liquidity” because while the sector mix would normally mean more than three deleted, the new rules cap changes at 3 per annual rebalance (which is not enough).

As noted above, ZOZO Inc (3092 JP) and Oriental Land (4661 JP) were among names which were expected as possible inclusions and therefore a certain amount of pre-positioning may be in place. They may get somewhat hurt tomorrow.

For more detailed analysis of the stocks, their positioning, how much to buy, etc, please read on.

For more about passive tracking in Japan, please refer to JAPAN PASSIVE: Who Owns What 2021? 

Today after the close, Pan Pacific International Holdings (7532 JP) announced two things (in Japanese only).

1. PPIH was registering for a bond issuance for up to ¥300bn, and
2. PPIH would buy back up to 38,054,300 shares tomorrow morning on ToSTNeT-3 before the open, for up to ¥80.94bn. 

The second states that FamilyMart, which bought just over 10% of the company in the market starting in 2019 after

1. selling the rest of its UNY business to PPIH, and
2. attempting to buy 20% of PPIH in a Partial Tender Offer, which was much discussed on Smartkarma (see this insight for the result of the Tender Offer to see the earlier ones in the stream)….       ….and missing because almost nobody would sell their shares to FamilyMart

… will sell 38,054,300 shares into the buyback. 

The second statement is odd so merits a quick discussion. And there are opportunities for those who care.  As of Monday’s close and consensus forecast Net Income to June 2022, PPIH’s forward PER has hit a 20.x handle. That is good, but despite that, the market was not terribly supportive of last month’s earnings/guidance release.

As always, more below the fold. 

Unlike major IPOs this year such as KakaoBank (323410 KS), SK Bioscience (302440 KS), and SK IE Technology (361610 KS) which had numerous hallmarks of blockbuster positive outcomes post IPO, Hyundai Heavy Industries is a mixed bag, in our view. Despite surging new orders in 1H 2021, it remains to be seen if this is sustainable. There also remain a lot of question marks about the company’s profitability as well as higher steel raw material costs, higher interest rates, and the M&A of Daewoo Shipbuilding which may be blocked by regulators in EU/Japan.

Even the book building results imply a mixed bag. The high ratios of lock up period and high demand ratio are certainly very positive. Also, it has a low free float and solid employees subscription for the IPO shares. However, why did the institutional investors not indicate higher prices for the IPO (above 60,000 won)?

The SK Inc/SK Materials stock swap arb spread has been consistently maintained at a 3% level.

Then, should we do this arb?

This depends on how much you see the possibility of cancellation, which is the only risk of this event.

For this merger to pass the EGM, it must satisfy the following two requirements:

The issue is stock purchase cost, whose ceiling is set at 800 billion won, representing 18% of the SO and 51% of the minority shareholders’ shares.

Ecopro Co Ltd (086520 KS) announced after the market close on September 6th that it will conduct a rights offering worth 676 billion won, representing 37% of market cap. The company will issue 6.37 million new shares (representing 34% of its existing outstanding shares) and the rights offering price is 106,172 won per share, representing 9.1% premium to the current price.

The following are the key dates of the rights offering:

• Subscription expected dates – 13 October to 1 November
• Rights offering subscription payments required – 4 November
• Rights offering new shares listing – 19 November

Ecopro Co will use the proceeds from the rights offering to purchase 6.12 million shares of Ecopro HN at 110,500 won (2% premium to current price) which total 676 billion won. Ecopro HN has 15.3 million shares outstanding so 6.12 million shares to be purchased in the tender offer would be 40% of outstanding shares. 

The Hang Seng Indexes Company Limited (HSIL) should announce the results of the December 2021 review of the Hang Seng Family of Indexes on 12 November. The constituent changes will be effective after the close of trading on 3 December.

The review period for the December rebalance ends on 30 September and stocks that have at least 3 month of trading history by the review cut-off date are eligible for inclusion in the Hang Seng China Enterprises Index (HSCEI INDEX).

At the December review, we see a high probability of Xinyi Solar Holdings (968 HK) being included in the index and of Evergrande Real Estate Group (3333 HK) being deleted.

Innovent Biologics Inc (1801 HK) is a close add for now and its inclusion would put China Pacific Insurance (2601 HK) at risk of deletion from the index.

XPeng (9868 HK) and Li Auto (2015 HK) are unlikely to be included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December rebalance since they have failed the velocity test in August.

With the one change, estimated one-way index turnover is 1.26% and will result in one-way turnover of HK$995m. This number will change over the next couple of months as stocks move around and the turnover increases due to capping changes on Alibaba Group (9988 HK), Tencent (700 HK) and Meituan (3690 HK).

West Japan Railway Co (9021 JP)  is one of the first three listed JR companies (along with East Japan Railway Co (9020 JP) and Central Japan Railway Co (9022 JP)) and was always the smallest, in size and investor interest, until Kyushu Railway Company (9142 JP) came along. 

JR West has “always” traded at a lower EV/EBITDA, EV/EBIT, and PER than a basket of its peers. For a long time that was due to lower ROAs and higher debt/EBITDA. Now ROAs have basically matched the basket of peers and so pre and post-covid, ROEs looked OK. 

Covid hit hard. Inbound tourism fell, business travel fell, commuting use fell, costs didn’t. Gross margins which had been 22-27% for most of the last 20 years fell below zero. Revenues fell by 40%. Four Zero Percent. That is huge for a transport utility.  This is the same story for all the rails, but more for some than others.   

The stock is down 50% from late 2019 highs. The question is whether that is enough. 

Last week on 1 September, the company announced an offering of 51+mm shares including greenshoe, split 40/60 international/domestic. That is about 40 days volume and after the stock fell 15%, is worth about ¥260bn. 

The company has a large number of retail shareholders, and a very heavy passive and cross-holding ownership. It has a relatively low active institutional ownership – domestic or foreign. 

With the dividend down 40+% it still yields ~2% because of where the stock has fallen. Even better for some potential holders, the kabunushi yutai yield is 5+%, and up to 9% if one optimises (and rides the shinkansen, stays in hotels, and eats at restaurants in hotels). That may make it a selling point to some, but institutional investors don’t get that benefit, so that aspect alone may not get all of the deal sold.

There is an interesting story of Historical Cheapness vs Supply vs Benefits along with large passive ownership and decent-to-large passive demand for the offering. 

More below the fold. 

As shown below, KRX BBIG consists of one mother index and four sub-indices. That is, a total of five individual indices each have their own ETF.

It is important to note that these indices consist of only 10 to 12 stocks. In addition, futures of the KRX BBIG mother index and two sub-indices (Secondary Battery and Bio) have been listed and operated since July of this year.

It’s time for the S&P500 Index Rebalance. Friday night on 3 Sep ahead of the long weekend we got the announcement from S&P Dow Jones Indices. 

This quarter we have 3 Additions…

• Match Group Inc (MTCH US) 
• Ceridian HCM Holding Inc (CDAY US) 
• Brown & Brown (BRO US) 

Combined, the three ADDITIONS had US$6.4bn of revenue in the last 12 months, US$1.6bn of OP in that time, and they are forecast to have OP of $1.97bn in the next 12 months.

and 3 Deletions… 

• Perrigo Co Plc (PRGO US) 
• Unum Group (UNM US) 
• National Oilwell Varco (NOV US)

Combined, the three DELETIONS had US$21.97bn of revenue in the last 12 months, US$1.1bn of OP in that time, and they are forecast to have $2.13bn of OP in the next 12 months.

While these names are not really a surprise, they may prove interesting.

Much more analysis below the fold. 

The September rebalance of the Hong Kong Hang Seng Index (HSI INDEX) was implemented at the close of trading on 3 September. Hang Seng Indexes should announce the results of the December 2021 review of the Hang Seng Family of Indexes on 12 November. The constituent changes will be effective after the close of trading on 3 December.

The review period for the December rebalance ends on 30 September and stocks that have at least 3 month of trading history by the review meeting date are eligible for inclusion in the Hong Kong Hang Seng Index (HSI INDEX).

There were 3 inclusions at the June rebalance and 3 inclusions and 1 exclusion at the September rebalance to take the number of index constituents to 60.

With Hang Seng Indexes looking to get up to 80 Hong Kong Hang Seng Index (HSI INDEX) members by mid-2022, there could be 20 inclusions over the next 3 index rebalances.

Stocks that are ranked towards the top of their Industry group and are potential inclusions are Smoore International (6969 HK), Nongfu Spring (9633 HK), China Resources Beer Holdings (291 HK), China Resources Mixc Lifestyle Services (1209 HK), Sunac China Holdings (1918 HK), China Gas Holdings (384 HK), JD Health (6618 HK), Hansoh Pharmaceutical (3692 HK), China Hongqiao (1378 HK) and Fosun International (656 HK).

Given that the index committee consciously avoided including stocks from sectors that were targeted by tightening regulations in China, this list will be revised closer to the index committee meeting in November. Another factor that will determine the number of inclusions is the turnover at the rebalance – while it is less than 4% now with the 10 inclusions, that number will move higher as stocks move around and there are capping changes on the largest constituents.

On Friday post market close, S&P Dow Jones announced the results of the September review for the S&P 500 (SPX INDEX) that will be effective after the close of trading on 17 September.

There are 3 inclusion –  Match Group Inc (MTCH US), Ceridian HCM Holding Inc (CDAY US) and Brown & Brown (BRO US), while the exclusions are Unum Group (UNM US), National Oilwell Varco (NOV US) and Perrigo Co Plc (PRGO US).

There are inclusions/exclusions to the S&P MidCap 400 and the S&P SmallCap 600 as well.

The stocks with the largest impact from passive buying are Match Group Inc (MTCH US), Tandem Diabetes Care (TNDM US), Brown & Brown (BRO US), UniqureNV (QURE US) and Ceridian HCM Holding Inc (CDAY US).

The stocks with the largest impact from passive selling are United Insurance Holdings (UIHC US), Team Inc (TISI US), Unum Group (UNM US), Perrigo Co Plc (PRGO US) and National Oilwell Varco (NOV US).

There are a lot of other stocks that will have a lot to buy/sell from passive funds due to changes in the number of shares and free float and due to funding flows.

Aeon Co Ltd (8267 JP)-controlled supermarket companies Fuji Co Ltd (8278 JP) (“Fuji“) and Maxvalu Nishinihon (8287 JP) (“MVNN“) announced they had agreed to merge in a long-dated transaction which will complete in March 2024.

Prior to that, both companies will establish a joint holding company to become a consolidated subsidiary of Aeon and integrate the management. This process is expected to be completed by March 2022. 

Below is a closer look at the details of this transaction.  

Below are KOSPI stocks that will see lockup releases in September. Four of these stocks have recently gone public.

In this insight, we discuss the end of the one month lock up period and more block selling ahead by major investors for KakaoBank in the months ahead. The one month lock up period will end on 6 September for KakaoBank and some institutional investors may try to take some profits. 

There are 3.14 million shares that will no longer be under the lock up period for KakaoBank starting 6 September, which represents 0.7% outstanding shares.

In addition, among the three largest shareholders of KakaoBank, we believe that there is an increasing probability of Korea Investment Asset Mgmt and KB Bank trying to unload partial stakes in KakaoBank once the 6 months lock-up period is over. 

When Showa Denko K.K. (4004 JP) presented their H1 results on 10 August 2021, and later held their analyst call, it seemed quite bullish. The company was a year ahead of its internal integration efforts after having purchased Hitachi Chemical (renaming it Showa Denko Materials) in a HUGE debt-financed deal in 2020. The company noted that all businesses were operating well and that residual negative numbers coming from restructuring costs and other weaknesses were simply a matter of time to overcome.

The company showed an OP forecast which even it admitted was light, and for the year the forecast at ¥85bn remains significantly impacted by the amortisation of goodwill due to the purchase of the Hitachi Chemicals business (¥17.6bn this year). This is to say that OP would be 20% higher if Showa Denko had used US-GAAP or IFRS to account for the purchase of Hitachi Chem.

Net Income forecasts out years from now are impacted by this cost to amortise the purchase goodwill. 

The call was interesting in that it talked about efforts to reduce interest-bearing debt, and also talked about aggressive investment measures. That probably should have been a hint. 

The shares fell hard from the 17th to the 20th as crude oil did too. 

And 13 days after the earnings release the company announced an equity sale where they would sell 35.1mm shares (including greenshoe) to investors. That is a big number, at roughly a quarter of the pre-existing share count. 

It is even bigger when you consider shareholder structure. 

Pricing is likely on 6 September. 

Below the fold we look at shareholder structure, offer structure, and index demand.

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

• The average premium for the new deals announced (or first discussed) in August was ~28%, with a year-to-date average of ~33% (112 deals & total deal size of US$234bn). This compares to the average premium for all deals in 2020 (158 deals) and 2019 (145 deals) of 31% and 31.5% respectively.

Enjoy your Sunday!

In this insight, we discuss the combination of the end of the lock-up period for Coupang on September 7th and the start of the Amazon Global Store Korea will likely to put further negative pressures on Coupang (CPNG US)‘s shares in the coming days. Starting September 7th, there is a whopping 83% of outstanding shares that could be sold due to the end of the lock-down period.

In this weeks recap, we look at:

• the changes at the KRX BBIG index rebalance in September
• the changes to the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) at the September rebalance
• the changes to the FTSE China A50 Index (XIN9I INDEX) at the September rebalance
• the changes to the FTSE China 50 Index at the September rebalance
• the changes to the FTSE TWSE Taiwan 50 Index at the September rebalance
• the changes to the FTSE EPRA Nareit Index at the September rebalance
• the changes to the UKX Index (UKX INDEX) at the September rebalance
• the index implications of the large new equity offering from West Japan Railway Co (9021 JP) 
• the changes to the S&P/ASX family of indices at the September review

Inflows to the KraneShares CSI China Internet Fund (KWEB US) ETF continue for yet another week. Assets now are at US$7.2bn and the ETF has taken in around US$4.7bn this year, most of the inflows starting mid-July.

On 2 September at 7pm Australia time, the Marvelous Milton Merger Arb ratio was fixed, and just now it was announced. 

The ratio of Milton Corp Ltd (MLT AU) shares to Washington H. Soul Pattinson and Co. Ltd (SOL AU) shares has been decided at 0.1863. Entitlements will be rounded up or down to the nearest share.

Those who have been following on my model would have the NAV at A$5.622 on 2 Sep at the close, or A$5.702/share including the A$0.08 of dividend which went ex- on August 31. That delivered me a number of 0.1864 but they started with A$5.70 rather than A$5.702.

As reported in the AFR, both major proxy services came out in favor of the deal saying advantages outweighed disadvantages, and noting the IE’s “fair value” range said pricing was appropriate; in a good quote from the article, “there were no stones thrown”, which usually results in an approval at the Scheme Meeting.

The schedule reported in the filing is unchanged from the schedule in the Scheme Booklet.

Post market close today, S&P Dow Jones Indices announced the list of changes to the S&P/ASX 200 (AS51 INDEX), S&P/ASX 100 and S&P/ASX 300 indices as part of the September index review that will be effective after the close of trading on 17 September.

For the S&P/ASX 100, Virgin Money Holdings Uk (VM/ LN) (VUK AU) has been added , while Boral Ltd (BLD AU) and Beach Energy (BPT AU) have been deleted.

For the S&P/ASX 200 (AS51 INDEX), there are four inclusions: Pinnacle Investment Management (PNI AU), Tyro Payments (TYR AU), Sealink Travel (SLK AU) and Lifestyle Communities (LIC AU), and there are four deletions: Nuix Limited (NXL AU), Westgold Resources (WGX AU), NRW Holdings (NWH AU) and G8 Education (GEM AU).

For the S&P/ASX 300, there are 13 inclusions and 9 deletions. The inclusions are Imugene Ltd (IMU AU), Paladin Energy (PDN AU), Liontown Resources (LTR AU), BetMakers Technology Group (BET AU), Novonix Ltd (NVX AU), Dubber Corp Ltd (DUB AU), Johns Lyng (JLG AU), Strike Energy (STX AU), Australian Strategic Materials (ASM AU), HomeCo Daily Needs REIT (HDN AU), PPK Group Ltd (PPK AU), Sezzle (SZL AU) and Vulcan Energy Resources Ltd (VUL AU). The deletions are Medical Developments International (MVP AU), Humm Group (HUM AU), Synlait Milk (SML NZ) (SM1 AU), Integrated Research (IRI AU), MACA Ltd (MLD AU), Jupiter Mines (JMS AU), Alkane Resources (ALK AU), Avita Medical (AVH AU) and Bubs Australia (BUB AU).

There is quite a lot of volume to trade on quite a few of the stocks across the FTSE GEIS and FTSE EPRA Nareit indices and there will likely be some big moves over the next couple of weeks.

FTSE Russell has announced the changes to the FTSE TWSE Taiwan 50 Index as part of the September 2021 index review that will be effective after the close of trading on 17 September.

As expected, Momo.Com Inc (8454 TT) has been included in the index while Asia Cement (1102 TT) has been deleted.

Momo.Com Inc (8454 TT) was an inclusion in the MSCI Standard index at the close on 31 August and the stock has dropped since then before rebounding today.

One-way turnover is small at 0.35% and there will be almost no funding flow on the index constituents.

Short interest has started to rise on Momo.Com Inc (8454 TT) and has been decreasing stradily on Asia Cement (1102 TT). 

Starting this year, KRX will rebalance the KOSPI size index series (LargeCap, MidCap, and SmallCap) twice a year. Until last year, it was done once a year in March (the option expiration date). However, from this year, the rebalancing is done twice a year, in March and September.

Back on the 31st March this year, the SGX announced a regulatory framework for SPACs to list on the SGX. This followed a consultation paper over a decade earlier.

The feedback phase ended on the 28 April – there were 80 respondents – and unfazed by increased regulatory oversight on blank cheque companies in the US, the SGX announced a proposed listing framework yesterday.

The detailed paper is here. 

The final framework mostly mirrors the March consultation paper, with the largest change being the abolishment of limits on the exercise of redemption rights by independent shareholders.

More below the fold.

China Logistics Property Holdings (1589 HK)/CNLP is a leading provider of premium logistics facilities in China. As of 30 June 2021, CNLP had 179 logistics facilities in operation in 38 logistics parks located in logistics hubs in 19 provinces or centrally administered municipalities. 

As discussed in China Logistics Property’s Potential MGO from JD.com, CNLP announced on 26 August that Mr Li Shifa, the founder and the Chairman, is in discussions with a potential purchaser to sell his 26.38% stake in CNLP. If the transaction is completed, it may lead to a change in control and a mandatory general offer (MGO) under Rule 26.1 of the Takeovers Code. The announcement was in response to a Bloomberg article that claimed that JD.com Inc (ADR) (JD US) is in discussions to purchase Mr Li Shifa along with RRJ Capital’s stake in CNLP at a valuation of about $2 billion (implies a price of HK$4.48 per share). 

Today, CNLP announced that Mr Li Shifa entered into a sale and purchase agreement with JD Property Group Corporation (owned 83.89% by JD.com) to sell his 26.38% stake in CNLP. The purchase price is HK$4.35 per sale share, a 17.25% premium to the unaffected share price of HK$3.71 (25 August). 

The completion of the sale and purchase agreement will result in the offeror owning 37.02% of the outstanding shares, which will trigger a mandatory share offer under Rule 26.1 of the Takeovers Code. The sale and purchase agreement is subject to various conditions including regulatory approval (AML authority). Regulatory approval which is expected within six months should be forthcoming as the transaction is unlikely to raise market concentration issues.

The FTSE EPRA Nareit Global Real Estate Index Rebalance for September 2021 has been announced. There are 29 Additions – 28 from Asia – and two deletions. 

The original announcement caught investors by surprise, and baskets were hurriedly formed as impact was expected to be large. Mine, iterated as time went on, had 35-38 names in it, with two large-ish names from Australia, several large names from Japan, and a few Korean REITs which I expected to pass muster but which did not.  There were fewer changes than I expected, and in particular, fewer changes from Japan. I assume the hiccup was volume or float, though I didn’t see it. From the performances this morning of the names that I and others expected to go in but which did not make it in, it looks like others expected it too. The original caveat was that the breakdowns of revenue reporting were not that easy to identify

On 1 September, West Japan Railway Co (9021 JP) announced an issuance of new shares and a secondary offering of shares amounting to US$2.7bn to fund strategic initiatives of the company and strengthen the financial position of the company.

A maximum of 52.667m shares will be issued and the price of the new issue and secondary placement will be determined between 13-15 September while settlement will take place between 20-23 September.

The current offering only covers 20% of the company’s bonds and loans outstanding and there could be more equity offerings if the COVID19 situation does not ease up significantly in the near future permitting the company to resume normal operations.

West Japan Railway Co (9021 JP) has underperformed its peers over the last 20 months and trades cheaper to the average of its peers.

Following the price drop yesterday and the passive buying that will emerge from the increased number of index shares, the stock could rebound in the near future.

The equity offering will increase the number of issued shares and the free float of the stock and will require MSCI, FTSE and Tokyo Stock Exchange Tokyo Price Index Topix (TPX INDEX) passive trackers to buy stock. This will provide near-term support for the stock with around 30% of the issue being bought up by passive trackers.

West Japan Railway Co (9021 JP) may be the first among its peers to raise additional capital and there could be more offerings from some of the other companies in the same sector.

Post market close, FTSE announced the changes to the UKX Index (UKX INDEX) that will be implemented at the close of trading on 17 September.

As expected, Wm Morrison Supermarkets (MRW LN) and Meggitt PLC (MGGT LN) will be added to the index, while Weir Group (WEIR LN) and Just Eat Takeaway (JET LN) will be deleted from the index.

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

Wm Morrison Supermarkets (MRW LN) and Meggitt PLC (MGGT LN) are subjects of bidding wars and the stocks could be deleted from the index before the next scheduled rebalance in December.

FTSE’s market consultation on the potential inclusion of stocks with dual class share structures and changes to the minimum free float requirements closed on 31 August. Any changes to the FTSE UK Index Series ground rules will be announced once any changes to the UK Listing Regime are confirmed. This could lead to the potential inclusion of Deliveroo (ROO LN), THG PLC (THG LN) and Wise PLC (WISE LN) in the UKX Index (UKX INDEX) at the March 2022 index review.

Fubon Financial Holding Co (2881 TT) announced many months ago when it took over Jih Sun Financial (5820 TT) that it would do an equity raise to do so. In Taiwan, doing an equity raise via rights issue is a relatively common event. 

The company applied to do so, got permission in early August, then announced in late August a timeline and key details as it announced its H1 results. 

Janaghan Jeyakumar, CFA discussed this rights issue in Fubon Financial Holding Co (2881 TT): Rights Issue a week ago. 

Pricing was expected to be confirmed in the days ahead, and it has been confirmed. 

The 548,000,000 common shares will be issued at NT$58.9/share each. 

The 333,330,000 C Class Preferred Shares (non-cumulative dividend) will be issued at NT$60/share each. The dividend rate was set at 3.0% (7yr IRS + a fixed spread (7yr IRS 0.6538% + 2.3462% spread)). 

I called the company to chat and had some questions. They got back to me today. 

First, let’s take a look at Samsung Electronics’ FY2021-2023 shareholder return policy.

On 4th January 2021, Small-cap logistics JREIT CRE Logistics REIT (3487 JP) (“CRE”) announced a follow-on equity offering to fund their acquisition of three logistics properties. As discussed in JREIT Offering: CRE Logistics REIT (3487 JP) – Take It (Vs Comps), I advised being LONG vs comps from the Pricing Date (13th January 2021) and since then CRE logistics has gained +44.6%, outperforming its comps and the overall JREIT market by +9.1% and +18.7% respectively. 

Source: Quiddity [Data: Capital IQ]

Today after market close, CRE launched another follow-on equity offering. 

This time, the total offer quantity will be 64,550 units and that means the total offer size would be around ¥13bn (~US$120mn) which is slightly larger than last time (~US$106mn) but still quite small in comparison to some of the other recent JREIT offerings. However, historically such follow-on equity offerings have acted as catalysts for strong secondary market performance in the weeks following the Pricing Date and in this insight, we will take a look at whether CRE has the potential to perform as well as it did last time. 

More below the fold. 

For a primer on J-REIT Offerings, their history, their patterns, etc, please refer to J-REIT Offering Primer: Get Ready for Offering Season 2021.

After the relative success of last year’s Partially Paid Rights Offer conducted by Reliance Industries (RIL IN) discussed in basics in The Reliance Industries [RIL] Rights Offering then in gory detail in Reliance Rights Offer Detailed – Big. $7bn Big. And Interesting, Bharti Airtel (BHARTI IN) has decided to conduct a Partially Paid Offering of its own. 

Bharti Airtel, of course, also raised money in a 19 for 67 rights offering in May 2019 followed by a straight equity raise announced in December 2019 and executed in January 2020. 

On 30 August, Bharti Airtel announced that its board had met and approved a Rights Issue to fully-paid up shares which works with a construct called Partially Paid Shares. 

There are no details yet for the issue period, trading period, and record date but what we do know is that investors

• will get 1 Right for every 14 Shares held
• will be entitled to purchase 1 Share at Rs 535/share (vs ~Rs 620/share on the 30th of August) for every Right (or Rights Entitlement (“RE”)) that they receive
• will only have to put up 25% of the funds in the initial stage (i.e. 25% of Rs 535 or Rs 133.75/share), then there will be subsequent capital calls over the following 36 months (vs 18 months for the Reliance version of the same.
• will be able to subscribe for over-allotments to take up the rights of those who let theirs lapse.

When will we know all the other important things like record date, trading period, etc?

I expect it may not take long.

Last year’s Reliance Rights Entitlement to Partially Paid Shares saw the announcement on 30 April, with more details on the 13th of May 2020 and a record date the 14th, more details on Friday the 15th, then full details out on Sunday the 17th of May with Rights Issue Opening Date on the 20th of May, 6 days after Record Date. 

These Rights Entitlements situations are funkier than people think. And while they are going to be a tiny portion of one’s portfolio, at receipt, there are some really cool aspects.

As always, there is more below the fold. 

A short while ago, FTSE Russell announced the changes to the FTSE EPRA Nareit Global Real Estate Index Series that will become effective after the close of trading on 17 September.

As expected, there are a lot of inclusions for Developed Asia following the changes in the ground rules that lowered the basis points inclusion threshold from 0.3% to 0.1% to align the region with other Developed Markets.

There are 11 adds for Singapore, 10 for Australia, 3 for Japan, and 2 each for Hong Kong and New Zealand.

Stocks with the largest impact in terms of days of ADV to trade are Industria Reit (ADI AU), OUE Commercial REIT (OUECT SP), Cromwell European REIT (CERT SP), Sunlight REIT (435 HK), Far East Hospitality Trust (FEHT SP), Prosperity Reit (808 HK), Hotel Property Investments (HPI AU), Starhill Global REIT (SGREIT SP), Argosy Property (ARG NZ) and Growthpoint Properties Australia (GOZ AU).

The Australia inclusions have outperformed their peers significantly over the last couple of months and there could be some retracement there closer to the rebalance implementation date.

The Singapore inclusions have outperformed their peers marginally and there could be further gains till implementation date.

FTSE Russell has announced changes to the FTSE China A50 Index (XIN9I INDEX) as a part of the September review that will be implemented at the close of trading on 16 September.

There are 2 inclusions, Great Wall Motor (601633 CH) and Cosco Shipping Holdings (601919 CH), and 2 exclusions, CSC Financial Co Ltd (601066 CH) and China Citic Bank Corp (601998 CH).

Estimated one-way index turnover is 1.43% and will result in a one-way trade of CNY 698m. This is almost no impact of the funding trade on the other index constituents.

Only China Citic Bank Corp (601998 CH) has more than 1 day of ADV to trade from passive funds, but the strong momentum on the inclusions could continue.

Long/short trades on the stocks have been performing well over the last couple of months. There could be more opportunities over the next couple of weeks prior to implementation of the changes.

Important: The implementation will be at the close on 16 September, one day ahead of the other rebalances, since Northbound Stock Connect is shut on 17 September.

Kakao Bank announced after the market close that the Korea Post, which holds a big stake in the company, will sell its shares through a big block deal sale. The price range of the block deal is 9.9% to 13.9% lower than the closing price today (88,800 won). Citi Group Global Markets is the lead banker on this deal. 

The block deal price range is from 76,457 won to 80,719 won per share. The block deal amount is expected to be from 1.05 trillion won to 1.1 trillion won. The number of shares to be sold range from 13.68m (2.9% of outstanding shares) to 15.24m (3.2% of outstanding shares). Korea Post is basically trying to take profits as Kakao Bank’s share price has risen 128% from the IPO price. 

Rebalancing results

Below is the official result of the regular rebalancing in September for the KRX BBIG K_New Deal Index.

The effective date is September 10, the same as the KOSPI 200 Fast Entry rebalancing. It means that Krafton will receive passive inflow from both KRX BBIG and KOSPI 200.

Below are the AUMs of the ETFs tracking these indices. Only the main index and the secondary battery sub-index have a meaningful size of AUM. And both indices’ AUMs have decreased from the peak in the first half of this year.

Regarding Krafton’s inclusion:

Krafton was listed after the review cutoff date (July 31). Nonetheless, KRX decided to include it in this rebalancing. Then, did KRX break its own rule? Well, it did not.

Here is my explanation which I posted previously, concerning this issue.

A “Buyback” is where (for our purposes) a publicly-listed company repurchases its shares from existing shareholders, sometimes in the market, sometimes in a structured buyback off exchange, and sometimes at a price higher than market price (in this insight, we will use the nouns “Buy-back” and “Buyback” interchangeably; the official regulatory documents in India often use the form with the hyphen).

When companies use excess cash to buy back shares, they often not only end up optimising their capital structure but also “achieve” EPS accretion with the aid of a reduction in the total share count of the company. Some companies use buy-backs to support their share prices during sluggish periods and others attempt to use it as a defence mechanism against hostile takeover situations.  Still others in India use it to return capital to their promoters.

All that is pretty well-known.

In India, such Buy-backs are governed by the SEBI (BUY-BACK OF SECURITIES) REGULATIONS, 2018 (last amended on 17th April 2020) and are principally executed through three main mechanisms – Tender Offers, On-Market Transactions, and Book-building Processes. 

This insight is the first of a two-part series by Quiddity on Indian Buy-backs.

In this insight, we will look into the regulations that govern each of the buy-back mechanisms to discover the basis for how they get executed.

Below is the shareholding % of Kakao Bank’s pre-IPO institutional shareholders who are not locked up. Of these, Yes24 is expected to sell its stake in the short term, as it has long indicated the possibility of a sale. Also, Netmarble and eBay Korea had little business strategic reasons to hold stakes in Kakao Bank for a long period of time, so they were highly likely to sell their stake in the short term.

But Korea Post is really unexpected. Korea Post is the only major domestic pension fund to invest in Kakao Bank as an alternative investment. So far, the investment amount is about ₩92B. Through this block deal in which 90% of the holdings are sold, the rate of return is 10 times higher than the investment, even though it has provided an incredible discount rate.

Korea Post’s AUM exceeds ₩140T. Among local pension funds, it is second only to the National Pension Service in terms of size. However, Korea Post is known for its inflexible management style, even compared with local pension funds. In the case of alternative investments that include pre-IPO investment, they account for 15~16% of the total within Korea Post. But the scope of alternative investments is not wide, and the flexibility should be quite low.

Then, Korea Post sold most of its shares (not just some of the shares) in Kakao Bank, which should be categorized as an asset with high long-term growth potential, immediately after listing. Yes, this is so unlike Korea Post.

Tencent Music (TME US) announced on Tuesday (31^st August) that it has relinquished all of its exclusive music licensing agreements as per the order of the Chinese regulators. It was reported by several news media outlets in July that that the State Administration of Market Regulation (SAMR) in China is likely to order Tencent Music (TME US) to give up exclusive rights to music labels and at the same time, impose a fine of RMB500,000 (US$77k) for failing to appropriately report the acquisitions of Kugou and Kuwo in 2016.

TME previously had exclusive music licensing agreements with global music streaming giants Warner Music Group (WMG), Universal Music (UMG) and Sony Music in China. The company also previously had exclusive rights to sub-license these catalogs to local rivals in China.

TME’s partnerships with these leading music labels have offered the company the content leadership position in music streaming in China. In addition to having exclusive rights to music labels, the company also has established exclusive distribution deals with leading independent artists such as Mandopop Star Jay Chou to further its growth and under the SAMR’s new mandate, TME is allowed to keep its exclusive music deals with these independent artists for a period of 3-years.

After 4 years plus of disappointment, short of another period of severe market dislocation, we believe actions that will bring about a long overdue share price re-rating for Genworth Financial Inc Cl A (GNW US) are most likely just weeks away. This insight considers valuation scenarios for the Enact Holdings (ACT US) IPO  and their ramifications for GNW and its share price.

The KRX has announced the results of the September review of the BBIG indices and the changes will become effective after the close of trading on 9 September.

These are the changes to the indices:

• Secondary Battery ETF: SK IE Technology (361610 KS) replaces Chunbo Co Ltd (278280 KS)
• Bio ETF: SK Bioscience (302440 KS) and Hanmi Pharm (128940 KS) join the index, replacing Shinpoong Pharmaceutical (019170 KS) and Seegene Inc (096530 KS). Additionally, SK Bioscience (302440 KS) replaces SK Biopharmaceuticals Co Ltd (326030 KS) in the top 3 stocks.
• Internet ETF: KG Inicis Co Ltd (035600 KS) replaces Rsupport Co Ltd (131370 KS) 
• Game ETF: Krafton Inc (259960 KS) and Devsisters (194480 KS) replace Wemade Co., Ltd. (112040 KS) and Neptune Company (217270 KS)
• BBIG ETF: SK Bioscience (302440 KS) and Krafton Inc (259960 KS) replace SK Biopharmaceuticals Co Ltd (326030 KS) and Kakao Games Corp (293490 KS).

KRX has broken its own rules (everyone does it, so join in!) by including Krafton Inc (259960 KS) even though the stock listed post the July-end cut off and there is no provision of Fast Entry in the index methodology.

Stocks with the largest inflows are SK Bioscience (302440 KS), Krafton Inc (259960 KS), SK IE Technology (361610 KS), LG Chem Ltd (051910 KS), SK Innovation (096770 KS) and Douzone Bizon (012510 KS) while the stocks with the largest outflows are Kakao Games Corp (293490 KS), SK Biopharmaceuticals Co Ltd (326030 KS), Kakao Corp (035720 KS), Posco Chemical Co Ltd (003670 KS), SKC Co Ltd (011790 KS) and Samsung SDI (006400 KS).

Krafton Inc (259960 KS) is also a Fast Entry to the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) and there will be passive buying from those trackers as well.

Last evening post market close, KRX announced the Fast Entry of KakaoBank (323410 KS) and Krafton Inc (259960 KS) to the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) at the close of trading on 9 September.

As expected, Lock&Lock (115390 KS) and Jw Pharmaceutical (001060 KS) will be deleted from the index.

Given the rapidly shrinking volumes in KakaoBank (323410 KS) and Krafton Inc (259960 KS), the impact of passive buying will be larger than what the headline numbers indicate.

The deletions were expected, the stocks have sold off from their highs, some shorts have been built, and they will no longer be short sell eligible from 10 September. Expect the stocks to move lower and then for short covering to begin as borrow is recalled.

Local institutions have been big buyers on both inclusions since listing. If part of this buying is for their passive tracking baskets, there could be less buying from now to implementation and the stocks may trade weak closer to rebalance day.

With the Kakao Pay (377300 KS) IPO back on the table, investors could look to switch out of KakaoBank (323410 KS) while the changing gaming rules and regulations in China could be a dampener for Krafton Inc (259960 KS).

On 27 August, Castor (the acquisition vehicle of Ion) raised the offer price to €10.20/share, a c. 7.4% increase, for a total consideration of €1,976 mn. The minimum threshold condition was raised to a stake of 80% from 50% plus one share and the tender period was extended until 9 September.

Ion has been pursuing Cerved since Cerved said it was negotiating with PE funds the sale of its credit management division. Ion had snapped Italian banking software provider Cedacri just prior to presenting the first offer for Cerved. The market considers that a combination of the two groups would make industrial sense, although Ion stated it supports Cerved’s business plan. Nevertheless, Ion is know for aggressive cost-cutting. In this brinkmanship game between Ion and Cerved, the Board of the latter considers the increased offer insufficient.

KRX officially announced the KOSPI 200 Fast Entry results of Kakao Bank and Krafton. KRX also announced the changes of KOSPI sector indices accordingly.

1. Kakao Bank in and Lock&Lock out

Below are the changes following the inclusion of Kakao Bank’s index. As expected, Lock&Lock (115390) was removed from the KOSPI 200. Lock&Lock was one of the two stocks with the lowest daily average market cap during the most recent rebalancing review period, from November 1 of last year to April 30. Another thing worth noting is that the stock excluded from the KOSPI 100 is Ottogi (007310).

2. Krafton in & JW Pharma out

Krafton is included in the KOSPI 200 through Fast Entry, replacing JW Pharma (001060). This is also an expected result. This is because JW Pharma, along with Lock&Lock, was the stock with the lowest daily average market cap during the last rebalancing review period. And the stock excluded from the KOSPI 100 is Posco International (047050).

In my prior insight Jardine Matheson: Lessons in Dissent on the 29 April, I thought Jardine Matheson Holdings (JM SP) was unattractive at a 13% discount to NAV, plus near-term news may focus on Jardine Strategic Holdings (JS SP)‘s dissension rights, and Matheson’s potential exposure thereon.

Matheson is down ~15% since that note (while the Straits Times Index is down ~4%). 

Since that insight, Matheson released its interim results, which not only provided clarity on the net debt at the parent level, which was largely guesswork amid the Matheson/Jardine Strategic Holdings (JS SP) circularity; but also unlisted stub ops – especially Jardine Motors – performed exceptionally in the 1H21.

At a ~23% discount to NAV on adjusted historical NAVs, value is emerging. Yet Matheson is not an obvious buy here.

More below the fold. 

A fairly interesting path to the growth strategy of SK Group, with SK Holdings at the center, spread in the local market this morning. The core of this strategic path is to maximize valuation by separating the business divisions owned by SK Holdings’ direct subsidiaries and listing them separately.

This is a part of the so-called SK Financial Story strategy that SK Holdings recently unveiled extensively. Through this, SK Holdings plans to increase its valuation nearly tenfold by 2025.

This strategic path was made clear by the merger of SK Holdings and SK Materials. Therefore, the SK Holdings/SK Materials merger is just the beginning, and that a similar merger will continue is spreading in the local market today.

So who will be the next target?

The answer to this? Well, we can find the answer from today’s stock prices. Among SK affiliates, SKC Co Ltd (011790 KS) is showing the largest share price movement. As of now (11:30 am local time), SKC is down more than 5%. This is because concerns are rapidly growing in the market that SKC will become the next affiliate to merge with SK Holdings.

• SKC will pursue a physical division in the same way as SK Materials, and a newly created operating company will be listed separately, aiming for a significant valuation re-rating.
• After SKC, SK Siltron, an unlisted company, will be the next target. This is a scenario where SK Siltron merges with SK Materials’ newly created operating company and goes public. Similarly, this newly combined company will again aim for a substantial valuation re-rating. 

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

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

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

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

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

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

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

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

Krafton Inc (259960 KS) shares are currently trading at 497,000 won, which is nearly flat versus its IPO price of 498,000 won. It traded as low as 400,5000 won on 11 August but has rebounded since then. In this insight, we discuss the end of the one month lockup period for Krafton, which could be significant due to the potential selling by the institutional investors (especially among foreign investors). We also discuss how the valuation of NCsoft has fallen so much that now, there is a high probability of the valuation gap between these companies narrowing in the coming months. 

China Youzan (8083 HK) has provided an update on its privatisation proposal. There is no change to the scheme consideration (HK$0.1352 in cash per scheme share) and the terms of the Youzan Technology distribution (0.05077265 Youzan Technology share for every China Youzan share). The key change is that Youzan Technology shares will be listed on the HKEx by way of an offering of new shares, instead of by way of introduction. 

The privatisation offer implies a total value of HK$1.4654 per share, which is a 100.7% premium to the last trading day price of HK$0.73 (27 August). However, the implied valuation of HK$1.4654 per share is -37% lower than the original valuation of HK$2.3088 per share (announced on 28 February 2021). As the cash consideration is unchanged, the lower valuation is driven by the decline in Youzan Technology’s estimated value between the original valuation reference date (30 November 2020) and the new valuation reference date (30 June 2021). 

The key conditions precedent are the headcount test and the scheme approved by at least 75% disinterested shareholders (<10% disinterested shareholders rejection). No independent shareholder holds a blocking stake.

The valuer continues to base Youzan Technology’s valuation by deducting the market value of the payment & other business from the market cap of China Youzan. However, since the latest assessment date (30 June 2021), China Youzan’s shares have further declined -45% in part due to the Chinese tech selloff driven by the regulatory reset. Consequently, based on the valuer’s methodology, Youzan Technology’s valuation is RMB11.02 per share at the last close vs the valuation of RMB21.76 per share at the valuation reference date (30 June 2021). 

Change the articles of incorporation for stock dividends

SK Innovation will hold an extraordinary general meeting of shareholders on September 16. The most important agenda for this general shareholders’ meeting is to get shareholder approval for SK Innovation’s spin-off announced on the 4th of this month.

Among the amendments, the amendment to allow for stock dividends is attracting attention from the market. It is unusual for a Korean local company to insert a stock dividend clause (in addition to a cash dividend) in the articles of incorporation. In fact, a stock dividend itself is unfamiliar in Korea.

Then, on the surface, it is interpreted that SK Innovation chose a stock dividend to reduce the backlash from shareholders following the spin-off because SK Innovation lacked cash and transferred most of its cash holdings to a new battery company.

Sanne Group PLC (SNN LN) has agreed to a £1.51 billion takeover by Apex, a PE-backed competing provider of services to the financial industry.

The offer is 920p/share, 0.5% above my estimate of fair value of 915p (see Cinven Sweetens Possible Offer for Sanne ), and c. £90 mn higher than the previous prospective offer from Cinven (at 875p/share).

• For an implied equity value of c. £1,509.4 mn and implied EV of £1,625.2 mn; 24.7x EV/21e EBITDA and 33.5x Fwd P/E (Capital IQ consensus).

The bid represents a further move in the consolidation of a sector that has proved resilient during the pandemic.

Sanne closed at 932p on 27 August, 1.3% above Apex’s offer, and c. 11% higher than the levels the shares traded when I reiterated my long recommendation. The market believes there will be a counteroffer from Cinven.

Cinven must make an offer before 5.00pm on 30 August. This time Cinven will highly likely make a serious counteroffer as opposed to the previous low-ball bids, in my view. A bid could come at levels close to 950p/share, 3.2% above Apex’s offer, 29.7x P/22e E (on Capital IQ consensus), which does not sound excessive. The industry is consolidating and with money inflows into alternative assets, great benefits could be captured from gaining scale. Reiterate long SNN LN.

Sanne belongs to the FTSE 250 index.

It was reported by Reuters and several other news media outlets that JOYY (YY US) top two shareholders: David Li – Chairman and Lei Jun – founder of Xiaomi, plan to take the Nasdaq-listed company private. David Li and Lei Jun respectively owned 23.2% and 7.8% of JOYY with David Li having 76% of voting power. Li and Len are said to be planning to offer about US$75-100 per JOYY’s share which will value the company at US$5.8-8bn and is aimed to be finalised by the end of 2021. As at the end of Friday (27^th August), JOYY’s shares closed at US$61.97 per share at a market capitalisation of US$4.9bn and an EV of US$1.3bn.

Tightening audit requirements and higher regulatory scrutiny have led to a number of New-York listed Chinese companies to opt out of the US through either going private or carrying out secondary listings in markets closer to China.

• The average premium for the new deals announced (or first discussed) in August was ~28%, with a year-to-date average of ~33% (112 deals & total deal size of US$234bn). This compares to the average premium for all deals in 2020 (158 deals) and 2019 (145 deals) of 31% and 31.5% respectively.
• The above does not include the possible US$5.5bn deal for between IGO Ltd (IGO AU) & Western Areas (WSA AU) (IGO/Western Areas: Battery Mineral Grab); ESR Cayman (1821 HK) acquiring unlisted ARA Asset Management for US$5.2bn (ESR Cayman (1821 HK) Takes Out ARA Asset Management),; or the rumoured US$7.8bn takeover of JOYY (YY US) (JOYY (JOYY US): Rumoured Privatisation). 

Offer Premium Summary

Summary of News in August 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)

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

Then we wait. 

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

And into the week after…

But we wait anyway. 

More below the fold. 

JOYY (YY US) may be subject to a privatisation bid from Mr David Li (co-founder and Chairman) and Mr Jun Lei (founder and Chairman of Xiaomi Corp (1810 HK)), its top two shareholders, according to Reuters report on 26 August. Mr David Li and Mr Jun Lei are looking to privatise Joyy at $75-$100 per ADS and finalise the deal by the end of 2021. Mr David Li and Mr Jun Lei aim to spin off Joyy’s key asset, BIGO, and list it in Hong Kong, to take advantage of higher valuations, according to Reuters. On 27 August, Joyy said it has not received any formal takeover offers, according to Chinese media reports.  

Joyy shares are around 60% below their February peak due to weak guidance (3Q21 revenue guidance was around 16% below consensus), the delay of SAMR anti-trust approval for the YY Live disposal and ongoing policy uncertainty on Chinese tech.

As a reminder, on 16 November 2020, Joyy entered into a definitive agreement with Baidu (BIDU US) for the disposal of YY Live for $3.6 billion in cash, subject to certain adjustments. The sale was substantially completed on 8 February 2021 resulting in a $1.9 billion payment from Baidu. Notably, Joyy’s market cap of $4.9 billion is 7% below its net cash of $5.2 billion, which is the sum of the 2Q1 net cash of $3.9 billion and Baidu’s remaining payment net of tax $1.4 billion.

As Joyy is incorporated in the Cayman Islands, for potential privatisation to succeed, shareholders representing two-thirds of shares present and voting need to approve the deal. Mr David Li represents 76.0% of the voting interest and has the two-thirds voting interest threshold needed to approve any potential privatisation deal.

The review date for MSCI’s November semi-annual index review (SAIR) is October 31. The announcement date is November 11, and the effective date is December 1.

The market cap threshold in SAIR is 1.5 times the interim cutoff, and the float-adjusted market cap threshold is 0.75 times the interim cutoff.

At this point, the interim cutoff is estimated at ₩3T. As a result, this November, SAIR’s full market cap threshold is estimated at ₩4.5T and the float-adjusted market cap threshold at ₩2.25T.

Below is a list of recent major Korean IPOs whose size is large enough for consideration. Of these, only SD Biosensor and Krafton exceed the full market cap threshold. It is important to note that the minimum trading period of 3 months must be met based on the effective date (December 1). Hyundai Heavy Industries meets the market capitalization requirement but falls short of the 3-month minimum trading period requirement.

On 25 August, the Board of Bharti Airtel (BHARTI IN) announced that they would be meeting on 29 August to consider various capital raising options through equity or equity linked or debt instruments or a combination thereof. The stock dropped 4.2% on 26 August and then gained 1.4% on 27 August.

Last evening, Bharti Airtel (BHARTI IN) announced a 1:14 rights issue (shareholders can subscribe to 1 share for every 14 shares they own) at INR 535/share to raise up to INR 21,000 crores (INR 210 bn; US$2.86bn). That is a 10.1% discount to the last close on the NSE.

Subscribers to the issue will need to pay 25% on application and the balance will need to be paid in two additional calls within an overall time horizon of 36 months.

The promoter and promoter group will subscribe to the full extent of their entitlement and will also subscribe to any unsubscribed shares in the issue.

The record date has not been announced yet and a ‘Special Committee of Directors’ has been formed to decide other terms and conditions of the offer, including the issue period and record date.

Given the small dilution, we do not expect the stock to trade a lot lower today. The stock could trade higher as investors that sold in size on Thursday and Friday re-enter the stock.

Bharti Airtel (BHARTI IN) has continued to gain subscribers at the expense of Vodafone Idea (IDEA IN) and the rights issue could help cement its position while helping pay the Adjusted Gross Revenue (AGR) dues.

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

In this weeks recap, we look at:

• the announced changes to the FTSE All-World and All-Cap indices as part of the September rebalance
• the potential changes to the FTSE China 50 Index at September rebalance
• the potential changes to the FTSE China A50 Index (XIN9I INDEX) at the September rebalance
• the potential changes to the FTSE TWSE Taiwan 50 index at the September rebalance
• the announced changes to the NIFTY Next 50 Index at the September rebalance
• the potential changes to the UKX Index (UKX INDEX) at the September rebalance
• the potential changes to the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) at the September rebalance
• the passive trading impact due to the Milton Corp Ltd (MLT AU) / Washington H. Soul Pattinson and Co. Ltd (SOL AU) merger
• the announced changes to the SSE STAR50 (STAR50 INDEX) at part of the September rebalance

Flows into KraneShares CSI China Internet Fund (KWEB US) continue even as the ETF price is near its lows. The ETF could now be the largest China ETF listed overseas, moving ahead of iShares MSCI China (ETF) (MCHI US).