Category

Event-Driven

Event-Driven: Toyo Seikan Group Holdings L, Murata Manufacturing, Pan Pacific International Holdings, Hyundai Heavy Industries, SK Inc, Ecopro Co Ltd, Xinyi Solar Holdings and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Nikkei 225 Index Rebalance: Nintendo, Keyence, Murata IN; Nisshinbo, Toyo Seikan, SKY Perfect OUT
  • 2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, ‘Skupper’ OUT
  • PPIH (7532 JP) ToSTNeT-3 Buyback – The Alliance Is Strong, so FamilyMart Is Selling Shares
  • Hyundai Heavy Industries – Trading Strategy Post Book Building Results
  • SK Inc/SK Materials Merger: Approval Possibilities & Another Arb Opportunity with SK Inc Futures
  • Ecopro Co Announces A Rights Offering Worth 676 Billion Won (37% of Market Cap)
  • HSCEI Index Rebalance Preview: Xinyi Solar Should Replace China Evergrande

Nikkei 225 Index Rebalance: Nintendo, Keyence, Murata IN; Nisshinbo, Toyo Seikan, SKY Perfect OUT

By Brian Freitas

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!


2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, ‘Skupper’ OUT

By Travis Lundy

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.

There are a LOT of moving parts here. There are 3 ADDs, 3 DELETIONS, 1 Price Adjustment Factor moved sharply higher and one moved somewhat lower (a list of all the PAFs announced by the Nikkei is here), then there are another 220 stocks which will see selling on 30 September at the rebalance. 

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? 


PPIH (7532 JP) ToSTNeT-3 Buyback – The Alliance Is Strong, so FamilyMart Is Selling Shares

By Travis Lundy

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. 


Hyundai Heavy Industries – Trading Strategy Post Book Building Results

By Douglas Kim

Hyundai Heavy Industries (HHI) announced its book building results and the IPO has been determined at 60,000 won, which was at the high end of the IPO price range. The demand ratio among the institutional investors was very strong at 1,836 to 1. There were 1,633 institutional investors that participated in the IPO survey of which 1,285 were domestic investors and 348 were overseas investors. 

Institutional Investors Demand Breakdown of Hyundai Heavy Industries IPO Bookbuilding Results
 
Domestic Investors    
 Asset mgmt companiesBrokeragesPension funds/insurance/banksOthers
No. of companies58740276382
Demand692 to 146.7 to 1318.1 to 1492.3 to 1
     
 Overseas Investors    
 (A)*(B)**  
No. of companies132216  
Demand71.3 to 1215.4 to 1  
     
Total (No. of companies)1,633   
Total Demand1,835.9 to 1   
Note: (A)* refers to overseas investment mgmt companies that have records of trading with the brokers involved in this deal.
(B)** refers to overseas investment mgmt companies that do not have records of trading with the brokers involved in this deal.
Source: Company data  

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)?


SK Inc/SK Materials Merger: Approval Possibilities & Another Arb Opportunity with SK Inc Futures

By Sanghyun Park

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:

  • 2/3 of attending shareholders to vote for the merger

AND

  • 1/3 of all shareholders to vote for the merger

First, treasury shares account for 15.07%, which is non-voting shares. So, as SK Inc owns 49.1%, which translates into 58% of the voting shares, it has a pretty good shot at passing the merger by itself alone, even though it falls short of hitting 2/3 (66%).

Shareholding – SK MaterialsShare %Voting %
SK Inc49.12%57.84%
Treasury shares15.07%
 
NPS7.13%8.40%
Minority shareholders28.68%33.77%
– Foreign17.50%20.61%
– Local institutions/retail11.18%13.16%
Voting rights (NPS+minority)42.16%
Voting rights (minority)33.77%
Source: KRX & FnGuide

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.

It is important to note that exceeding the ceiling doesn’t necessarily mean SK will cancel the merger. Instead, it will consider canceling the merger if the total cost exceeds the ceiling.

Minority shareholders can be broken down into NPS (7.1%), foreign (17.5%), local institutions/retail (11.2%). I wouldn’t care much about local institutions/retail. Local institutional investors typically do not oppose corporate events involving local conglomerates. This is because most of them are affiliates of financial holding companies, which in turn are tied to various deal opportunities with conglomerates such as SK Group. Local retail shareholders have significantly lower shareholder attendance rates. In addition, the proportion of stocks traded after August 23rd, the last day to have a dissent right, should be high.

Then NPS? I don’t think they would vote against it. NPS has not said much about the merger so far. There has been a recent case where NPS voted against the corporate event of local conglomerates. But this merger, it’d be different. Since both are listed companies, there is no problem with the merger ratio. In addition, it would be difficult to see that the strategic value of the merger is low enough to claim that SK Materials’ shareholder value is damaged.

Then, the key would be foreign shareholders (17.5%). Based on today’s closing price, the dissent right spread is around 1%. It is questionable whether such a spread will lead to a huge dissent right exercise. But even if foreign shareholders fully exercised their dissent rights, it would be right below the ceiling.

Spread – stock purchase for SK Materials
Current price₩410,400
Exercise price₩415,751
Transfer income tax₩1,122
– Shares10,000
Tax-adj. exercise price₩414,629
Spread1.03%
Source: DART & KRX

So, my prediction is this merger will go through.


Ecopro Co Announces A Rights Offering Worth 676 Billion Won (37% of Market Cap)

By Douglas Kim

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. 

Despite the opportunity to purchase an increasing stake in Ecopro HN, this will result in a significant shares dilution for the existing shareholders of Ecopro Co which is a big negative. Many investors will be concerned about Ecopro Co purchasing a large stake of Ecopro HN, especially after a steep increase in the latter company’s stock price in the past three months. As a result, we have a Negative view of Ecopro Co at current levels. 


HSCEI Index Rebalance Preview: Xinyi Solar Should Replace China Evergrande

By Brian Freitas

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).


Before it’s here, it’s on Smartkarma

Event-Driven: West Japan Railway Co, SK Bioscience, Perrigo Co Plc, China Gas Holdings, Match Group Inc, Maxvalu Nishinihon, KakaoBank and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • JR West (9021 JP) Offering – Supply Vs Yutai+Passive Demand
  • ETF Arbitrage Using KRX BBIG New Deal Is on the Rise
  • S&P500 September 2021 Rebalance:  3 OUT, 3 IN – The Deletions May Be More Interesting
  • HSI Index Rebalance Preview: Potential Inclusions in December
  • S&P500 Index Rebalance: Swiping Right on Match
  • Fuji (8278) & Maxvalu Nishinihon (8287): Aeon Family Supermarket Integration
  • September Lockup Releases on KOSPI: Looking at Each Stock’s Flow Situation
  • KakaoBank – End of the 1 Month Lock Up Period & More Block Selling Ahead Likely by Major Investors

JR West (9021 JP) Offering – Supply Vs Yutai+Passive Demand

By Travis Lundy

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. 


ETF Arbitrage Using KRX BBIG New Deal Is on the Rise

By Sanghyun Park

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.

Index calculationsBBIG (the mother index)
Four sub-indices
: Secondary Battery, Bio, Internet, & Game
Number of constituents1210
Index weight
Equal-weighted at 8.33%
Top 3 (by full market cap): Equal-weighted at 25%
The remaining 7: float-adjusted market-cap-weighted totaling 25%
Source: KRX & WISE Index

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.

Hence, these indices provide relatively suitable conditions for ETF arbitrage.

  • In other words, we can aim for arbitrage using an ETF/NAV disparity. In particular, in Korea, we get tax-free benefits (no transaction tax) when selling ETFs.
  • For this reason, if a disparity rises above -0.25% (equivalent to transaction tax rate), we can consider a classic ETF arb setup.
  • We buy underlying securities and undergo ETF creation and redemption in the primary and then sell ETFs in the secondary market.

S&P500 September 2021 Rebalance:  3 OUT, 3 IN – The Deletions May Be More Interesting

By Travis Lundy

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…

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… 

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.

With 3+x the revenue and a combined OP forecast 8% higher than the ADDITIONS in the next 12 months, these three DELETIONS have a combined market cap of US$16bn as of Friday’s close against the combined market cap of the ADDITIONS which are at US$75bn.

That may not make much sense but most major indices are like that – they buy what goes up, after it has gone up, and they sell what underperforms, after it has underperformed. 

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

Much more analysis below the fold. 


HSI Index Rebalance Preview: Potential Inclusions in December

By Brian Freitas

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.


S&P500 Index Rebalance: Swiping Right on Match

By Brian Freitas

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.


Fuji (8278) & Maxvalu Nishinihon (8287): Aeon Family Supermarket Integration

By Janaghan Jeyakumar, CFA

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.  

For more information about M&A rules, regulations, and practices in Japan, please refer to Quiddity Japan M&A Guide 2019 


September Lockup Releases on KOSPI: Looking at Each Stock’s Flow Situation

By Sanghyun Park

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

NameTickerShare typeRelease dateRelease volume% of SO
Ottogi Corp007310Ordinary2021. 09. 2566,7441.82%
Ajusteel139990Ordinary2021. 09. 202,507,5189.48%
Y2 Solution011690Ordinary2021. 09. 1959,000,00040.07%
SK Bioscience302440Ordinary2021. 09. 1856,298,10073.59%
Krafton259960Ordinary2021. 09. 102,137,4784.37%
Krafton259960Ordinary2021. 09. 0990,0000.18%
Kakao Bank323410Ordinary2021. 09. 063,141,6000.66%
Source: KRX KIND

In the DETAIL section below, let’s take a look at the flow of the 4 recently listed stocks this month one by one.


KakaoBank – End of the 1 Month Lock Up Period & More Block Selling Ahead Likely by Major Investors

By Douglas Kim

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. 


Before it’s here, it’s on Smartkarma

Event-Driven: China Logistics Property Holdings, Showa Denko K.K., Singtel, Kerry Logistics Network, Coupang, Tyro Payments and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • China Logistics (1589 HK): JD.com’s Offer Comes Up Short
  • Showa Denko (4004 JP) Offering – Supply, Passive Demand, and Opportunity
  • Last Week in Event SPACE: SingTel, Bharti Airtel, Kerry Logistics, Milton, Jardine Matheson
  • Asia-Pac Weekly Risk Arb Summary: China Logistics, Kerry Logistics, China Youzan
  • End of Lock Up Period + Start of Amazon Global Store Korea = Lower Share Price Likely for Coupang
  • Index Rebalance & ETF Flow Recap: FTSE China50/A50/TW50, UKX, ASX200, KOSPI2, EPRA Nareit, JR West

China Logistics (1589 HK): JD.com’s Offer Comes Up Short

By David Blennerhassett

China Logistics Property Holdings (1589 HK) (CLPH) has announced its chairman, Li Shifa, has entered into an S&P Agreement with JD.com Inc. (9618 HK), to sell his 26.38% stake in CLPH at a price of $4.35/share.

Provided conditions to the S&P are fulfilled, and with JD.com currently holding 10.64%, it would be obligated to make a Mandatory General Offer (MGO) – also at HK$4.35/share.

The key S&P condition is approval from China’s AML (Anti-Monopoly Law) Authority.

The key condition to the MGO becoming unconditional is JD.com holding 50% of the voting rights in CLPH. RRJ Capital, Joy Orient, and Dajia Baoxian have given irrevocables to tender in their 21.94%, 3.3%, and 4.14% respective stakes.

This all looks pretty clean.

The pushback is that when CLPH announced on the 29 December 2020 Li and RRJ Capital were “conducting a preliminary strategic review of their stakes“, indicating a possible change of control for the company, the pre-announcement share price was HK$3.90. Therefore the Offer Price is an 11.5% premium to the undisturbed price. Many investors thought a $4.50+ handle was more in keeping with this space which has been garnering significant attention.

The Offer price will not be increased. 

Still, as one reader put it, they’re just happy to get this slow-burning deal off their books.

More below the fold.


Showa Denko (4004 JP) Offering – Supply, Passive Demand, and Opportunity

By Travis Lundy

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.


Last Week in Event SPACE: SingTel, Bharti Airtel, Kerry Logistics, Milton, Jardine Matheson

By David Blennerhassett

Last Week in Event SPACE …

  • Singtel (ST SP)‘s implied stub, net of all listcos, is currently around the lowest level outside of the GFC. 
  • Bharti Airtel (BHARTI IN)‘s Rights Entitlements 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.
  • If assuming the Irrevocable Agreement signors intend to tender only what they put in their Irrevocable Agreement, then owning Kerry Logistics Network (636 HK) around $24.00 looks the right place. Share are currently trading comfortably through that level. 
  • Milton Corp Ltd (MLT AU) is now a straightforward short-dated scrip merger arb trade PLUS an index inclusion trade with high impact.
  • Jardine Matheson Holdings (JM SP) still looks rather rich compared to history and other conglomerates. Plus the buybacks have gone and long onlies have had 4 months to reinvest Jardine Strategic Holdings (JS SP) proceeds into JM.
  • Plus, other events, CCASS movements (flagging possible Offers and  IPO lock-ups), and Mood Spins.

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

M&A – ASIA

Kerry Logistics Network (636 HK)  (Mkt Cap: $6.0bn; Liquidity: $8mn)

KLN announced on the 24 August a delay in the record date for the Special Dividend. With the Partial expected to close on the 2 September, questions have been asked whether those shareholders who have already tendered – or those investors who tender before the 2 September – whether they are still eligible for the special dividend? My call with KLN was such that the Partial may be declared unconditional on the first close – the 2 Sept – which means the Partial is required to be open for at least another 14 days, or through to the 16 September, which would then encompass the special dividend’s 15 September record date.

  • But it is actually simpler than this. In the circular (page 7) it says: “means the date immediately prior to the Final Closing Date, being the record date for determining Shareholders’ entitlement to the Special Dividend“. So the Special Dividend record date has to be 1 day prior to the Final Closing Date.

  •  This is a partial offer, not a voluntary/mandatory general Offer. This means, even if unconditional, shareholders who tender, sell all rights and benefits attaching to them as at or after the Final Closing Date. “Whether or not a Shareholder tenders any Share for the acceptance of the Partial Offer, conditional on completion of the Warehouses Sale (which is conditional upon, amongst other conditions, the Partial Offer becoming or being declared unconditional in all respects), every Shareholder as at the Record Date will receive the Special Dividend.”

  • At HK$24.10 – at the time of my insight – assuming the Controlling Shareholders and Executive Directors, etc tender only the Irrevocable Quantities, and assuming the back end trades at Undisturbed of HK$16.92 less the Special Dividend of HK$7.28, the fair value back end is HK$9.64, and the Implied Public Shareholder Participation Rate is 100%.  If using PER at the undisturbed price, the six-month prior average, and the price at which the warehouses were sold, then you’re looking at HK$23.80, HK$23.85, and HK$23.65 as an entry-level – assuming 100% participation. The key risk here is that the Irrevocable Agreement signors will tender more.
  • And as anticipated, Kerry Logistics Network (636 HK)‘s partial was declared unconditional on the First Closing Date. The Offer will now remain open until the 16 September – and cannot be extended further. The record date for the special dividend is the 15 September, and 13th Sept for the interim. You’ll get both if you buy today, and then tender – or not tender. Doesn’t look terribly attractive at these levels though. 

(link to my insight: Kerry Logistics (636 HK): Technicalities As Partial Draws To An End)

Milton Corp Ltd (MLT AU)  (Mkt Cap: $3.4bn; Liquidity: $5mn)

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 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. This is now a straightforward short-dated scrip merger arb trade PLUS an index inclusion trade with high impact.  The risk arb spread is MLT to WHSP where the current price of MLT also includes a special dividend with franking credits. The ratio is 1 share of MLT gets you A$0.37 shares of special divs (plus franking credits) and 0.1863 shares of WHSP.  The index inclusion is one where Travis expects passive trackers in MSCI, FTSE, and S&P/ASX 200 index family funds will have to buy A LOT of shares of  WHSP. 

  • It is not clear when all the index trades will occur. There are rules, and there are overrides. Travis goes into considerable detail in his piece out Friday.

(link to Travis’ insight: Marvelous Milton Merger Mapping Mabbled: Ratio Done, Now For The Hard Part)

China Logistics Property Holdings (1589 HK)  (Mkt Cap: $1.8bn; Liquidity: $7mn)

CLPH has announced its chairman, Li Shifa, has entered into an S&P with JD.com Inc. (9618 HK), to sell his 26.38% stake in CLPH at a price of $4.35/share.  Provided conditions to the S&P are fulfilled, and with JD.com currently holding 10.64%, it would be obligated to make a Mandatory General Offer (MGO) – also at HK$4.35/share. The key S&P condition is approval from China’s AML (Anti-Monopoly Law) Authority, which should not be an issue. The key condition to the MGO becoming unconditional is JD.com holding 50% of the voting rights in CLPH. RRJ Capital, Joy Orient, and Dajia Baoxian have given irrevocables to tender in their 21.94%, 3.3%, and 4.14% respective stakes. This all looks pretty clean.

  • JD.com had the patience, played the long game, which essentially backed CLPH into a corner.
  • But the price is widely viewed as a disappointment, given where it traded back in December last year when a change of control was first floated. This may trade wide at the onset given investors expected a higher price, and may be disinclined to hold all the way to close. But I think this should trade relatively tight to terms. The Offer price will not be increased. And as one reader put it, they’re just happy to get this slow-burning deal off their books.

(link to my insight: China Logistics (1589 HK): JD.com’s Offer Comes Up Short)

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. Janaghan Jeyakumar 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)).  By all means exercise the Common Share Rights you are allocated.  The Pref Shares are probably a toss-up. If you do not exercise them in order to sell, you aren’t losing much at all. Link to Travis Lundy‘s insight: Fubon Financial Rights – Common Share Rights Should Be Exercised, Pref Rights Are Worth Near Zero.

China Youzan (8083 HK) announced Youzan Tech has re-filed its application for the listing of shares, which will now be done by way of an offering of new shares, not a listing by introduction. Both the scrip ratio and cash portion remain unchanged under China Youzan’s delisting transaction, by way of Scheme. The estimated value per Youzan Tech shares by an independent valuer is now RMB21.76 (~HK$26.20/share), down 39% from the previous indicative price.  Therefore the proposed consideration for China Youan shareholders is HK$1.4654/share, a 100.7% premium to last close, but a 55.7% discount to last close ahead of the initial announcement in February this year. I would avoid this stock. It is extremely volatile. Plus there are various moving parts leading to the calculation of what is considered “fair”.  Plus there is a question mark over timing, and whether the listing gets Exchange approval.  I do, however, expect the Scheme to get up. Link to my insight: China Youzan (8083 HK): Once Bitten …. .

Small-cap logistics JREIT CRE Logistics REIT (3487 JP) (“CRE”) has 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 his insight CRE Logistics (3487 JP): Can They Do Better Than Last Time?, Janaghan took a look at whether CRE has the potential to perform as well as it did last time. 

Travis took a look at the Showa Denko K.K. (4004 JP) offering. He notes the history to peers, the offering size itself, the Real World Float of Showa Denko and concludes that one could be bullish or bearish depending on one’s horizon. More on his thoughts out this weekend at Showa Denko (4004 JP) Offering – Supply, Passive Demand, and Opportunity

Specialty prescription drug manufacturer Lansen Pharmaceutical Holdings Co, Ltd. (503 HK) has been a terrific little earner since December last year. Lansen has made significant gains from the sale of its stake in Zhejiang Starry Pharmaceut-A (603520 CH). Cash on hand was US$103mn (~HK$800mn) as at 1H21, with a net cash position of US$73.88mn.  Chairman Wu Zhen Tao acquired 66.44mn shares (16.873%) at an average price of HK$1.84/share, outlaying HK$122.5mn. The highest price paid was ~HK$2.197/share.  Buybacks were 11.01mn shares (2.772% of shares out) at an average price of HK$2.71/share, outlaying ~HK$30mn. The highest price paid was probably ~HK$2.85/share.  Lansen is not a large, nor liquid company. But it was a potential privatisation play. Concurrent with its interim results, Lansen announced a special dividend of HK$1.55/share. The record date is the 16 September, with payment on the 28 September.   Shares gained 33% on the news to close at HK$2.97. This is your cue to exit. Link to my insight: Lansen Pharm (503 HK): Here Is Your Exit.

STUBS

Singtel (ST SP) (Mkt Cap: $29bn; Liquidity: $44mn)

SingTel’s 1Q22 (March-June 2021) return to the black, versus last year’s loss, illustrates an improving business environment. EBITDA at the parent level – the unlisted ops – returned a 11% gain yoy.  Amid improving earnings, the market is assigning S$6.3bn less for the unlisted ops since the beginning of the year. 

  • Stripping out its listco holdings, I see the implied stub, trading at <1x forward EV/EBITDA – if extrapolating out 1Q22 number for theFY22E.  Plus you have potential monetisation of non-core assets together with other infrastructure assets up for sale. 
  • The pushback I hear is that SingTel is too “busy” amid a myriad of “distractions”, and that StarHub Ltd (STH SP) is potentially a better 5G bet.
  • Yet SingTel appears to have well overshot to the downside. SingTel is down 39% yoy, compared to +21%, +29%, and +1% for Bharti Airtel (BHARTI IN), Globe Telecom (GLO PM), and STH.  Get involved either as deep value play, and/or an inexpensive entry into Airtel. 

(link to my insight: StubWorld: SingTel Plumbs Multi-Year Low

Jardine Matheson Holdings (JM SP) (Mkt Cap: $20.6bn; Liquidity: $16mn)

In my prior insight Jardine Matheson: Lessons in Dissenton the 29 April, I thought Matheson 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, but rich vs. historical levels. 

  • The market cap is down US$3.2bn since my last report. The market is also assigning US$1.2bn less to the stub ops – and those ops have had a stellar 1H21. Plus US$0.9bn in cash has been banked from those ops. My current stub ops are valued at US$2.1bn compared to US$1.2bn back in April.
  • There is still a question mark over the cost of those dissension rights. But as seen in recent Cayman Island appraisal rights cases, the final uplift in “fair value” for dissenters has been modest to non-existent.
  • Collapsing the circularity and removing its complexity should drive interest (from LOs) in Matheson. And holdings like HKL are cheap at 0.3x P/B. The pushback? – the unattractiveness of the UK Standard listing, the absence of buybacks, plus Matheson gained 20% at the time of the Strategic Offer.

(link to my insight: Jardine Matheson: Value Gradually Emerging Four Months On)

EVENTS

Bharti Airtel (BHARTI IN)  (Mkt Cap: $50bn; Liquidity: $6mn)

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 InterestingBharti 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; and will be able to subscribe for over-allotments to take up the rights of those who let theirs lapse.
  • Investors should look for a chance to buy the Rights and PPS near intrinsic. That put option and the embedded financing are worth a fair bit.
  • Because passive funds will receive the rights and the rights will not go into the various indices immediately. I expect those shares to come out quickly when they start trading as the dummy line is taken out of the index (passive managers receive the rights, but the index provider does not include them and instead assigns a zero value to them.

Link to:
Travis’ insight: Bharti Airtel Partially Paid Rights Situation
Brian Freitas‘ insight: Bharti Airtel’s Large Partly Paid Rights Offering

Hitachi Transport System (9086 JP)  (Mkt Cap: $3.5bn; Liquidity: $11mn)

Hitachi Transport has decided to cancel 19.8% of its shares outstanding, effectively ridding itself of treasury shares. That cancellation occured this week. This will mean a substantial drop in share count. That will mean, unless countered by the TSE in a corporate action treatment to be named later, a large selldown of shares on 29 October based on TOPIX calculation rules. Because the TSE measures Free Float Weight on a different time frame than it measures shares outstanding, and the FFW is updated once a year based on the numbers as of the end of the fiscal year, the fact that Hitachi Transport’s float was very low at end-March using the TSE’s FFW methodology means there is a decent chance that the float rate will be lowered, meaning an even larger selldown in end October (29 October).

  • If the TSE does an ad hoc measurement which takes into account both the increase in float percentage by using 31 March float shares against 29 Sep float shares, it will still be a big selldown at end-October.  The Passive Sell should be 1.2-2.0mm shares or 7-11 days of ADV. There could be a selldown by SG Holdings. They have stock to go to meet their target from a year ago. That could be 3.5mm shares or more. 
  • Travis likes the “HTS is a takeover candidate trade” and it is part of the reason why he liked the stock nearly a year ago. HOWEVER… he had hoped the earnings rebound would move faster, and M&A would move faster, and for the moment he sees nothing to suggest a great deal of urgency. Furthermore,  he is not convinced (and this comes without the benefit of having spoken to management) that HTS really wants to be taken over by a PE Fund. They may be willing to work with one in growing outside Japan, but he doesn’t get the feeling they want to be owned by one. If they did, management and directors would probably own more than 0.1%.

(link to Travis’ insight: Hitachi Transport Uncoupled – TSE Prime, Price Popping, And Supply To Come)

Results are out for the WH Group (288 HK) Partial Offer.  1,916,937,202 Shares to be bought-back against valid acceptances in respect of a total of 8,288,742,088 Shares tells you Pro-Ration was 23.12699782%. Travis has seen a notice passed around which says that the MSCI selldown for the 2 Sept at the close on WH Group  includes no change in FIF (float weight) which stays at 65% but there will be a share count reduction of 1.917bn shares.  I have yet to see a FTSE or Hang Seng announcement. In FTSE, it sits in limbo because it is not specifically a UK/Aus name though the event is specifically like one described, and it is more than large enough to warrant a specific change. Link to Travis’ insight: WH Group Post-Tender Outlook – Index Selldown and Back-End Trading/Valuations.

TAKEOVER RULES – INDIA BUY-BACK GUIDE 2021

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.
  • In this insight Quiddity India Buy-Back Guide 2021: Regulations & Patterns – Travis and Janaghan will look into the regulations that govern each of the buy-back mechanisms to discover the basis for how they get executed.

M&A – US

M&A – EUROPE

  • On 27 August, Castor (the acquisition vehicle of Ion) raised the offer price FOR Cerved Group S.p.A. (CERV IM) to €10.20/share, a ~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. In Castor Raises Bid for Cerved Jesus Rodriguez Aguilar‘s fair value is  €11.04/share. 

M&A ROUND-UP IN AUGUST

For the month of August, 10 new deals (firm and non-binding) were discussed on Smartkarma with an overall announced deal size of ~US$39bn, buoyed by the massive Afterpay Touch (APT AU) transaction.

  • 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.

M&A RISK ARB WEEKLY ROUND-UP

  • This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks. I number 36, mostly firm, deals around the region.

INDEX REBALS

  •  FTSE EPRA Nareit Rebalance Decided. 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. The inclusion date is 17 September. The impact should still be large (it has been large so far). Link to Travis’ insight: FTSE EPRA Nareit Rebalance Decided; Sub-Baskets Worth Trading Still.

  •  JPX-Nikkei 400 Rebalance 2022. A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. This review is conducted using the final business day of June as the base date. In JPX-Nikkei 400 Rebalance 2022: Leader Board End-Aug 2021, Janaghan Jeyakumar looks at the lists of potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2022. The conventional trade would be to go LONG the Potential Inclusions and go SHORT the potential Removals. However, Janaghan believes it is too early in the timeline to set up this trade. For now, he would add these to a watchlist and track the evolution of these baskets. 

OTHER M&A & EVENT UPDATES

  • As expected, Golden Throat Holdings (6896 HK) has pushed out the dispatch date for the Scheme Document to the 19 October (on or before). 
  • Also expected, Independent Scheme Shareholders of Chong Hing Bank (1111 HK) overwhelmingly (99.97%) approved the Scheme at the Court Meeting yesterday. The effective date is expected to be the 27 September, with payment on or before the 7 October.

  • Central Pattana Pub (CPN TB) has now completed the purchase of shares in Siam Future Development (SF TB)on 30 August 2021 equal to 52.15% of shares out at Bt12.00/share. After the completion of shares purchase, the number of shares held by CPN is 56.26%. Therefore, CPN is required to make a tender offer for the remaining shares in SF.

  • The SPA is now unconditional triggering a mandatory take-over for the remaining shares of Ijm Plantations (IJMP MK) at RM3.10. The Offer Doc is expected to be dispatched within 21 days. Settlement takes place within 10 from valid acceptances. This will trade tight. 

  • Youfoodz Holdings (YFZ AU)announced that the Federal court of Australia has approved the convening of Scheme Meeting and despatch of Scheme Booklet. The Scheme Meeting will be held on the 8th October 2021.

  • Mcdonald’s Corp (MCD US) reported that it had sold 3.5mm shares of Mcdonald’s Holdings Co Japan (2702 JP) at JPY 5290 on 26 August (the closing price of that day). That means there should be another 3.5mm shares sold in the market over the next short while, but that should be the last block. The stake which remains is 35.32% and in July 2020, MCD said they would stop at 35%. 

CCASS

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

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

Name

% chg

Into

Out of

Tibet Water Resources Ltd. (1115 HK) 10.29%Chiw SangChing Hing
Hang Tai Yue Group Holdings (8081 HK) 14.33%Get NiceKingston
TL Natural Gas (8536 HK)32.92%Glory SunSt Chart
Jiangxi Bank Co Ltd (1916 HK) 10.03%CCBChina Industrial
Zioncom (8287 HK)30.00%CNILego
Source: HKEx
The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Hygeia Healthcare Group (6078 HK) 13.19%JPMOutside of CCASS
Source: HKEx

I listen to a bunch of music when writing insights. Here are a handful of tunes, old & new, that piqued my interest during the week: Pynch’s Somebody Else; Let Out on the Loose (Danny Krivit Edit), Christelle Bofale’s Miles, Nick Garbett & Mike Majkowski’s Mid Mountains.

What are you listening to? 

Enjoy your Sunday!


Asia-Pac Weekly Risk Arb Summary: China Logistics, Kerry Logistics, China Youzan

By David Blennerhassett

This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks.

I number 37, mostly firm, deals around the region.

More below the fold.


End of Lock Up Period + Start of Amazon Global Store Korea = Lower Share Price Likely for Coupang

By Douglas Kim

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 our view, Softbank may try to sell as much of $3 billion in Coupang shares over the next 6-12 months, which represents nearly 5.8% of current market cap. We do believe that Softbank will try to recoup at least its original investment of nearly $3 billion.

A $3 billion investment is a big amount of money. If we assume a 30% per annum ROI required by Softbank (taking into consideration the time value of money of the two investments made in 2015 and 2018), this means that AT MINIMUM, Coupang’s market cap would need to be $28 billion (which would suggest $16 per share). At $16 per share, this would represent a further 46% lower levels than the current price of $29.65.


Index Rebalance & ETF Flow Recap: FTSE China50/A50/TW50, UKX, ASX200, KOSPI2, EPRA Nareit, JR West

By Brian Freitas

In this weeks recap, we look at:

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.

Events This Week

Click on the link under Detail to go to the Insight

Date

Index

Detail

6 September (e)
NKY
9 September
KOSPI200
9 September
KRX BBIG
10 September
STAR50

Before it’s here, it’s on Smartkarma

Event-Driven: Milton Corp Ltd, Lifestyle Communities, Momo.Com Inc, Douzone Bizon, Vertex Venture Holdings, China Logistics Property Holdings and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Marvelous Milton Merger Mapping Mabbled: Ratio Done, Now For The Hard Part
  • ASX100/200/300 Sep21 Index Rebalance: Some Surprises In Here + Same Way Flow
  • FTSE TWSE Taiwan 50 Index Rebalance: Momo.com IN, Asia Cement OUT
  • KOSPI LargeCap & MidCap Rebalancing Preview on September 9
  • Green Light For SPAC Listings In Singapore
  • China Logistics Property’s Mandatory Conditional Offer Set in Motion

Marvelous Milton Merger Mapping Mabbled: Ratio Done, Now For The Hard Part

By Travis Lundy

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.

Today’s announcement means the merger trade is “fixed” rather than floating and now the remaining “risks” are…

  • a small and eminently arb-able risk arb spread (which is 3.56% less comms and borrow fees as I type (excluding any franking credit benefit)
  • the risk of whether this gets voted through at the Scheme Meeting on the 13th, and
  • the index impacts

There is, as always, more below the fold.


ASX100/200/300 Sep21 Index Rebalance: Some Surprises In Here + Same Way Flow

By Brian Freitas

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 TWSE Taiwan 50 Index Rebalance: Momo.com IN, Asia Cement OUT

By Brian Freitas

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)


KOSPI LargeCap & MidCap Rebalancing Preview on September 9

By Sanghyun Park

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.

  • The screening method is simple and clear. It is based on the 3-month average daily market cap.
  • LargeCap includes 1st to 100th, and MidCap takes 101st to 300th.
  • The screening base date is the last trading day of February and August. So, this September rebalancing review period is June 1 to August 31.

Green Light For SPAC Listings In Singapore

By David Blennerhassett

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’s Mandatory Conditional Offer Set in Motion

By Arun George

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 mandatory share offer is conditional on the offeror and parties acting in concert with it holding more than 50% of the voting rights. The offeror has received irrevocables which represent 29.38% of the outstanding shares. Consequently, the 50%+ voting threshold will be satisfied due to the irrevocables. At the last close price of HK$4.05, the gross spread to the MGO price of HK$4.35 per is 7.4%. 


Before it’s here, it’s on Smartkarma

Event-Driven: OUE Commercial REIT, Singtel, West Japan Railway Co, Wm Morrison Supermarkets, Fubon Financial Holding Co, Samsung Electronics Pref Shares, CRE Logistics REIT, Bharti Airtel and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • FTSE EPRA Nareit Rebalance Decided; Sub-Baskets Worth Trading Still
  • StubWorld: SingTel Plumbs Multi-Year Low
  • JR West (9021 JP) New Issue: Index Implications
  • FTSE100 Index Rebalance: Looking Beyond The Announced Changes
  • Fubon Financial Rights – Common Share Rights Should Be Exercised, Pref Rights Are Worth Near Zero
  • Samsung Electronics Special Dividend Situation Checkup for This Year
  • CRE Logistics (3487 JP): Can They Do Better Than Last Time?
  • Bharti Airtel Partially Paid Rights Situation

FTSE EPRA Nareit Rebalance Decided; Sub-Baskets Worth Trading Still

By Travis Lundy

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

The inclusion date is 17 September.

The impact should still be large (it has been large so far).

More analysis below the fold.


StubWorld: SingTel Plumbs Multi-Year Low

By David Blennerhassett

This week in StubWorld …

Singtel (ST SP)‘s implied stub, net of all listcos, is currently around the lowest level outside of the GFC. 

Preceding my comments on SingTel 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%.


JR West (9021 JP) New Issue: Index Implications

By Brian Freitas

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.


FTSE100 Index Rebalance: Looking Beyond The Announced Changes

By Brian Freitas

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 Rights – Common Share Rights Should Be Exercised, Pref Rights Are Worth Near Zero

By Travis Lundy

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. 


Samsung Electronics Special Dividend Situation Checkup for This Year

By Sanghyun Park

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

  • Samsung will continue to return 50% of the free cash flow (FCF) generated in FY21~23.
  • The regular dividend will increase to an annual total of ₩9.8T for FY21~23 (it was ₩9.6T for FY18~20).
  • So, this year’s (and the next two years) guaranteed minimum dividend is ₩1,443 for ord and ₩1,444 for 1P. The quarterly dividend should then be ₩361.
  • Samsung also reiterated that it would continue to return any remaining from the 50% of the FCF after regular dividend payouts.
  • What’s different now is that Samsung will share the annual FCF at the end of each year.
  • In addition, Samsung will actively consider executing a portion of it at the close of each year’s results. Yes, we may have special dividends at each yearend in FY21~23.

CRE Logistics (3487 JP): Can They Do Better Than Last Time?

By Janaghan Jeyakumar, CFA

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.


Bharti Airtel Partially Paid Rights Situation

By Travis Lundy

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. 


Before it’s here, it’s on Smartkarma

Event-Driven: Hotel Property Investments, Baidu, Great Wall Motor, KakaoBank, Douzone Bizon, Tata Consultancy Svcs, Lansen Pharmaceutical Holdings Co, Ltd., Tencent Music, Genworth Financial Inc Cl A and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • FTSE EPRA NAREIT – Lots of Adds In Developed Asia
  • FTSE China 50 Index Rebalance: High Turnover; Relatively Low Impact; Surging Shorts
  • FTSE China A50 Index Rebalance: Strong Momentum; No Surprises
  • Kakao Bank – A Major Block Deal Is a Big Negative Overhang
  • KRX BBIG Rebalancing Results & Passive Impact Estimations: Watch Douzone Bizon
  • Quiddity India Buy-Back Guide 2021: Regulations & Patterns
  • Korea Post’s Kakao Bank Block Deal, Yes, It Is Unexpected
  • Lansen Pharm (503 HK): Here Is Your Exit
  • TME Facing the Music; Ends Exclusive Music Licensing Deals
  • SpinTalk: Genworth Raises The Curtain On Its Follow-Up ACT-Why We May Be Looking At A September IPO

FTSE EPRA NAREIT – Lots of Adds In Developed Asia

By Brian Freitas

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 China 50 Index Rebalance: High Turnover; Relatively Low Impact; Surging Shorts

By Brian Freitas

Post HK market close today, FTSE Russell announced the changes to the FTSE China 50 Index as part of the June review. The changes will be effective after the close of trading on 17 September.

As expected, there are 4 sets of changes to the index. Baidu (9888 HK), Ganfeng Lithium (1772 HK)Geely Auto (175 HK) and Sunny Optical (2382 HK) have been added to the index, replacing Hansoh Pharmaceutical (3692 HK)Alibaba Health Information Technology (241 HK)Haidilao (6862 HK) and China Merchants Securities Co Ltd (H) (6099 HK).

Li Ning (2331 HK) just missed out on index inclusion and joins the Reserve List along with Bilibili (9626 HK), Shanghai Fosun Pharmaceutical (Group) (2196 HK), China Overseas Land & Investment (688 HK) and CRRC Corp Ltd H (1766 HK)

Estimated one-way index turnover is 11.07% and will result in a one-way trade of HK$5.03bn. The large turnover is a result of the number of changes and the capping changes to the largest index constituents. Final capping will use prices from the close of trading on 10 September.

Short interest has risen rapidly on the deletions and is at the high on three of the four names. There could be small covering close to implementation date.


FTSE China A50 Index Rebalance: Strong Momentum; No Surprises

By Brian Freitas

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 – A Major Block Deal Is a Big Negative Overhang

By Douglas Kim

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. 

Overall, we believe this big block deal is a big negative overhang for the existing shareholders of Kakao Bank. For the short-term investors in Kakao Bank, there may be quick, short-term trading opportunities (2-5%). However, we believe double digit returns on Kakao Bank is likely to be less likely, given the stretched valuations and likelihood of greater competitive pressures. 


KRX BBIG Rebalancing Results & Passive Impact Estimations: Watch Douzone Bizon

By Sanghyun Park

Rebalancing results

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

Of course, the big changes are Krafton and SK Bioscience in the main index. And SKIET’s inclusion in the Secondary Battery sub-index also deserves special attention.

Constituents Change of KRX BBIG K-New Deal Index
Index
AdditionDeletion
TickerNameTickerName
KRX BBIG K_New Deal
302440SK Bioscience302440
SK Biopharm
259960Krafton293490
Kakao Games
KRX Secondary Battery361610SK IE Technology278280Chunbo
KRX Bio
302440SK Bioscience019170
Shinpoong Pharm
128940HanmiPharm096530Seegene
KRX Internet035600KGInicis131370
Rsupport
KRX Game
259960Krafton112040Wemade
194480Devsisters217270Neptune
Source: KRX

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.

Rebalancing schedule
Rebalancing cycleSemi-annually
Rebalancing month
March and September
Implementation date
The trading day following the last trading day for KOSPI 200 futures contracts
Next implementation date
September 10, 2021
Rebalancing trading
At the close on September 9, 2021
Screening base date
The last trading day of the month preceding the date of regular rebalancing.
Screening period
The three months preceding the screening base date
Source: KRX & WISE Index

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.

ETFs tracking BBIG indicesIndexTickerAUM
Mirae Asset TIGER KRX BBIG K-New Deal ETF
KRX BBIG K-New Deal Index
364960₩441.4B
Hana Financial Investment Hana KRX BBIG K-New Deal ETN 3700003₩10.3B
TIMEFOLIO TIMEFOLIO BBIG Active ETF385710₩27.6B
– Total₩479.2B
Mirae Asset TIGER KRX Second Battery K-NewDeal ETFKRX Secondary Battery K-New Deal Index364980₩647.2B
Mirae Asset TIGER KRX BIO K-New Deal ETFKRX Bio K-New Deal Index364970₩100.5B
Mirae Asset TIGER KRX Internet K-New Deal ETFKRX Internet K-New Deal Index365000₩64.9B
Mirae Asset TIGER KRX Game K-New Deal ETFKRX Game K-New Deal Index364990₩31.9B
Source: KRX

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.

First of all, this BBIG index does not have a Fast Entry clause. So, KRX was internally debating whether to apply the review cutoff date to newly listed stocks with large market caps. (This was what I heard from KRX directly.) Since this index has few constituents, if newly listed stocks with large market caps are excluded from the index for nearly six months, the resulting disparity between the index and the actual sector may become too large, and KRX is also concerned about this.

Therefore, KRX said that it would decide on Fast Entry of those stocks with large market caps, such as Krafton, Kakao Pay, and LG Energy Solution, at the time of regular rebalancing in consultation with the ETF operators (Mirae Asset). In the end, it turned out that the outcome of the KRX & Mirae Asset discussion on the Fast Entry of Krafton was Go, which wasn’t outside the scope of the KRX Index methodology at all.


Quiddity India Buy-Back Guide 2021: Regulations & Patterns

By Travis Lundy

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.


Korea Post’s Kakao Bank Block Deal, Yes, It Is Unexpected

By Sanghyun Park

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.

Kakao Bank: Pre-IPO institutional shareholders not locked up
Netmarble (KS 251270)1.60%
Skyblue Luxury Investment Pte. Ltd. (Tencent)1.60%
Seoul Guarantee Insurance Company3.21%
Korea Post3.21%
 
eBay Korea3.21%
Yes24 (KS 053280)1.41%
Source: DART

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.

OK, it is not difficult to understand that Korea Post wanted to realize a profit when the return was 10 times the investment. However, given the fund operation tendency of the Korea Post as a local pension fund, there are several questions about the size and timing of this block deal.

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.


Lansen Pharm (503 HK): Here Is Your Exit

By David Blennerhassett

Specialty prescription drug manufacturer Lansen Pharmaceutical Holdings Co, Ltd. (503 HK) has been a terrific little earner since December last year.

  • But first, some background information to bring us up to date:

Date

Data in the Date

9-Mar-16

Zhejiang Starry Pharmaceut-A (603520 CH) (Starry) specialises in the research and development, manufacture, marketing, and sales of bulk pharmaceuticals and intermediates.
One of the core products of Starry is iohexol for X-CT non-ionic contrast agents. Starry is the largest generic drug manufacturer of iohexol’s active pharmaceutical ingredients in China.
Starry IPO-ed on the Shanghai Stock Exchange on 9 March 2016.
Lansens’s equity interest in Starry was diluted from 21.5% to 16.1%, which constituted a disposal of an associate. 

FY17Lansen sold down its stake in Starry to 12.6% as at Dec-17
FY18Lansen sold down its stake in Starry to 10.8% as at Dec-18
FY19Lansen sold down its stake in Starry to 4% as at Dec-19
FY20

Lansen sold down its stake in Starry to 1.3% as at Dec-20

29-Sep-21Lansen’s chairman Wu Zhen Tao made a Tender Offer for Cathay International.
We, via his holding in common shares and A Shares, controlled 73.54% of the vote in Cathay.
Cathay, in turn, held 52.83% of Lansen
3-Nov-21Cathay’s Tender Offer was approved by shareholders
11-Nov-21Cathay’s Tender Offer closed on the 11 November with 94.3% of the common shares and A shares held
1-Dec-21A compulsory acquisition notice was issued by Cathay and was done and dusted by the 11 January this year.
11-Dec-21Wu started buying shares in Lansen – aggressively. 41 separate incidences of buying, up to and including the 27 April, lifting his stake to 69.56%, from 52.83% initially.
23-Feb-21Lansen sells more Starry shares and then held ~1.3%.
15-Apr-21Lansen sells more Starry shares and then held ~0.9%
24-May-21Lansen sells more Starry shares and then held ~0.3%.
2-Jun-21Two days after the AGM, Lansen starting buying back shares, and proceeded to do so over a 10 separate trading days, stopping on the 26 July, prior to the earnings blackout.
Once canceled these buybacks lifted Wu’s stake to 71.54%
31-Aug-21Interim results released
Source: HKEx announcements

The Takeaway from the Above

  • Lansen has made significant gains from the sale of Starry. Cash on hand was US$103mn (~HK$800mn) as at 1H21, with a net cash position of US$73.88mn (~HK$575mn). Lansens held 0.3% of Starry as at 30 June. 
  • Wu acquired 66.44mn shares (16.873%) at an average price of HK$1.84/share, outlaying HK$122.5mn. The highest price paid was ~HK$2.197/share. 
  • Buybacks were 11.01mn shares (2.772% of shares out) at an average price of HK$2.71/share, outlaying ~HK$30mn. The highest price paid was probably ~HK$2.85/share. Buybacks accounted for ~40% of daily volume, on average.
  •  Lansen is not a large, nor liquid company. But it was a potential privatisation play.
  • After gaining another 35% in the preceding week, on 15th July when shares were changing hands at HK$3.75,  I said (in the discussions section at the bottom of Lansen Pharma (503 HK): This Is Still A Buy) that “my pound-the-table recommendation is wavering, given the 260+% gain since Wu started buying last December.  I think the risk/reward has shifted at current levels“.
  • Shares closed yesterday at HK$2.23.

The New News

  • Concurrent with its interim results, Lansen announced a special dividend of HK$1.55/share. 
  • That’s equivalent to ~HK$599mn assuming shares recently bought back are canceled. 
  • The record date is the 16 September, with payment on the 28 September.

The idea of a small-cap company returning excess cash to shareholders is a welcome change; however, my initial reaction was that there could may be some degree of disappointment the preceding events didn’t (so far) lead to a takeover. And the back-end will now focus on the lackluster underlying business ops.

Not to be. Not even close. Shares gained 33% today to close at HK$2.97.

This is your cue to exit.


TME Facing the Music; Ends Exclusive Music Licensing Deals

By Shifara Samsudeen, ACMA, CGMA

Tencent Music (TME US) announced on Tuesday (31st 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.


SpinTalk: Genworth Raises The Curtain On Its Follow-Up ACT-Why We May Be Looking At A September IPO

By Robert Sassoon

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.


Before it’s here, it’s on Smartkarma

Event-Driven: China Youzan, Krafton Inc, KakaoBank, Softbank Corp, Cerved Group S.p.A. and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • China Youzan (8083 HK): Once Bitten …
  • KRX BBIG Index Rebalance: Krafton, SK Bioscience, SK IE Tech Included (Among Others)
  • KOSPI200 September Index Rebalance: Krafton, Kakao Bank Fast Entry Confirmed
  • JPX-Nikkei 400 Rebalance 2022: Leader Board End-Aug 2021
  • Castor Raises Bid for Cerved
  • KOSPI 200 September Rebalancing Results & Passive Impact Estimations

China Youzan (8083 HK): Once Bitten …

By David Blennerhassett

Back on the 28 February this year, SaaS provider China Youzan Limited (8083 HK) announced a pre-conditional Offer by way of a Scheme to take its GEM-listed shares private, then list 51.7%-held Youzan Technology on Hong Kong’s mainboard by “way of introduction“. Shareholders were to be offered HK$0.1352/share in cash plus an in-specie distribution of 0.05077265 Youzan Technology shares for every China Youzan share held. The total indicative Offer price was HK$2.3088/share, a 30.2% discount to last close. The scrip portion was based on a fair value of RMB35.73/share for Youzan Tech.

In China Youzan (8083 HK): Proposal Towards Relisting Youzan Tech, I recommended avoiding the stock –  China Youzan was up 283% in the past year, and 44% YTD prior to the Offer announcement. 

Disinterested Scheme Shareholders approved at the First SGM on the 6 May, a rollover arrangement and other side-agreements – not the take-private proposal as was incorrectly reported by some media sources.

At the time, shares were trading at $2.09/share, down 37% since the delisting proposal. 

And shares continued to fall, with double-digit declines on multiple days including 19.5% on the 11 May on significant volume. 

The Scheme Document was expected to be posted on or before the 15 June, but was delayed on that day to at least the 19 October. 

Reportedly Youzan Tech’s listing application had been rejected, however, the wording in the monthly update on the 13 August said “Youzan Technology has been revising features of its application“, a slightly varied statement to “Youzan Technology has continued to progress its application with the Stock Exchange” seen in previous monthly updates

Shares touched a low of HK$0.71/share on the 23 August. 

The New News

China Youzan announced yesterday Youzan Tech has re-filed its application for the listing of shares, which will now be done by way of an offering of new shares, not a listing by introduction. 

Both the scrip ratio and cash portion remain unchanged under China Youzan’s delisting transaction, by way of Scheme.

The estimated value per Youzan Tech shares by an independent valuer is now RMB21.76 (~HK$26.20/share), down 39% from the previous indicative price. 

Therefore the proposed consideration for China Youan shareholders is HK$1.4654/share (HK$0.1352 +(HK$0.05077265 x HK$26.20)), a 100.7% premium to last close, but a 55.7% discount to last close ahead of the initial announcement in February this year. 

Shares are up ~16% in the last two trading days, but down 74% since the delisting proposal and 37% adrift of the indicative Offer price in February. Those are pretty grim performance numbers.

There’s probably value to be had here at the current level, but there are a multitude of factors at work in arriving at a “fair value.” Further delays in the dispatch of the Scheme Doc are feasible. And will the Exchange grant this listing application, when it clearly had issues with the prior submission?

More below the fold.


KRX BBIG Index Rebalance: Krafton, SK Bioscience, SK IE Tech Included (Among Others)

By Brian Freitas

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:

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.


KOSPI200 September Index Rebalance: Krafton, Kakao Bank Fast Entry Confirmed

By Brian Freitas

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).


JPX-Nikkei 400 Rebalance 2022: Leader Board End-Aug 2021

By Janaghan Jeyakumar, CFA

JPX-Nikkei 400 is composed of common stocks whose main market is the TSE1, TSE2, JASDAQ, and Mothers sections (which will become the Prime Market, Standard Market, or Growth Market next April) of the Tokyo Stock Exchange. This is a free-float-adjusted market-value-weighted (capped) index composed of 400 constituents selected based on several factors including market capitalization, trading value, operating profits, and ROE.

A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. This review is conducted using the final business day of June as the base date. 

Quiddity provides quantitative research on pre-event basket strategies surrounding this Index Rebalance event and others. The rebalance of 2021 took place yesterday. It was discussed in The 2021 JPX Nikkei 400 Rebalance. Another Year, Another Mess – Bigger, But Smaller – there were lots of large names deleted because of covid-related writedowns and losses, and in typical JPX Nikkei 400 construction fashion, I expect most of them will be back in the index three years from now after they have rebounded. 

Below is a look at the lists of potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2022. 


Castor Raises Bid for Cerved

By Jesus Rodriguez Aguilar

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.

Ion has grown largely via acquisitions and therefore has acted as a consolidator, looking for complementary businesses with which to integrate its services. Ion aims to disrupt the current market by fostering automation in the financial markets and featuring high potential complementarities.

Cerved is the third-largest collector of NPLs in Italy, a business that is expected to grow due to  rising bad debts resulting from the aftermath of Covid-19. Ion has been pursuing Cerved since the latter said it was negotiating with PE funds the sale of its credit management division. 

My fair value estimate on a standalone-basis is €11.04/share (DCF based, see Trading Above Terms at the Start of the Tender Offer Period), 8% above the current offer price. Median TP on Capital IQ consensus is €10.4. Gross spread to the increased consideration is 2.3%. Upside could come from an increased offer from Ion. The share is supported by solid fundamentals, although risk could come from business plan execution. Reiterate long CERV IM.


KOSPI 200 September Rebalancing Results & Passive Impact Estimations

By Sanghyun Park

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

The effective date is September 10th, so the rebalancing trading should occur at the close on September 9th.

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).

Kakao BankAddDelete
KOSPI 200KakaoBank (323410)L&L (115390)
 
KOSPI 200 FinancialsKakaoBank (323410)None
KOSPI 200 Consumer discretionaryNoneL&L (115390)
KOSPI 200 MidSmallCapOTTOGI (007310)L&L (115390)
KOSPI ex-KOSPI 200L&L (115390)
KakaoBank (323410)
KOSPI 200 ex-TOPKakaoBank (323410)L&L (115390)
KOSPI 200 Factor Tilt MomentumKakaoBank (323410)None
KOSPI 200 Factor Tilt LowVolKakaoBank (323410)L&L (115390)
KOSPI 200 Factor Tilt ValueKakaoBank (323410)None
KOSPI 200 Factor Tilt QualityKakaoBank (323410)L&L (115390)
KOSPI 200 GIVINoneL&L (115390)
KOSPI 200 Climate ChangeNoneL&L (115390)
KOSPI 100KakaoBank (323410)
OTTOGI (007310)
KOSPI 50KakaoBank (323410)
COWAY (021240)
KRX 300KakaoBank (323410)None
KRX 300 FinancialsKakaoBank (323410)None
KRX BankKakaoBank (323410)None
Source: KRX

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).

KraftonAddDelete
KOSPI 200KRAFTON (259960)
JWPHARMA (001060)
 
KOSPI 200 Communication ServiceKRAFTON (259960)None
KOSPI 200 Health CareNone
JWPHARMA (001060)
KOSPI 200 MidSmallCapPOSCO INTERNATIONAL (047050)
JWPHARMA (001060)
KOSPI ex-KOSPI 200JWPHARMA (001060)
KRAFTON (259960)
KOSPI 200 ex-TOPKRAFTON (259960)
JWPHARMA (001060)
KOSPI 200 Factor Tilt MomentumKRAFTON (259960)None
KOSPI 200 Factor Tilt LowVolKRAFTON (259960)
JWPHARMA (001060)
KOSPI 200 Factor Tilt ValueKRAFTON (259960)None
KOSPI 200 Factor Tilt QualityKRAFTON (259960)None
KOSPI 200 Consumer GoodsNone
JWPHARMA (001060)
KOSPI 200 Low Volatility High Div IndexNone
JWPHARMA (001060)
KOSPI 200 GIVINone
JWPHARMA (001060)
KOSPI 200 Climate ChangeNone
JWPHARMA (001060)
KOSPI 100KRAFTON (259960)
POSCO INTERNATIONAL (047050)
KOSPI 50KRAFTON (259960)
Kangwonland (035250)
KRX 300KRAFTON (259960)None
KRX 300 Communication ServiceKRAFTON (259960)None
KRX Media & EntertainmentKRAFTON (259960)None
Source: KRX

Before it’s here, it’s on Smartkarma

Event-Driven: Kerry Logistics Network, Jardine Matheson Holdings, SK Materials, Alibaba Group, Krafton Inc, China Youzan, SK Innovation, Sanne Group PLC, JOYY, Afterpay Touch and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Kerry Logistics (636 HK): Technicalities As Partial Draws To An End
  • Jardine Matheson: Value Gradually Emerging Four Months On
  • SKC Is Down 5% Today: Why & What Impact on SK Holdings/SK Materials Arb Spread-Hunting
  • HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping
  • End of the 1 Month Lockup Period for Krafton & An Excessive Pricing Gap Vs. NCsoft
  • China Youzan’s Updated Privatisation Proposal
  • SK Innovation’s Unusual Attempt to Change the Articles of Incorporation for Stock Dividends
  • Apex Leads Takeover Contest for Sanne
  • JOYY Inc Privatisation: Our Thoughts on Valuation
  • (Mostly) Asia M&A: August 2021 Roundup

Kerry Logistics (636 HK): Technicalities As Partial Draws To An End

By David Blennerhassett

Back on the 9 February, Kerry Logistics Network (636 HK) (KLN) announced a pre-conditional Partial Offer from  S.F. Holding (002352 CH) (“SFH”).  SFH intended to acquire 931.21mn shares or 51.8% of shares outstanding, of KLN. The Offer price of  HK$18.80/share was a 19.83% discount to last close. KLN’s shares also gained 25% prior to the suspension.

Below is a timeline of events that subsequently unfolded:

Date

Data in the Date

30-Mar-21The controlling shareholders of Kerry Logistics Network (636 HK) (KLN), including Kerry Properties (683 HK), plus shares held by executive directors, comprise 63.1% of shares out. These shareholders have given an irrevocable to tender 575.545mn shares or 32% of shares out. Those irrevocables have now been fulfilled – this forms part of the pre-conditions.
9-Apr-21KLN announced that the antitrust approval has been received from the State Administration for Market Regulation with respect to the Partial Offer.
26-May-21At an SGM, KLN shareholders overwhelmingly approved the sale of its Hong Kong, Taiwan warehouse business to Kerry Holdings.
7-Jun-21The free float waiver has been received from the HKEx.
15-Jun-21

Approval by the shareholders of Kerry Properties (683 HK) obtained

29-Jun-21CFIUS approval received
20-Jul-21KLN announced approval by the Independent Shareholders in respect of the Special Deal Agreements and the Framework Services Agreement had been obtained.
2-Aug-21KLN announced NDRC and MoC approval has been received as to the partial offer.
9-Aug-21Exactly on the Long Stop date, KLN announced all of the pre-cons have been met – or waived (the Thai waiver in particular)  – and that the Composite Document is expected to be dispatched, on or before, the 16 August. 
12-Aug-21Composite Doc dispatched
17-Aug-21The Record Date for the Special Dividend is expected to be the 1 September. The Special Dividend is expected to be paid on or about Friday, 17 September 2021
18-Aug-21Irrevocables received. Thai MGO waiver received,. 
Source: HKEx announcements

All appears to be going to plan.  The first close is the 2 September. 

Then KLN announced on the 24 August a delay in the record date for the Special Dividend. KLN estimates:

that the Record Date for the Special Dividend will be on or around Wednesday, 15 September 2021, instead of Wednesday, 1 September 2021 as disclosed in the Special Dividend Announcement. The Special Dividend is expected to be paid on or about Tuesday, 5 October 2021, instead of Friday, 17 September 2021.

With the Partial expected to close on the 2 September, questions have been asked whether those shareholders who have already tendered – or those investors who tender before the 2 September – whether they are still eligible for the special dividend?

More below the fold. 

Plus updated Ye Olde Arb Grids


Jardine Matheson: Value Gradually Emerging Four Months On

By David Blennerhassett

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. 


SKC Is Down 5% Today: Why & What Impact on SK Holdings/SK Materials Arb Spread-Hunting

By Sanghyun Park

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.

(Courtesy SK Holdings)

The full version of this SK Financial Story presentation is attached below in this insight.

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. 

HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping

By Brian Freitas

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

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

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

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

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

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

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

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


End of the 1 Month Lockup Period for Krafton & An Excessive Pricing Gap Vs. NCsoft

By Douglas Kim

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. 

Among the various lockup periods, the one month period is perhaps the most important for Krafton. There are 0.97 million shares of Krafton that are under the lockup period (2% of outstanding shares). However, among the overseas institutions, 100% of the shares that are locked up is for the one month period (0.68 million shares or 1.4% of the outstanding shares). As a result, the one month period after the IPO is perhaps the most important in terms of potential selling by the overseas investors. 


China Youzan’s Updated Privatisation Proposal

By Arun George

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). 

The privatisation offer remains broadly fair in both the distribution in-specie (distribution ratio in line with the control ratio) and the cash consideration (marginally below the value of the payments business due to peer multiple re-rating).

China Youzan’s valuation hinges on the valuation of Youzan Technology, which remains in a state of flux due to the uncertain regulatory backdrop. China Youzan’s last close price of HK$0.82 per share implies that Youzan Technology is valued at a trailing EV/Sales multiple of 12.7x, broadly in line with SaaS commerce peers’ current trailing EV/Sales multiple of 13.4x (but at a premium to Chinese peers). As Youzan Technology is at best fairly valued at China Youzan’s last close price, we would remain on the sidelines. 


SK Innovation’s Unusual Attempt to Change the Articles of Incorporation for Stock Dividends

By Sanghyun Park

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.

But other things stand out as well.

That is, SK innovation is partially amending its articles of incorporation. And it wants to obtain shareholder approval for these amendments at this general meeting.

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.


Apex Leads Takeover Contest for Sanne

By Jesus Rodriguez Aguilar

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.


JOYY Inc Privatisation: Our Thoughts on Valuation

By Shifara Samsudeen, ACMA, CGMA

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 (27th 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.


(Mostly) Asia M&A: August 2021 Roundup

By David Blennerhassett

For the month of August, 10 new deals (firm and non-binding) were discussed on Smartkarma with an overall announced deal size of ~US$39bn, buoyed by the massive Afterpay Touch (APT AU) transaction.

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

New Deals

Industry

Size (US$bn)

Type

Premium

Australia

1300 Smiles Ltd (ONT AU) Dental0.2Scheme14%
1300Smiles (ONT AU): BGH Sinks Its Teeth In
Afterpay (APT AU) Payment facilitator29.0Scheme30.6%
Afterpay Ltd (APT AU): All Squared Away
Huon Aquaculture (HUO AU) Fisheries0.3Scheme61%
JBS Nets Huon Agriculture (ASX: HUO)
Huon Ag (Huo AU): Twiggy Went To Market

Hong Kong

Golden Throat Holdings (6896 HK) Cough medicine0.3Scheme55.8%
Golden Throat (6896 HK): Affirma and Founder Group Cough Up
Suchuang Gas Corp (1430 HK) Gas transmission0.1Scheme2.9%
Suchuang Gas (1430 HK): Delisting Proposal From CR Gas

Japan

GCA Corporation (2174 JP) Finance0.6Tender Offer31.3%
Houlihan Lokey To Take Out GCA :  Light But Likely Done
Kobe Steel Ltd (5406 JP) / Kobelco Eco Solutions (6299 JP)Materials0.4MergerN/A

New Zealand

Z Energy Ltd (ZEL NZ) Petrol Stations1.3Scheme22%
Z Energy (ZEL NZ) Tentatively Backs Ampol’s Approach

Taiwan

China Development Financial (2883 TT) / China Life Insurance (2823 TT)Insurance4.8MergerN/A
CDFHC – China Life Insurance: US$2bn+ Cash & Scrip Deal to Reach the Finish Line

Thailand

Siam Future Development (SF TB) Malls0.8MGO8%
Siam Future Development (SF TB): Central Pattana MGO As MAJOR Cineplex Exits

US

New Frontier Health Corp (NFH US) Hospitals1.6Merger27.9%
New Frontier (NYSE: NFH): Healthcare Homecoming
Source: Smartkarma Insights

Offer Premium Summary

2019

2020

2021 YTD

Australia33.0%32.4%35.2%
Hong Kong25.2%34.7%33.9%
Japan44.0%35.2%28.6%
ROW29.1%24.2%34.6%
Average31.5%31.1%33.0%

Source: Smartkarma Insights

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)

Australia

Comments (with links to announcements & insights)

No August update

No August update

No August update

24-Aug. Capgemini has received OIO approval.

26-Aug: Hansen Technologies (HSN AU) said today BGH needs further time to complete its DD, but that it has confirmed to Hansen it remains willing to proceeds with a transaction substantially on the terms of its original proposal.  BGH’s DD extended to the 10 September. That’s a worrying long DD period. 

13-Aug: iCar Asia Ltd (ICQ AU) and Carsome obtained ASIC joint bid relief. 

11-Aug: Iress Ltd (IRE AU)‘ board has now backed a revised Offer from EQT – but at $15.91/share, just 3.3% above the previous proposal.
Iress (IRE AU) Accepts EQT’s Latest Proposal

30-Aug: FY21 results

27-Aug: FY21 results

2-Aug: Santos and Oil Search Agree on Terms
24-Aug: Oil Search Ltd (OSH AU) posted a net profit of US$139mn in FY21.

No August update

23-Aug: A firm Offer for Spark Infrastructure (SKI AU) has now been tabled and a SID entered into with KKR, OTTPB, and PSP. The terms remain the same. Spark’s board unanimously recommends the Offer. The Scheme Meeting is expected to be held by the end of 2021. Spark Infrastructure (SKI AU): KKR/OTPPB/PSP’s Firm Offer

16-Aug: Sydney Airport (SYD AU) announced it had received a revised offer of $8.45 from the consortium on the 16 Aug. The Board also concluded the proposal was low-balled. That rejection comes as no surprise – this is just a 2.4% bump in terms.  I’m still disinclined to chase it here. I still think there is a chance of a “no deal”.
Sydney Airports (SYD AU) Reject’s Consortium’s Revised Offer.

18-Aug: Court meeting scheduled for the 29 September for Think Childcare (TNK AU).

13-Aug: Youfoodz Holdings (YFZ AU) enters into a SID with Hellofresh

24-Aug: Youfoodz Holdings (YFZ AU) posted a net loss of A$3.5mn in FY21.

Hong Kong

Comments (with links to announcements & insights)

19-Aug: Beijing Capital Land (2868 HK): Pre-Cons Satisfied. This Should Trade Tight
24-Aug: This will give the stock a bit of an extra push. The SFC does not consider GIC’s Reco Pearl to be acting in concert with the Offeror for Beijing Capital Land Ltd H (2868 HK). In addition, Redo Pearl has given an irrevocable undertaking to vote in favour of the Scheme resolutions. Reco owns 181,194,000 H Shares, representing 4.15% of the issued shares and 11.83% of the H Shares held by the Independent H Shareholders.

27-Aug: Beijing Capital Land (2868 HK): EGM On The 23 Sept. IFA Says Fair

22-Aug: Scheme Doc dispatched. Court Meeting will be held on the 15 September with expected payment on or before the 19 October. 

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

11-Aug: And it’s a deal break – Sinopharm has decided not “to proceed with the Possible Privatisation this time”.

30-Aug: Youzan Technology has re-filed its application with the Stock Exchange for the listing of the Youzan Technology Shares by way of an offering of new shares, instead of by way of introduction.

14-Aug: Chong Hing Bank Ltd have announced an interim dividend of HK$0.11 will be added to the cancellation price:  
23-Aug: Irevocables received
24-Aug: Chong Hing Bank (1111 HK) has announced Cosco Shipping, with 19,823,037 shares, representing approximately 2.04% of the issued shares, 8.14% of the Scheme Shares, and 12.68% of the Independent Scheme Shares, has given an irrevocable to vote for the Scheme. 

3-Aug: Kerry Logistics Network (636 HK) announced NDRC and MoC approval has been received as to the partial offer. A number of pre-cons still remain outstanding, all of which are technically waivable, apart from the SFC consent. 

10-Aug: Kerry Logistics (636 HK): Pre-Cons Done. Partial Offer To Commence Next Week
14-Aug: Kerry Logistics (636 HK): Doc Out Early – Offer Now Open
30-Aug: Kerry Logistics (636 HK): Technicalities As Partial Draws To An End

18-Aug: Nature Home Holding Company (2083 HK) has announced an (expected) delay in the dispatch of the Composite Doc so as to accommodate the interims, which are due out on the 31 August. The dispatch date is now expected on or before the 30 September compared to my earlier estimate of 27 September. 

India

Comments 

No August update, though SEBI is said to be investigating the low indicative price.  And the stock is going into FTSE Large as of 17 September. 

No August update

Japan

Comments (with links to announcements & insights)

No August update

No August update (City Index Eleventh reported on 3 August that as of 27 July they had lifted their stake to 8.01%); tender closes 8 Sep. 

Before it’s here, it’s on Smartkarma

Event-Driven: WH Group, Hitachi Transport System, JOYY, Krafton Inc, Bharti Airtel and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • WH Group Post-Tender Outlook – Index Selldown and Back-End Trading/Valuations
  • Hitachi Transport Uncoupled – TSE Prime, Price Popping, And Supply To Come
  • Joyy’s Potential Privatisation by Top Two Shareholders
  • MSCI Std Korea Nov SAIR Adds Checkup: SD Biosensor & Krafton
  • Bharti Airtel’s Large Partly Paid Rights Offering

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

By Travis Lundy

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

Then we wait. 

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

And into the week after…

But we wait anyway. 

More below the fold. 

Insights on This WH Group Event To Date

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

Hitachi Transport Uncoupled – TSE Prime, Price Popping, And Supply To Come

By Travis Lundy

This insight covers a bit of history, a bit of teaching about how TOPIX works, a bit about the foreseeable events, and a bit of the fundamentals of the company. If you think you know all that, please don’t hesitate to jump immediately to the bottom section where there is a Thin Red Line across the screen and a section titled Short & Sweet Version. That is also the conclusions. 

The Background

At the end of March 2016, Hitachi Ltd (6501 JP),  Hitachi Transport System (9086 JP), and as-yet unlisted SG Holdings (9143 JP)  announced Hitachi Transport was going to spend ¥66.3bn to buy a 20% stake in the unlisted delivery subsidiary (Sagawa Express) of then still-unlisted SG Holdings (9143 JP), forming a capital and business tie-up looking to merge “within three years” (i.e. merger by 1 April 2019). Hitachi Ltd (6501 JP) was going to sell a 29% stake (out of the 59% they owned) in Hitachi Transport for ¥87.5 billion to SG. They were both going to expand strongly outside of Asia.  HTS was known at the time for its 3PL and “Smart Logistics” capabilities to make customer supply chains more efficient, etc, whereas Sagawa was known as a top last-mile delivery business. The combined entity was set to overtake Yamato Holdings (9064 JP) in terms of revenue and get closer to industry top dog Nippon Express (9062 JP). It was supposed to help SG improve margins by doing more in B2B. 

SG IPOed in late 2017. Three years came and went. Nothing happened. There were a few collaborative projects but it was slow-going, and there were signs of friction. In May 2019 a Medium Term Management Plan (with no mention of SG or Sagawa) was announced, and the Nikkei carried an interview with HTS President Nakatani who said, when asked about the integration..

“I am aware that we are moving toward integration. I would like to harmonize future directions.” [Nikkei: He showed a positive attitude…] “We have decided to discuss and consider the possibility of business integration, but we have not made any decisions, including any start to discussions.”

On September 25 last year, the Diamond Online let fly a scoop saying the capital and business tie-up between the two was going to be scrapped. HTS shares fell 10+%. 

Hitachi Transport’s first release to the exchange said the article wasn’t based on information they announced and that it was not going to be a dissolution of the capital tie-up, just a re-arranging of the deckchairs and a board meeting was going on and there would be an announcement within the day. HTS shares – at that point down 7% on the day – bounced sharply (they closed down 4%).

The announcement after the close talked about a “partial modification” of the business and capital tie-up, but it involved HTS selling its 20% stake in Sagawa Express, and buying back 27.675mm of the 32.35mm shares of HTS SG held. It was almost a full unwind. SG managed to sell fewer than 27.675mm shares in the ToSTNeT-3 transaction as others also jumped in to sell. 

My conclusion was to NOT sell that despite the opportunity to be able to do so in size. My conclusion was bullish HTS and basically bearish SG. 

That didn’t work so well in the first ten weeks, with the share price ratio falling 20% from 1.252 to 1.00 by 1 December 2020. 

When the TSE announced its new listing criteria for TSE Prime, there was going to be trouble. There had to be 35% of shares “tradable” and by that time, the register looked as follows:

It did not clear the 35%v threshold (it would have been fine but for the large number of public sellers in the 28 September ToSTNeT-3 transaction.) 

By early February 2020, the HTS/SG ratio had reached the ratio of that fateful day announcing the split and by mid-June, the ratio was 26% higher in 9 months. So I am now happier with that call from the past.

On 20 April 2021, SG Holdings announced they had sold 4.6mm shares (at JPY 3,119.5). And on 20 May (the yellow dot on the blue line in the chart above), HTS announced it would cancel 6,975,786 shares (6.2% of shs out) in order to put tradable shares back above 35%. In fact, the sale by SG had done that, and the market did not react. But it was a start, and it kept Hitachi Transport in the TSE Prime section and therefore the TOPIX Index when it launches in April 2022 because tradable shares were back above 35%. 

But there were still a lot of Treasury Shares, which as per the 6 May Results Presentation, included the use of stock (and cash) for alliance and M&A. 

With the shares rallying, on 19 August, the company announced that on 3 September, they would cancel 20,699,214 shares out (19.8% of total shares out), leaving treasury shares of 228,308. That would put Hitachi to just under 40% (where there is no question of consolidation if Hitachi Transport doesn’t want), it puts SG Holdings to 9.8% (i.e. still below 10%), and puts the public at greater than 50%. 

The shares reacted well to that too. 

But all this creates a curious problem. 

The float is now 50%, vs 41% pre-selldown, and 33.6% post-dealbreak, and the stock will stay in Prime.

But there is selling to come. 

More below the fold. 


Joyy’s Potential Privatisation by Top Two Shareholders

By Arun George

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.

Our SOTP and relative valuation suggest that the rumoured privatisation range of $75-100 per ADS is justifiable and reasonable. Our base-case SOTP valuation is $71.69 per ADS, which is a 16% premium to the last close price of $61.97 per ADS. Despite Joyy’s insistence that no formal bid has been received, we would be buyers as the shares offer a favourable risk/reward profile to the emergence of a formal privatisation bid.


MSCI Std Korea Nov SAIR Adds Checkup: SD Biosensor & Krafton

By Sanghyun Park

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.

Requirements (× Interim cutoff)Semi-annuallyQuarterlyIPO
Full market cap (add)1.501.801.80

Full market cap (delete)

0.670.50
Float market cap (add)0.750.900.90
Float market cap (delete)0.50
Source: MSCI

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.

Interim cutoff estimations
Interim cutoff₩3.00T
Full market cap hurdle₩4.50T
Float-adjusted market cap hurdle₩2.25T
Source: Clepsydra Capital

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.

Recent major IPOsSD BiosensorKraftonHK Inno.NLotte RentalAjusteelHyundai Heavy Ind
Ticker137310259960195940089860139990329180
Listing07. 1608. 1008. 0908. 1908. 20Mid-Sep
Market cap₩5.45T₩24.30T₩1.75T₩1.84T₩0.76T₩5.33T
Source: KRX FIND & DART

Bharti Airtel’s Large Partly Paid Rights Offering

By Brian Freitas

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.


Before it’s here, it’s on Smartkarma

Event-Driven: Sembcorp Marine, Beijing Capital Land Ltd H, KakaoBank and more

By | Daily Briefs, Event-Driven

In today’s briefing:

  • Last Week in Event SPACE: Sembcorp, CK Hutch, Prosus/Naspers, Z Energy, Milton, China Logistics
  • Asia-Pac Weekly Risk Arb Summary: Beijing Capital Land, Suchuang Gas, Siam Dev, 1300Smiles
  • Index Rebalance & ETF Flow Recap: FTSE GEIS/CH50/A50/TW50, UKX, KOSPI200, MLT/WHSP, Busy Week Ahead

Last Week in Event SPACE: Sembcorp, CK Hutch, Prosus/Naspers, Z Energy, Milton, China Logistics

By David Blennerhassett

Last Week in Event SPACE …

  • The final insult to Sembcorp Marine (SMM SP)‘s share price should probably occur in the next two weeks.
  • Cashed up CK Hutchison Holdings (1 HK) looks cheap at 6.8x/0.4x forward PE/PBR, together with a 50% discount to NAV. Plus it is in the market every day buying back shares. 
  • Prosus (PRX NA)‘s buyback was not expected to start so quickly given the buyback in 2020 started with a fair delay. With the buyback now underway, it behooves us to look at flows and impact.

  • Ampol (ALD AU) is committed given it is open to shedding its discount retailer Gull, but Z Energy Ltd (ZEL NZ)‘s board stops short of recommending the Offer. 

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

EVENTS

Two months ago, Sembcorp Marine (SMM SP) announced a Rights Offering to raise S$1.5bn to recapitalise operations and provide working capital for the 16 projects currently under execution, some of which have been hit by delays where payment was expected sooner and it will instead come later. SMM have now announced of the Rights Trading Period (31 Aug – 8 Sep), the Exercise Period (31 Aug – 14 Sep) and Pay Date (22 Sep) along with a re-delivery of all the documents from late June and early August. At S$0.08/share, the situation becomes interesting because there is a potential but not necessary MGO backup “Compliance Offer.” At S$0.075/share, it becomes MUCH more enticing.  There should be no noticeable passive fund effect in the market on these rights except for the fact that passive managers can sell shares and buy rights to do the rights arbitrage themselves very easily.  Long-only investors can do the same. Link to Travis Lundy‘s insight: Sembcorp Marine Goes Ex-Rights – Strategy From Here

China Telecom (601728 CH)  (Mkt Cap: $4bn; Liquidity:  US$.4bn)

China Telecom Corp Ltd (H) (728 HK)‘s new A-share was priced and allocated nearly two weeks ago and had its first day of trading today on 20 August.  The shares had been priced at an 87% premium to the H-shares, and the Hs therefore at a 46% discount to the As at IPO price, where the IPO price was supported by a 3.4% 2021 dividend yield, rising to an expected high-4%s range in 2024. I thought a 46% discount “cheap” and expected the Hs to trade better. They did, but then started coming back down in recent days. Shares popped 35% on the first day.

  • Travis expects the China Telecom A-shares to fall back from their fantastic performance on Friday. He does not see a need for the stock to trade with a dividend yield in the low 2s. However, given the “buyback obligation” and the rising payout ratio on expected rising profits, I expect the Telecom A-shares to have significant support around the IPO price of RMB 4.53/share. He also expects the China Telecom Hs to trade in a range which assumes that the As will fall back to near IPO price.
  • Longer-term, Travis expects the China Telecom and Mobile Hs to trade tighter than where China Telecom H/A spread traded at the A-share IPO price (46% discount). Size and HK liquidity behooves it. However, the fact that US investors are barred from investing increases Real World Float relative to most other stocks out there, and this should dampen volatility and interest somewhat. 

(link to Travis’ insight: China Telecom A-Share Trades – Up 35% on Day 1)

In April 2021, Fubon Financial Holding Co (2881 TT) announced a rights issue to raise NT$50bn (~US$1.8bn) to fund their acquisition of Jih Sun Financial (5820 TT). A few weeks ago, on 2nd August 2021, the FSC approved this capital-raising effort and the company released an exchange announcement on 20th August 2021 with the expected timeline and other key details regarding this rights issue.  The company will issue 548,000,000 common shares and 333,330,000 Class C Pref Shares in these offerings. The pricing ranges for the common shares and the Class C Pref Shares are tentatively set to be NT$40-60 and NT$50-70 respectively (with NT$60 indicated). The final pricing is expected to be confirmed in the next few days. Link to Janaghan’s insight: Fubon Financial Holding Co (2881 TT): Rights Issue.

The long saga of the hostile takeover become friendly overbid for Invesco Office J Reit (3298 JP) takes its next step on Monday as the TSE indices reduce the FFW of the name in their indices. Travis would be inclined to leave a “cheeky bid” below the market on Monday near the close. He would tend to want to put those cheeky bids in with a second or two left to go.  The take-out is ¥22,750 and that is what will get paid. Travis expects cash-out it will take 8-12 weeks from the EGM which is 8 October.  As a balance sheet trade, IF it is highly leverage-able to you, then Travis would suggest you’d want to buy in the high JPY 22,500s to low JPY 22,600s. If not, you may want to bid a little lower depending on your return objectives. Link to Travis’ insight: Invesco Office Index Deletion Monday 30 Aug.

After the market close on the 25 August,Doosan Infracore (042670 KS) announced that it plans to complete a rights offering worth ₩800bn, which represents nearly 70% of its current market cap of ₩1.15tn. This rights offering will lead to a significant share dilution risk. The company has yet to provide full details of this rights offering but it is likely that the rights offering price will be priced at least 20-25% lower than current share price. Given the huge dilution risk, in  Doosan Infracore Announces a Rights Offering Worth 70% of Its Market Cap Douglas Kim we believe that shares of Doosan Infracore will likely face significant weakness in the next several days.

STUBS

CK Hutchison Holdings (1 HK) / CK Infrastructure Holdings (1038 HK) 

CKH is currently at an estimated discount to NAV of ~50%, bang in line with its 12-month average. But the longer-term chart – after the 2015 restructuring – paints a different picture, with both the implied stub and simple ratio (CKH/CKI) around all-time lows.

  • Since the release of its 2021 interims on the 5 August, CKH has been in the market every day buying back shares. As at the time of the insight, it had acquired 5.88mn shares (~0.16% of shares out), at a cost of HK$315mn. That buying accounted for ~10% of daily volume on average.  By some estimates, taking into account interest savings on account of the cash proceeds from the tower sales, and the added outlay of HK$3bn+ for tower rental expenses, CKH may be looking to buy back ~5% of shares out, or over HK$10bn. At the current clip, buying could continue for well over a year. CKH also acquired ~7.7mn shares in June of this year. As per the interim presentation (page 15), CKH bought HK$460mn since March 2021.
  • CKH has added HK$33.3bn (~HK$8.9/share) in market cap since the tower sales were announced, about one-third of the transaction proceeds. On page 30 of the 2019 interim IR presentation, management provided some initial guidance based on select transactions, with a mid-range value of HK$61bn or ~HK$16/share based on those transactions. Given the final figure was almost 50% higher, and that cash is coming through the door, arguably the share price reaction has not fully reflected the sale. 
  • Recommend an outright long CKH; or hedge it with ~76%-held CKI worth 41% of market cap, but just 20% of NAV) together with a basket of European telco players.

(link to my insight: StubWorld: CK Hutch’s Ongoing Buybacks

Pre-open today, a day after the FTSE/JSE announced its expected capping rule for Naspers (NPN SJ) and Prosus NV (PRX SJ) in the September FTSE/JSE index rebalances (the cap at 6% of index for each of the stocks is only valid for the FTSE/JSE Capped SWIX All Share and Capped SWIX Top 40 indices), and a week after the Exchange Offer closed….. Prosus (PRX NA) has announced a US$5.0bn buyback. Travis had expected a bigger buy of NPN in September, which would have necessitated a larder sell on Prosus. The smaller buy now means a smaller sell.  Going forward, capping will not help Prosus, or Naspers.  Going forward, the more Prosus performs in the next ten days, the more potential there is to sell shares in September. In Prosus Announces US$5bn Buyback of FloatTravis thinks the buyback has positive implications for Prosus and for Prosus vs Tencent.

With a stub value of -¥614.5bn (Holdco net debt of ¥299.1bn) and a NAV discount of 61%, it seems that investors are failing to assign a fair valuation to Keisei Electric Railway Co (9009 JP)‘s unlisted assets (transportation and other businesses) that carry a valuation of close to ¥700.0bn on Keisei Electric’s balance sheet. Link to Oshadhi Kumarasiri ‘s insight: Long Keisei Electric Railway/Short Oriental Land

Douglas Kim believes that the  merger between SK Inc (034730 KS) and SK Materials (036490 KS) is likely to get completed. The long term benefit should be higher for SK Inc as it removes the holdco discount associated with its stake in SK Materials and is able to absorb the company without too much dilution. Link to Douglas’ insight: Merger of SK Inc & SK Materials Holdings: A Prelude to An Eventual Merger with SK Square?

M&A – ASIA

Z Energy Ltd (ZEL NZ)  (Mkt Cap: $1.2bn; Liquidity: $3mn)

Kiwi fuel distributor ZEL has announced it has received a non-binding indicative acquisition proposal from Ampol (ALD AU). The Offer of NZ$3.78/share, by way of a Scheme, is a 22% premium to the last closing price. According to the announcement, negotiations started at NZ$3.35/share. As per Ampol’s separate announcement, the Offer price is a 35% premium to the last close on the 26 July, the day prior to the first press speculation of corporate activity. Dividends up to a limit of NZ$0.10/share may be payable depending on when all approvals are secured. 

  • The proposal requires a raft of approvals including ZEL’s shareholder’s approval, and both the New Zealand Commerce Commission and the New Zealand Overseas Investment Office. Ampol is committed to divesting discount retailer Gull if need be to gain necessary regulatory approvals. It has been argued that if Ampol successfully took over ZEL, it would make minimal difference to Kiwi motorists, given competition in the fuel market had increased following NZCC’s law changes.
  • The Offer still looks light, most noticeably when compared to pre-Covid levels. The share price had fallen from around $4.50 in February last year to ~$3, prior to this offer. 
  • ZEL’s chief executive Mike Bennetts said the company’s board did not think Ampol’s offer was high enough, and it had not recommended the proposal to shareholders. It is ZEL’s intention to grant DD (a four-week period on an exclusive basis) on the expectations a bump is forthcoming in terms. Ampol is clearly committed given its intention to divest Gull, if need be, to secure the deal.

Links to:
my insight:  Z Energy (ZEL NZ) Tentatively Backs Ampol’s Approach
Brian Freitas‘ insight: Ampol’s NBIO for Z Energy: May Need More to Go Through

Milton Corp Ltd (MLT AU) (Mkt Cap: $3.2bn; Liquidity: $4mn)

The Marvelous Milton Merger which is the proposed joining of two of Australia’s longest-lived Listed Investment Companies – Milton to be absorbed in a share swap by Washington H. Soul Pattinson and Co. Ltd (SOL AU) (“WHSP”) – is coming closer to its do-or-die date. There is less than one week until the Reference Date which will decide the share swap ratio. Travis has not been shy in writing about this situation. This time, I note that with both Milton and WHSP hitting new 30-year highs today, despite the merger arb spread remaining reasonably wide, there are signs that the situation has started “accruing value.”  The rise in both stocks should be a good thing for the vote. Better performance tells voters that it is a good thing for them. Deal break on MLT – assuming it is 10% below NAV – is now further down than before because MLT has been running against future terms (i.e. WHSP share price), not just NAV.

  • The Risk Arb itself is still trading slightly wide. Travis attributes this to some laziness on the part of arbitrageurs. They may feel uncomfortable with the vote risk, or they may feel uncomfortable with the liquidity. As of the 25 August close, Buy A$6.59mm of MLT vs short A$5.23mm of the NAV basket. Short A$5.76mm of WHSP. Monitor this ratio based on the movement of the MLT NAV. For every 1% that MLT NAV goes up vs 25 Aug, short 1.1% more shares (not dollars) of WHSP. For every 1% it goes down, you can buy back 1.1% of the shares of WHSP you are short.  Buy the NAV basket at the close of 2 Sep and then you will be long MLT and short the appropriate number of shares of WHSP at the close. 
  • The combined trade is the best one. There is more to love. Buy A$6.59mm of MLT vs short A$5.23mm of the MLT NAV basket. Borrow the share equivalent of say A$6.2mm of WHSP. Don’t short it yet.  Buy back the MLT NAV basket at the close of 2 Sep. That gets you  a) long the risk arb spread at 3% & b) +long the equivalent of A$5.76mm of WHSP (today) on a forward basis. Short the WHSP into the index inclusion at the ratio to be announced on 2 Sep.
  • The index inclusion trade is still good to buy. There is still a LOT of stock to buy. Buy A$6.59mm of MLT and short A$6.12mm of ASX200, or…Buy A$6.12mm of WHSP and short A$6.12mm of ASX200. 

(link to Travis’ insight: Marvelous Milton Making Its Move – New 30yr Highs On Both Stocks)

China Logistics Property Holdings (1589 HK)(Mkt Cap: $1.9bn; Liquidity: $4mn)

After shares increased 14% the previous day on massive volume, before being suspended, CLPH announced that Chairman Li Shifa was is in discussion with a potential purchaser of 26.38% of the total issued shares, which, if completed, may lead to a change in control and a mandatory general offer. In all likelihood, the purchaser is JD.com. To trigger the MGO, the acquirer must already own at least 3.62%, to clear the 30% mandatory takeover threshold. Either JD.com or ESR Cayman fits the bill. And JD has made its intentions known by bumping its stake above 10% leading to CLPH be in breach of Hong Kong’s public float. 

  • So, what is going on?  On the 29 December 2020, CLPH announced Li and RRJ Capital (~23.35%), were “conducting a preliminary strategic review of their stakes“, indicating a possible change of control for the company.  This latest announcement appears to be an extension of those negotiations although RRJ’s current intentions were noticeably absent in the latest announcement.
  • This space is garnering significant attention. Companies are merging (ESR’s recent grab for Ara – see ESR Cayman (1821 HK) Takes Out ARA Asset Management – and assets from Blackstone) or being bought out, such as Blackstone’s recent acquisition. Word on the street is ESR was offering HK$4/share, which was rejected, so ESR turned its focus to ARA. JD.com has the patience, and the funding to go large. The rumoured price tag asked by the board? I’m hearing HK$4.50+. 1x CLPH’s EV/portfolio (the book value of property, equity investments, PP&E) places a value close to $4.50/share.
  • This remains a pre-event, one that has been percolating for 9 months. There can no guarantee an Offer will be forthcoming. But shares are back down to the same level at the time of the December announcement. With 126m shares traded on Thursday, the correction Friday is probably a reflection of insiders cashing out in response to the “no-deal (yet)” announcement today.  This looks a buy here.

(link to my insight: China Logistics (1589 HK): More Talk On “Change Of Control”)

Siam Future Development (SF TB) (Mkt Cap: $0.8bn; Liquidity: $4mn)

On the 5 July, Major Cineplex Group (MAJOR TB)‘s board approved the entering of a MOU with Central Pattana Pub (CPN TB) in relation to its shares in Siam Future Development (SF TB), at a price of Bt12/share. An IFA was appointed to assess the sale and its opinion on the 19 July, concluded the “Transaction is reasonable with price and conditions that are fair“. A SPA was entered into yesterday with an expected completion on the 30 August. I estimate a trailing EV/EBITDA/PER/PBR of 16.3x/12.3x/1.7x under the Offer against a five-year average of 10x/8.2x/1.1x. It is also a life-time high.

  • In Thailand, the obligation to make a mandatory offer is triggered when an acquirer obtains shares of the target company of more than 25%, 50%, or 75% of the total voting rights of the target company.  Therefore CPN is required to make a tender offer for the remaining shares in SFD at the same price of Bt12/each upon the completion of the SPA.  A mandatory tender offer must be unconditional. 
  • I would expect a mandatory tender offer to commence early this next month. These offers can be open for 25-45 business days. I’ve opted for the latter given CPN would prefer to acquire as many shares as possible.

Huon Aquaculture (HUO AU)  (Mkt Cap: $0.3bn; Liquidity: $1mn)

On the 6 August, Huon announced a firm Offer, by way of a Scheme, with  Brazil’s JBS SA (JBSS3 BZ). Huon shareholders would receive A$3.85/share in cash. A fully-franked dividend of $0.0125/share – if paid – will be netted. The cash price was a 61% premium to the last close, before a  strategic review was announced on the 26 February. The Bender family with 53% of shares out intend to vote all of their shares in support of the Scheme, in the absence of a superior offer. The Offer also required approval from FIRB. Apart from FIRB signing off – no small ask given JBS had fallen foul of US regulators recently – this looked like a done deal, with possible completion in November. 

  • But Andrew Forrest’s family fund Tattarang had other plans and promptly upped its stake to 18.51% on the 10 August from 7.33% at the time of the SID announcement. That current stake all but blocks a Scheme. Not to be outdone,  JBS announced a parallel takeover bid on the 13 August. This second Offer is conditional on 50.1% acceptances from shareholders.  With the Bender’s stake, that Offer is effectively done – barring FIRB rejection. The Bender family also entered in a pre-bid acceptance agreement for 19.9% of shares out.
  • Forrest has called on JBS to commit to the same principles as Tattarang’s agri-food business, Harvest Road, and its beef processing company, Harvey Beef. Not altogether surprisingly, JBS took umbrage with this challenge, saying it already adheres to high standards in its animal handling. As did Huon. Huon also added Tattarang had earlier expressed interest in Huon and submitted a non-binding and conditional indicative offer. Tattarang was invited to participate further in the strategic review process but declined to do so. Tattarang’s non-binding and conditional indicative offer was at a material discount to JBS’s $3.85 offer.
  • The company is very much on the back foot in the face of increasing debt amid falling salmon prices and skyrocketing freight prices. Huon needs funding, and JBS emerged as the highest bidder as other suitors fell by the wayside. However, Forrest is very well connected. Marine science is the field in which he received a Ph.D. And JBS has not been a poster child with regulators of late. I doubt there is a bump here. I’d be inclined to avoid this transaction. I think FIRB approval is a very real risk.

(link to my insight: Huon Ag (Huo AU): Twiggy Went To Market)

On the 9 July, Beijing Capital Land Ltd H (2868 HK) (BCL) announced a pre-conditional Offer from its controlling shareholder, state-owned Beijing Capital Group. The Offer price of HK$2.80/share was a 62.79% premium to last close, and a 150% premium to the average closing price over the previous 60 trading days. The Offer price would NOT be increased. No dividends are expected to be declared. A concurrent Offer for BCL’s domestic shares at RMB2.334080/share was also tabled. The pre-conditions, which could not be waived, included approvals from NDRC, MoC, SAFE, and if applicable, SASAC. Those pre-conditions were satisfied on the 18 August.  The Composite Doc is now out. The EGM/H-Class Meeting is scheduled for the 23 September, with an expected payment on the 12 October. This is done and should trade close to terms. Link to my insight: Beijing Capital Land (2868 HK): EGM On The 23 Sept. IFA Says Fair.

Woolworths Ltd (WOW AU) announced earnings to June 2021 with revenues up 5.7%yoy (e-commerce now at 8.3% of the total and up 58% on the year), EBIT +13.7%, and NPAT +22.9% to A$1.972bn for the year. The final dividend was announced at 55 cents, up 14.6% on the year for a full-year dividend of 108cts (+14.9%) after EPS from continuing operations was 119.1cts (+20.7%yoy) and EPS from continuing operations after one-offs was 127.1cts (+73%).  In addition to a high payout ratio, the company also announced a A$2bn Off-Market Buyback (OMB). This was not unexpected.  Like the previous off-market buyback executed in May 2019, this OMB has a two-tier approach, significantly favouring small investors. Link to Travis’ insight: Woolies (WOW AU) Announces ~4.4% Off-Market Buyback.

Just under two weeks after rejecting two take-private proposals from KKR and Ontario Teachers’ Pension Plan Board (OTPPB), Aussie poles and wires company Spark Infrastructure (SKI AU) announced support for the Consortium’s improved proposal of $2.95/share. The Offer was up from the initial Offer of $2.70/share. Due diligence was subsequently afforded. On the 10 August, Spark received a request from the Consortium to engage with Public Sector Pension Investment Board (PSP), Canada’s largest pension investment managers.  OTTPB and KKR said their interest in Spark is not contingent on PSP receiving all internal and external approvals to participate in the Consortium’s revised Offer. A firm Offer has now been tabled and a SID entered into with KKR, OTTPB, and PSP. The terms remain the same. Spark’s board unanimously recommends the Offer. The Scheme Meeting is expected to be held by the end of 2021. This looks done to me. Link to my insight: Spark Infrastructure (SKI AU): KKR/OTPPB/PSP’s Firm Offer.

Dental surgery chain 1300 Smiles Ltd (ONT AU) has announced it has entered into a Scheme Implementation Agreement with BGH/OTPPB-backed Abano Healthcare. Abano is offering $8/share to non-founder shareholders, less any special dividends. Non-founder shareholders (meaning Daryl Holmes), who hold ~59.8% of shares out will receive $6.33/share. These shareholders also have the right to roll over 26.2% of their shares – or ~15.7% – and they have indicated their intention. Therefore the Scheme is for ~84% of shares out. Ellerston Capital, holding 7.1% of shares out, intends to vote in favour of the Scheme. The Scheme is also subject to FIRB approval. This looks done. No definitive timetable was provided, by presumably this transaction could be wrapped up late November, early December. Link to my insight: 1300Smiles (ONT AU): BGH Sinks Its Teeth In.

Back on the 25 June, outdoor leisure products manufacturer Bestway Global Holding (3358 HK) received a privatization Offer by way of a Scheme from founder/chairman/CEO Zhu Qiang. Zhu controls 54.3% of Bestway via Great Success Enterprises Holdings Limited (the Offeror), and offered HK$4.38/share (in cash), a 27% premium to last close. The Offer Price would not be increased. Any dividend declared and paid from hereon would be netted from the Offer price. Together with concert parties, Zhu controls 77.81% of shares out, therefore disinterested shareholders hold 22.19%. The headcount test applies as Bestway is Cayman-incorporated. The Scheme Doc is now dispatched. The Court Meeting will be held on the 15 September with expected payment on or before the 19 October. I expected shares to narrow to $4.25-4.30 – although this is not a particularly liquid arb situation, and why it is trading wide. Link to my insight: Bestway Global (3358 HK): Scheme Doc Out. Court Meeting On Sept 15th.

Activia Properties (3279 JP) announced a follow-on equity offering today after market-close to fund part of their recent property acquisition. The primary offer quantity is 49,030 units. In addition, there will also be an over-allotment quantity of 2,500 units. The total size of this offering could be roughly ¥23bn (~US$210mn). In Activia Properties (3279 JP): Offering Could Trigger Outperformance Vs TSEREIT Index, Janaghan Jeyakumar expects API’s latest equity offering to act as a catalyst for outperformance vs TSEREIT Index as most JREITs do in the wake of follow-on equity offerings.

Piped natural gas operator Suchuang Gas Corp (1430 HK) has announced a privatisation Offer by way of a Scheme from a wholly-owned subsidiary of CR Gas (1193 HK). CR Gas is offering HK$2.50/share, a 2.88% premium to last close – or given the pre-announcement pop, a 23.15% premium to the average closing price for the 10 days to the last day of trading. Suchuang shareholders are afforded the option of exchanging their shares on a one-for-one basis into Holdco. Disinterested Shareholders total 62.6% of shares out,  ~60% of which have given an irrevocable. The headcount test applies as Suchuang is Cayman incorporated. Regulatory approvals include SASAC. This looks done. Link to my insight:  Suchuang Gas (1430 HK): Delisting Proposal From CR Gas.

In Toshiba – Possibility of a Kioxia-Western Digital Deal, Mio Kato discusses a WSJ report that Toshiba Corp (6502 JP)‘s Kioxia and Western Digital (WDC US) have been continuing their previously rumoured talks and that discussions appear to be heating up. Details include a potential mid-September timeline, $20bn valuation and the deal being for shares rather than cash which would make sense given WDC’s market cap and leverage. $20bn is still good value for Toshiba and at its 40.2% stake implies about ¥884bn in value or ¥1977 per share. Given the current price of ¥4,650 that is rather chunky.

M&A – EUROPE

In Wm Morrison Supermarkets (MRW LN) (see Fortress/Morrisons: 272p Pre-Emptive Strike ), Jesus Rodriguez Aguilar mentioned that a bid from CD&R could come at 285p. The bid came, recommended, at 285p and the shares closed at 291p on 20 August. Now shares are trading at around 291p,  on expectations of a raised offer by Fortress and  expectations that Morrisons may enter the FTSE 100, which should support the shares and drive them higher. Link to Jesus’ insight: CD&R Leading the Bid War for Morrisons with a Recommended Offer.

M&A – US

Bausch Health Companies (BHC US) recently announced that it intends to split-off via an IPO  its highly profitable and fast-growing medical aesthetics business, Solta Medical, adding to the proposed spin/split-off of its eyecare business, Bausch & Lomb (B&L), which it announced a year ago. Although the share price has climbed ~60% since Robert Sassoon published in August 2020, the BHC share price appears to have hit a value wall in recent months. In SpinTalk: Bausch Health Companies- Restructuring Broadens, Considerable Value Still Left On The Table, Robert discusses why BHC’s share price momentum has stalled in recent months and why we believe this represents an opportunity to pick up the considerable value still left on the table.

M&A RISK ARB WEEKLY ROUND-UP

  • This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks. I number 36, mostly firm, deals around the region.

INDEX REBALS

  • Kewpie Corp (2809 JP). $3bn Japanese condiment maker Kewpie – famed for its mayonnaise in a slightly-floppy squeeze-bottle – announced that it would buy cancel 8.5 million shares or 5.67% of shares out.  The share cancellation takes place on 13 September 2021.  That causes an index effect, and given the time of year, I would expect minimal earnings-related updates between now and then. Link to Travis’ insight: Kewpie (2809 JP) Share Cancellation Index Event.

OTHER M&A & EVENT UPDATES

CCASS

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

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

Name

% chg

Into

Out of

Hao Tian (1341 HK)21.17%Shanghai CommCCB
F8 (8347 HK)38.29%BluemontGreat Bay
Source: HKEx
The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Shinsun Holdings (2599 HK) 23.00%HSBCCCB
Betterlife (6909 HK)72.29%BOCIOutside CCASS
Honliv (9906 HK)51.065CitiOutside CCASS
Source: HKEx

Asia-Pac Weekly Risk Arb Summary: Beijing Capital Land, Suchuang Gas, Siam Dev, 1300Smiles

By David Blennerhassett

This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks.

I number 36, mostly firm, deals around the region.

More below the fold.


Index Rebalance & ETF Flow Recap: FTSE GEIS/CH50/A50/TW50, UKX, KOSPI200, MLT/WHSP, Busy Week Ahead

By Brian Freitas

In this weeks recap, we look at:

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).

Events This Week

Click on the link under Detail to go to the Insight

Date

Index

Detail

30 August
JPXNK400
31 August
MSCI
1 September (e)
NKY
1 September
FTSE China 50
1 September
FTSE China A50
1 September
EPRA NAREIT
1 September (e)
KOSPI200
1 September (e)
KRX BBIG
2 September
STI
Rebalance announcement
3 September
HSCEI
3 September
HSI
3 September
HSTECH
3 September
ASX200
3 September
FTSE Taiwan 50

Before it’s here, it’s on Smartkarma