Category

Hong Kong

Brief Hong Kong: (Mostly) Asia M&A: February 2020 Roundup and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. (Mostly) Asia M&A: February 2020 Roundup
  2. Wharf REIC/Wharf Holdings – Index Impact of Wheelock Privatisation
  3. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

1. (Mostly) Asia M&A: February 2020 Roundup

For the month of February, 21 new deals were discussed on Smartkarma with an overall announced deal size of ~US$24bn.

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
Healius (HLS AU) Medical1.4Indicative Scheme23%
Healius: Partners And Heads In The Cloud
National Storage Reit (NSR AU) Storage REIT1.3Indicative Scheme16.5%
National Storage: A Public/Gaw Tussle
Spectrum Metals (SPX AU) Mining0.125Off-market52%
Spectrum Metals: Inside Ramelius’ Wheelhouse
China
Sichuan Road A (600039 CH) Construction0.177Partial12.9%
Sichuan Road & Bridge: A PRC Partial Offer
Hong Kong
Wheelock (20 HK) Property5.7Scheme52.2%
Wheelock’s Privatisation Offer
Japan
Japan U Pica (7891 JP) Polyester play0.024Tender Offer81.7%
Smallcap Japan U-Pica (7891) Tender Offer Buyout
Mamezou Holdings (3756 JP) Consulting0.03MBO Tender Offer34.2%
Mamezou Holdings MBO – Nice Premium, Non-Extravagant Multiple 
Odelic Co Ltd (6889 JP) Lighting solutions0.166MBO Tender Offer26.3%
Odelic MBO Going Too Cheaply – Vaguely Kosaido-Ish
Odelic MBO – STILL The Wrong Takeover Price, It’s a Good Long Here
Sogo Medical Holdings (9277 JP) Drugstore0.007MBO Tender Offer22.6%
Sogo Medical (9277) Tender Offer:
Sawada Holdings (8699 JP) Finance0.189Partial Offer4%

Sawada Holdings Partial Tender – An Odd Duck

Sawada Withholds Opinion on TOB – Mongolia Deal Risk May Exist

Yamaha Motor Robotics (6274 JP) Auto-molding0.12Tender Offer44.5%
Yamaha Motor Robotics TOB/Buyout
Malaysia
Ta Global Bhd (TAGB MK) Property0.05Vol Offer21.7%
TA Global: Minorities Get The Short End
Singapore
Breadtalk (BREAD SP) F&B0.09Vol Offer19.4%
Breadtalk: Privatisation Opportunism
Taiwan
Growww Media (8497 TT) Advertising0.06Tender Offer13.7%
Taiwan’s GROWWW Media to Be Acquired by Hakuhodo (2433 JP)
Thailand
Bumrungrad Hospital Pub Co (BH TB) Hospitals2.2VTO11.6%
Bumrungrad: Bangkok Dusit’s Poor Diagnosis
Middle East
DP World (DPW DU) Ports2.7MBO28.8%
DP World Squeezeout – Governance Discount Deserved (And Served) So Minorities Lose
Europe/UK
Godewind Immobilien AG (GWD GR) Real estate0.75Vol. takeover14.9%
Godewind-Covivio: German Real Estate Deal Trading at Terms
Ingenico Group Sa (ING FP) 
Unione Di Banche Italiane (UBI IM) Banking5.4Vol. takeover23.7%
Intesa SanPaolo Swoops on UBI for a Win-Win Deal
Intesa Sanpaolo Offer for UBI Banca – Bold Step Towards Domestic Bank Consolidation
BPER (BPE IM) – Tougher Targets to This Intesa-UBI Banca Side-Deal)
North America
Delphi Technologies PLC (DLPH US) Auto parts1.5Scheme77.4%
Delphi-BorgWarner: Why Are Acquirer Shareholders Unhappy?
Front Yard Residential (RESI US) Rental homes0.68Merger10.5%
Front Yard Residential: Awaiting a Bump?
Northview Apartment (NVU-U CN) REIT1.8SPA11.5%
Northview REIT: A Good Arb and Optionality To Boot
Source: Smartkarma Insights, SPA = Statutory Plan of Arrangement
National Storage Reit (NSR AU) announced a non-binding indicative proposal from Hong Kong-based real estate private equity firm Gaw Capital Partners last month – and who has now walked away from negotiations – but only first discussed on Smartkarma this month.

The merger of auto parts manufacturers Borgwarner Inc (BWA US) and Delphi Technologies PLC (DLPH US) was announced last month but only first discussed on Smartkarma this month.

The premium for Bumrungrad Hospital Pub Co (BH TB) could be 33.9% if using THB 150/share, the high-end of the implied range. But for now, the headline conditional offer price is THB 125/share. 

The average premium for the new deals announced in February was ~29% and the YTD average premium for all deals discussed on Smartkarma is 25%.

The average for all deals discussed on Smartkarma in 2019 (145 all-in) was 31.5%.

Brief Summary of News in February 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. Where a new insight was written on these names in June, I’ve included a link to that insight in italics.)

Australia

Comments (with links to announcements and insights)

3 Feb: AUIREL, the responsible entity of AOF – and whose issued capital is owned by AOF – announced it will now be owned JV 50:50 by AOF and Keppel Capital subsequent to an agreement. Despite the sale being a defeating condition to the current takeover offer, Starwood remains committed to pursuing its AOF bid. 4 Feb: The independent board of AOF is advising (page 17) shareholders to reject Starwood’s Offer. Separately, Hume Partners does not plan to accept the Offer.
6 Feb:Starwood/AOF: Sixth Time’s A Charm?

13-Feb: Alimentation Couche-Tard (ATD/A CN)bumped its offer by 2% to A$35.25.
16-Feb: CTX to allow ATD to conduct additional due diligence on a non-exclusive basis.
19-Feb: EG Group throws its hat into the ring
Caltex: EG Inconveniences ATD’s Offer

25-Feb: CTX announced its “CEO transition” whereby CEO Julian Segal will step down, effective 2 March. This is not a new development. Caltex previously announced on the 14 August that Segal would retire and step down once the Board had completed a formal succession and transition process. However, it is still a tad odd to depart in the midst of a competitive bidding process.

14-Feb: Scheme Booklet lodged with ASIC. The Scheme Meeting will be on the 19 March
20-Feb: FIRB approval

6-Feb: QMS shareholders overwhelmingly approve the Scheme. The Scheme is expected to become effective on the 11 Feb with payment expected on the 21 Feb.

No Feb update

3- Feb: 95.25% of Webster’s shareholders – present and via proxy – voted For the Scheme. 86.83% of the register rolled up. The effective and implementation dates are the 6 & 17 Feb. The last day of trading is expected to be the 6 Feb.

Hong Kong

Comments (with links to announcements and insights)

14-Feb: AVIC overwhelmingly gains shareholder approval for the merger by absorption. The next step is to clear the 90% acceptance condition. 

AVIC: The Vote Is In; Now For The Acceptances

19-Feb: BBI announced BGI Tech Holdings, with 4.10% if shares out, has given an irrevocable to vote for the Scheme. 
4 Feb: China Agri) declared an interim dividend of HK$0.04 in lieu of the final dividend for the year ended 31 Dec 2019. The Offeror has consented this dividend will not be netted off the Offer price.
14-Feb: China Agri: Done Deal As IFA Signs Off
19 Feb: Apparently, on account of difficulties – due to the virus – in preparing China Agri’s Profit Forecast, which was supposed to form part of the Scheme Document, the SFC granted a waiver not to include it. The IFA now says that taking into account the Profit Forecasts, its “fair & reasonable” opinion remains unchanged. 
16-Feb: The Potential Offeror announced it is continuing to explore a possible privatisation.

16-Feb: iDreamsky Technology Limited (1119 HK)‘s exclusivity period in a possible MOU with sellers of shares in Leyou has expired with no further extension.  However, the selling shareholders and the iDreamsky have reached an “advanced stage of negotiation and are in the course of finalising the transaction and financing documents”.

6-Feb: Springland’s Scheme was approved yesterday – 96.59% present and proxy voting FOR. Today is the last day of trading. Cheques will be dispatched on the 9 March.

6-Feb: Yixin announced DD in regards to the US$16/share Offer from Tencent Holdings (700 HK), Hammer Capital for Bitauto Holdings Ltd Adr (BITA US) is ongoing.

Indonesia

Comments (with links to announcements and insights)

12-Feb: Bangkok Bank Public (BBL TB)‘s IFA recommends shareholders approve the acquisition of Bank Permata.
13-Feb: Thinking About BBL’s Buy of Permata – Buy the Dips 
No Feb update

Japan

Comments (with links to announcements and insights)

No Feb update
Feb-25: China’s State Administration for Market Regulation (SAMR) unconditionally approved the purchase of Hitachi Chem by Showa Denko K K (4004 JP) as of the 21st of February according to an announcement on the SAMR website today. 
Feb-6: Keihin announced Q3 results on 4 Feb. 
As expected something of a disaster. 
The company did not revise full year from the last time, but one wonders whether production stoppages across China will have any significant effect anywhere.
18-Feb: Mitsubishi Chemical (4188 JP) has now cleaned out the minorities of Tanabe through the Demand for Shares.  Money should be in the bank in the not distant future.
4-Feb: Nissin Kogyo announced Q3 results and a sharply revised fiscal year forecast which suddenly makes this Tender Offer look less interesting to sell into than before. This is mostly because the company announced an increased stake in its Chinese subsidiaries.
18-Feb: Result of the J Front Retailing (3086 JP)Tender Offer for Parco is 96.43%. Minorities will get squeezed out cleanly, quickly.
No Feb update
10-Feb: The Tender Offer for by Bain started
6-Feb: Showa posted Q3 results. A bit slow, but not overwhelming. No change to full-year forecast.
18-Feb: Murakami extends the tender deadline to April 16

10-Feb: Chitocea raisees its bid to Y5,700/share from Y5,100.
24-Feb: Blackrock increased its indicative bid to JPY 6000/share, meaning its bid is 5% higher than Chitocea’s bid, which is due to expire this Friday. 
25-Feb:  Chitocea has extended their JPY 5700/share bid to expire March 18 (from Feb 28th) as Blackstone has indicatively bid JPY 6000/share.
27-Feb: Fortress has extended their Tender Offer deadline from 6 March to 26 March. This is probably still too early and would likely be extended again. Price is unchanged at JPY 5200. 

Malaysia

Comments

No Feb update.

New Zealand

Comments (with links to announcements)

No Feb update.
1-Feb: In a Scheme update notice, Metlifecare announced that it is working to send “detailed information” ahead of the shareholders’ meeting on the 29 April; and contemplates the transaction will be implemented in May, as per initially guided (page 46-47).

Philippines

Comments (with links to announcements and insights)

1 Feb: The Mergers and Acquisitions Office of the Philippine Competition Commission (PCC) has raised concerns that the takeover of Holcim by San Miguel (SMC PM) might lead to a monopoly in the grey cement industry. The PCC said the deal might result in “increased market power, and potential collusion arising from the merger” as well as “substantial lessening of competition in the market for grey cement in 4 key areas in the Philippines.”

PCC Concludes Merger-To-Monopoly In Holcim/San Miguel Tie-Up

South Korea

Comments 

No Feb update

Thailand

Comments (with links to insights)

No Feb update

18-Feb: Robinson’s Delisting Offer obtained 98.39% of shares outstanding in the hands of Central and affiliates. 
That leaves 1.61% outstanding in public hands. The subsequent price movement from Jan31 to yesterday was executed on a total of 1.2mm shares (undoubtedly some of it was also people trading in and out), which is about 0.11% of shares out. The reason why the price movement since then is irrelevant is that shareholders have NO recourse to that THB 66.5 price. The IFA’s fair price was below that price. And shareholders will simply hold delisted shares as of tomorrow.

Central Retail IPO Day 20 Feb – Basis Risk, Flow, and Index Dynamics

UK

Comments (with links to announcements)

27-Feb: Court sanctions Scheme. Shares suspended.
No Feb updsate

1 Feb: Declared unconditional now. 

27-Feb: What should have been the last day on the London Stock Exchange, this now need s FCA clearance

Europe

Comments (with links to insights)

10-Feb: Tender Offer closed. But optionality remains. Effectively there is a 2-month put option,  struck at €14.50. 

Capgemini/Altran: Optionality Window

2. Wharf REIC/Wharf Holdings – Index Impact of Wheelock Privatisation

Image

Yesterday, Wheelock (20 HK) announced a proposal to privatise the company by distributing its equity holdings in Wharf Holdings (4 HK) and Wharf Real Estate Investment (1997 HK) to shareholders, plus HK$12 per share for its other holdings.

The implied premium to Wheelock (20 HK)‘s previous close was 52.17%, though this will keep changing with movements in the price of Wharf Holdings (4 HK) and Wharf Real Estate Investment (1997 HK). At yesterday’s closing prices, the premium to Wheelock (20 HK)‘s undisturbed price was 46.88% and will probably be lower today once Wharf Holdings (4 HK) resumes trading.

In this Insight, we look at the impact of the privatisation on Wharf Real Estate Investment (1997 HK) due to its inclusion in the Hong Kong Hang Seng Index (HSI INDEX) and MSCI Hong Kong indices, and of Wharf Holdings (4 HK)‘s inclusion in the MSCI Hong Kong index. 

3. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

Image 41514005621582821543929

Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Hong Kong: BOCHK – A Very Managed, Yet Poor Set of Numbers and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. BOCHK – A Very Managed, Yet Poor Set of Numbers
  2. How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?
  3. Governments and Policies Adapting to Critical Known Unknown
  4. Costs of and Response to COVID-19
  5. Huge Short Covering Last Week

1. BOCHK – A Very Managed, Yet Poor Set of Numbers

* Despite Managed Set of Results, Still A Miss: BOC Hong Kong Holdings (2388.HK) [BOCHK] reported 2H19 earnings results of HKD 15.6 bn substantially missing consensus forecasts – although HKD 645 mn or 13.1% ahead of 1H19 numbers. Given the reserve bleed on top of credit weakness which was attributed to mainland China, we calculate that the 2H19 bottom-line result was overstated by over 5%;

* Credit and NIMs to Weaken: BOCHK’s stated figures fail to tell the entire story. Net new problem loan growth amounted to HKD 2.0 bn or 74.4% linked period or 149% on annualized basis. This is alarming as we have yet to feel the impact of the corona virus on BOCHK’s results while its mainland China NPLs have already increased 157% HOH. 4Q19 net interest income actually declined 2% as the higher HIBOR rates was more than offset by USD rates while the NIM declined 6 bp to 1.66%. There is increasing pressure on asset sensitive balance sheets in response to a lagging HIBOR post the aggressive FRB moves.

2. How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?

Buffett 2

The main subject of this report is as follows: “How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?” Certainly, COVID-19 will change the way people behave. The longer that COVID-19 lasts and the longer that millions of people are under lockdown, their behaviors will change further, potentially making them into a habit and this would have a tremendous impact on the global economy. 

We are specifically interested in this topic because as millions of people around the world undergo “lockdown” for a period of one to three months, this could have an enormous behavior change once this lockdown period ends.

The change in behavior patterns (especially related to consumer spending) in the post COVID-19 world would also have a big impact on whether the global economy/stock market can turn around quickly (such as after the Great Financial Recession in 2008/2009) or whether the turnaround lasts longer (such as after the Internet tech/crash lasting for nearly 3 years from 2000 to 2002). 

3. Governments and Policies Adapting to Critical Known Unknown

Chart%206c

We argued in Lack of US market & macro volatility both reassuring and troubling that “the market’s willingness to look through domestic political and geopolitical events suggests that only a significant exogenous or endogenous shock currently beyond markets’ radar screens (an “unknown unknown”) is likely to really move the needle”.

That unknown unknown, a “black swan” event, has turned out to be a global viral pandemic on a scale not seen since the Spanish influenza pandemic of 1918-1919.

The coronavirus outbreak is now three months old but governments, central banks, corporates and households still face a critical known unknown, in our view, namely the total number people who had the coronavirus, acquired immunity and are no longer contagious and who currently carry the coronavirus and are thus potentially infectious.

This includes people who have not been clinically tested – more than 99.9% of the world’s population. We estimate that only 3.3 million people (4 out of every 10,000) have been tested for coronavirus, although testing data are patchy and often released with a lag. The main reason so few people have been tested is the still limited capacity to rapidly and reliably test a very large number of people.

In econometric terms that is a very small sample from which to extrapolate country-wide trends. One implication is that the actual mortality rate may be far smaller than reported.

The high number of tests-per-capita conducted in countries such as South Korea has been posited as an explanation for their relatively low number of coronavirus-related deaths. However, other factors have likely been at play, including the timing of clinical tests, demographics, national health systems’ capacity to treat infected patients and the timing and efficacy of self-isolation and self-distancing policies, including country “lockdowns”.

For now what policy-makers know they don’t know will likely continue to influence country-specific containment plans, as well as domestic measures to support economic growth while ensuring the functioning of financial markets.

4. Costs of and Response to COVID-19

Capture

As the epicentre of the coronavirus pandemic shifts from Europe to the US and the number of deaths and infection cases reach new highs, the costs of the crisis are beginning to be revealed. In Singapore economic activity contracted in 1Q20 at a faster pace than at the worst point during the GFC while Chinese industrial profits were down 38% in the first two months of the year. Despite this we are cautiously optimistic that Asian economic activity led by China will pick-up in the second half of the year. We are much more worried about advanced economies where policy mis-management threatens to tip the world economy into recession.

5. Huge Short Covering Last Week

Image

We take a look at the latest SFC data released today evening on short position reporting in Hong Kong for the week ended 20 March 2020.

Total short notional in Hong Kong decreased from HKD 430.33bn to HKD 382.05bn over the week due to lower stock prices and short covering.

Shorts decreased in all sectors led by Financials (US$375m), Real Estate (US$272m), Consumer Discretionary (US$216m), Information Technology (US$162m) and Consumer Staples (US$136m).

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Hong Kong: Wharf REIC/Wharf Holdings – Index Impact of Wheelock Privatisation and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. Wharf REIC/Wharf Holdings – Index Impact of Wheelock Privatisation
  2. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint
  3. Wheelock’s Unexpected Two-Step Privatisation Proposal

1. Wharf REIC/Wharf Holdings – Index Impact of Wheelock Privatisation

Image

Yesterday, Wheelock (20 HK) announced a proposal to privatise the company by distributing its equity holdings in Wharf Holdings (4 HK) and Wharf Real Estate Investment (1997 HK) to shareholders, plus HK$12 per share for its other holdings.

The implied premium to Wheelock (20 HK)‘s previous close was 52.17%, though this will keep changing with movements in the price of Wharf Holdings (4 HK) and Wharf Real Estate Investment (1997 HK). At yesterday’s closing prices, the premium to Wheelock (20 HK)‘s undisturbed price was 46.88% and will probably be lower today once Wharf Holdings (4 HK) resumes trading.

In this Insight, we look at the impact of the privatisation on Wharf Real Estate Investment (1997 HK) due to its inclusion in the Hong Kong Hang Seng Index (HSI INDEX) and MSCI Hong Kong indices, and of Wharf Holdings (4 HK)‘s inclusion in the MSCI Hong Kong index. 

2. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

Image 41514005621582821543929

Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

3. Wheelock’s Unexpected Two-Step Privatisation Proposal

Precedents

Wheelock (20 HK) is one of the largest property developers in Hong Kong. On 27 February, its shares rose 40% on the back of a privatisation offer from the Woo family, its controlling shareholder. The Woo family is taking private Wheelock through a two-step transaction. First, Wheelock will distribute its equity holdings in Wharf Real Estate Investment (1997 HK) and Wharf Holdings (4 HK) by offering one share each of Wharf REIC and Wharf Holdings. Second, the Woo family will offer HK$12.00 cash per Wheelock scheme share. 

Overall, we believe that the offer is a reasonable but not a knockout bid. In combination with the bid’s small cash component, short-term investors/traders should lock in profits as we expect the value of the privatisation bid to creep downwards. 

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Hong Kong: Wharf REIC/Wharf Holdings – Index Impact of Wheelock Privatisation and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. Wharf REIC/Wharf Holdings – Index Impact of Wheelock Privatisation
  2. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint
  3. Wheelock’s Unexpected Two-Step Privatisation Proposal
  4. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery

1. Wharf REIC/Wharf Holdings – Index Impact of Wheelock Privatisation

Image

Yesterday, Wheelock (20 HK) announced a proposal to privatise the company by distributing its equity holdings in Wharf Holdings (4 HK) and Wharf Real Estate Investment (1997 HK) to shareholders, plus HK$12 per share for its other holdings.

The implied premium to Wheelock (20 HK)‘s previous close was 52.17%, though this will keep changing with movements in the price of Wharf Holdings (4 HK) and Wharf Real Estate Investment (1997 HK). At yesterday’s closing prices, the premium to Wheelock (20 HK)‘s undisturbed price was 46.88% and will probably be lower today once Wharf Holdings (4 HK) resumes trading.

In this Insight, we look at the impact of the privatisation on Wharf Real Estate Investment (1997 HK) due to its inclusion in the Hong Kong Hang Seng Index (HSI INDEX) and MSCI Hong Kong indices, and of Wharf Holdings (4 HK)‘s inclusion in the MSCI Hong Kong index. 

2. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

Image 41514005621582821543929

Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

3. Wheelock’s Unexpected Two-Step Privatisation Proposal

Precedents

Wheelock (20 HK) is one of the largest property developers in Hong Kong. On 27 February, its shares rose 40% on the back of a privatisation offer from the Woo family, its controlling shareholder. The Woo family is taking private Wheelock through a two-step transaction. First, Wheelock will distribute its equity holdings in Wharf Real Estate Investment (1997 HK) and Wharf Holdings (4 HK) by offering one share each of Wharf REIC and Wharf Holdings. Second, the Woo family will offer HK$12.00 cash per Wheelock scheme share. 

Overall, we believe that the offer is a reasonable but not a knockout bid. In combination with the bid’s small cash component, short-term investors/traders should lock in profits as we expect the value of the privatisation bid to creep downwards. 

4. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery

Macau chart

  • Melco is well positioned, it’s taken a big virus related hit but offers a very cheap entry point relative to peers.
  • Virus duration unknown, but we see a strong upside forming late Q3 to Q4 2020 from a low base.

2019 performance in mass subsection will ramp fast, but VIP will take longer to rebuild.

Buy when everyone sells, sell when everyone buys…”Warren Buffett

 As global markets precipitously dive over mounting fears that the coronavirus will evolve into a pandemic, we are reminded of the above quote attributed to Warren Buffett. It seems appropriate at this juncture to watch valuations crumble by the day and bear in mind that no matter the damage ultimately inflicted on stocks, at one point or another, the outbreak will peak and finally end.

 SARS, Swine Flu, Ebola and others as frightening as they were, ultimately peaked and faded around a 6 month time frame. We make no such forecasts here other than to stipulate we are using it as a benchmark duration only. Nine months or more cannot be ruled out. All that can be ruled out is that we are clearly not experiencing a revisit of the medieval black plague which swept through Europe and Asia for years during the 14th century and the latter day early 20th century Spanish flu pandemic which killed millions. World health authorities possess an armory of weapons to battle the virus that simply did not exist before. But the coronavirus will take its toll at all events.

 So the penultimate question now for investors is the same one raised through war, depression, recession, global financial crises or mass health emergencies. Do you take money off the table, run and hide until events play out? Or do you make bets now when good stocks are cheap and getting cheaper, then grit your teeth and twist the cork on a bottle of good champagne and hold it in place until macro disasters dissipate and send your bets now soaring with profits? And in the aftermath will you bask in the adulation of peers commending your genius for following that very penetrating notion of Warren Buffett at the top of this insight?

 The Asian gaming sector is rife with bargains now for those strong of heart and conviction in the longer term valuations

 The Asia gaming sector in particular has taken a huge beating and may well experience a continuing fall until the health scare passes and valuations return, or exceed pre-virus levels. The action on gaming stocks at first news of the virus breakout, puzzled many observers. Investors not only stood pat, but did some buying, keeping the sector remarkably immune from the unfolding health disaster—temporarily.

 It did not last. We now have a sector, along with broader markets, taking a major beating. Valuations have plunged. The cause and effect of the Asian sector in particular clearly shows a straight line between the collapse of the Macau customer flow and the anticipated damage it will in the end inflict on earnings and valuations this year.

 Added to that we have two days of plunge suggesting capitulation. Yet the virus doesn’t play by traditional market rules. Have we indeed experienced capitulation after a long bull trend? Whether after a standard bubble or a virus black swan we note that the market has left Asia gaming stocks at lows that invite serious consideration as entry points now for those with the risk profile.

 We have applied the Buffett principal to the situation and concluded that yes, for reasons we will detail here, we think It’s time to buy and buy strongly in the Asian casino sector. Valuations tumbled, but fundamentals are unchanged. It is in the interim period, between now and such a time when the virus finally abates and disappears, that the sector can expect to be hammered.

  As the sector get cheaper, the temptation to buy on the deep dips would normally kick in. Thus far we have noted in trading volume and various options plays the ongoing sentiment remains: Take money off the table and get out. The assumption: There will be plenty of time ahead where the sector will be cheap enough to dive back in when the waves of selling pressure begin to abate.

 Regardless of that well- worn attitude we see much value right now in the sector.

Consider Melco Resorts & Entertainment Inc.

Melco volatility and virus has brought the stock down to a bargain price.

We have selected one stock we believe offers the longest and most vibrant ramp up post virus: Melco Resorts & Entertainment Inc. (NASDAQ: MLCO). Overall we believe there is money to be made across the Macau sector as all the stocks have had their recent run ups destroyed. We have selected Melco as representative of a stock we believe has dropped to a level that makes it extremely attractive because of a friendly entry price compared with industry peers.

 Recovery from the virus disruption will be slow and steady but at some point in the process, pent up demand in mass will ignite and translate into a powerful earnings tide late this year. We like Melco’s low starting point, its quick response to the virus challenge, particularly in cutting Capex. The company announced it was postponing acquiring the second tranche of Crown Resorts(ASX:CWN) stock and making other judicious cuts which reduced its run rate during the crisis to around US$2.5M a day.

Macau has recovered from 2015 crackdowns and will find its way back by Q4 this year or before.

Furthermore, management has gone on record as promising to continue dividend payments for the knowable duration of the crisis. As a general sense, management is looking at a six month time line for a return to normal operations.

 Our thesis: Building a larger position pre-recovery at a smaller outlay. In theory you can now buy 3.5 shares of MLCO for every share of Las Vegas Sands Inc. (NYSE: LVS). You can also buy 6 shares of MLCO for every share of Wynn Resorts Ltd. at the price at writing. We expect the entire Macau gaming sector to ignite post recovery. All face the same headwinds, all will respond with similar forward momentum. But MLCO sits at a cheaper starting point with as sound a going forward recovery potential than any of its major peers.

 A quick glance at Melco (USD)

 Price at writing: $19.53

52wk range: $18.68 —$26.97

5 year high: Sept 2017: $31.21

Market cap: $8.982B

Beta: (5 yr monthly) 1.93

P/E: (ttm): 25.23

EPS: $0.77

Forward dividend and yield: $0.66 (3.38%)

 Our view: Based on its  global ambitions, surefooted asset allocation skills,  and operational flexibility, we believe MLCO has been undervalued even at its recent pre-virus highs.

 Pre-virus performance this month:

 Stock was at $22. 58

 This company’s 4Q19 and annual 2019 results are impressive:

 Q4 luck adjusted EBITDA hit a record, all time high propelled by a 17% increase in  the mass segment up 17% to $249M. Group wide EBITDA was $382M, but luck adjusted at $413M. MLCO played unlucky in Q4.

 A key metric we like: MLCO’s 2019 share of the Macau market rose 180bps to 16%—in a market showing a sector wide decline in VIP. Its properties proximity to the new light rail station is superior to many peers putting properties within 14 minutes of the ferry and 12 minutes from the airport. We believe this will contribute to an uptick in market share again once recovery begins probably in the back six months of this year.

 The company showed strong upsides in mass at all properties including its Manila operation yet at the same time it is facing market wide declines in VIP. The success of the Morpheus tower in Macau in premium mass in particular played a significant role in the solid performance.

City of Dreams Manila, a key player in vibrant growth in the Philippine gaming market.

 Capex going forward MLCO will continue to move ahead on its $1.35B investment in the Phase One expansion of Studio City, a project aimed directly at the heart of the mass and premium mass market segments by adding 600 rooms and a water park.

 Cyprus: MLCO’s EBITDA from its temporary casinos rose to $9M. The properties are a toe-dip into what is coming there in the integrated resort project with a large footprint expected to debut in late 2021. The property will be de facto the first ever, modern integrated casino resort built to service the European /Middle East market. City of Dreams Mediterranean will cost just over $617M to complete and the capex on the project will continue through the virus interregnum. The property will open with a modest game spread of 100 tables and 1,000 slot machines.

City of Dreams Cyprus coming in 2021 could be a game changer in Europe.

We think the Cyprus property will quickly absorb the capacity and provide a rationale to MLCO to scale. It will open with 500 rooms, but we note that the property will sit on 91 acres controlled by MLCO. It is a clear first mover advantage for the company in  the European facing market.

 Japan: MLCO has been among the most aggressive pursuers of one of the three Japan IR licenses to be issued late this year or early 2021. It has pivoted from an Osaka target to a Yokohama first strategy going head to head with Las Vegas Sands. In the last quarter it’s PL showed it had spent $18M on various initiatives in Japan. Our industry source on the ground in Tokyo believes that “it will be a tough down to the wire contest between the two companies. The estimates of sunk cost for a Yokohama IR have risen as high as $18B. It’s entirely possible that MLCO and LVS will wind up in some kind of joint venture with a third, Japan based partner.”

 MLCO cash and coronavirus burn rate

 At writing, MLCO is sitting on $900M in cash against $3B in long term debt exclusive of Studio City and the Cyprus project.

Management now estimates the burn rate during the virus challenge at $2.5M per day fixed expenses, inclusive of some cost cuts already made in both operations and capex expense.

 Their outlook at present foresees no substantive recovery beginning before Q3 this year. Cash reserves are considered more than adequate to meet that contingency. However, management sees a ramp up back to normalcy starting slower and not gaining powerful momentum until late in Q4 or early 1Q21. Our take: Most of the virus downside is already baked in.

 In effect management sees Q1 and Q2 as essentially lost in terms of contribution to annual results this year.

Lawrence Ho and President Duterte signals a continuing presence in a solid ramp up in Manila.

The takeaway

 Market consensus has put a $27.87 PT on the stock. Analysts believe that now within the virus context, it is trading at near fair value. My own view from an industry perspective is contrarian to these calls. I believe and have believed for two years that MLCO has remained undervalued trading in a very narrow range. Going through the history I found that much of the periodic downside volatility I discovered in the trade was related to unlucky play. And that was fueled by the company’s aggressive posture in marketing to VIPs and taking on a bit more risk in bad debts to support the arrival in 2018 of the Morpheus Tower $1.2B investment at City of Dreams.

 There is also the inherent volatility of the Macau market in general where since 2015, Beijing assaults on money laundering and junkets have bruised the VIP business. The macro China economic woes (pre-virus) likewise had their impact on the sector.

 CEO Lawrence Ho is among the industry’s most effective asset allocators. Yet his decisions at times, such as a sudden pull out from a highly touted deal in the Russian Far East., and a quick pivot to Cyprus have raised some eyebrows among investors. His more recent move to acquire James Packer’s stake in Crown Resorts for US$1.2B triggered several calls I had from hedge fund friends questioning the move on several grounds. Mostly they expressed concern about a growth trajectory in the Australian market with new capacity coming on line. Second, one associate, an admirer of Ho’s, questioned whether “Lawrence has the penchant to bite off more than he can chew”. He believes that these moves are part of what keeps the stock “hostage in a narrow range”.

 While I believe that MLCO may be fairly valued by traditional metrics, I think the potential of the stock based both on management effectiveness under pressure and the global vision of Lawrence Ho to move his asset base to places where he expects the highest risk/reward ratios is worth a premium to the stock.

 MLCO has always been relatively cheap among its peers for a company whose vision reaches beyond Asia. US based giants have fortress positions in Las Vegas. Ho has apparently bypassed opportunities there and pivoted to Cyprus and Australia beyond Macau and Manila. Therefore, in time, MLCO will be a strong contender in Asia and global in scope with its shares still “held hostage” as my hedge fund friend noted, by aspects of the company it has not valued.

 I believe post virus in full recovery mode in Macau, plus continuing strong growth trends in Manila and the possibilities both for the Cyprus project and Japan, that MLCO looks like it could be a $35 stock to me bought at a price now that could afford a larger opening position than many peers.

 

Everyone’s selling? Buy.

 

 

 

 

 

 

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Hong Kong: How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World? and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?
  2. Governments and Policies Adapting to Critical Known Unknown
  3. Costs of and Response to COVID-19
  4. Huge Short Covering Last Week
  5. Fault Lines and Positive Surprises: Buy Car Makers

1. How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?

Buffett 2

The main subject of this report is as follows: “How Long Does It Take To Change One’s Behavior? Why Does This Matter in the Post COVID-19 World?” Certainly, COVID-19 will change the way people behave. The longer that COVID-19 lasts and the longer that millions of people are under lockdown, their behaviors will change further, potentially making them into a habit and this would have a tremendous impact on the global economy. 

We are specifically interested in this topic because as millions of people around the world undergo “lockdown” for a period of one to three months, this could have an enormous behavior change once this lockdown period ends.

The change in behavior patterns (especially related to consumer spending) in the post COVID-19 world would also have a big impact on whether the global economy/stock market can turn around quickly (such as after the Great Financial Recession in 2008/2009) or whether the turnaround lasts longer (such as after the Internet tech/crash lasting for nearly 3 years from 2000 to 2002). 

2. Governments and Policies Adapting to Critical Known Unknown

Chart%203c

We argued in Lack of US market & macro volatility both reassuring and troubling that “the market’s willingness to look through domestic political and geopolitical events suggests that only a significant exogenous or endogenous shock currently beyond markets’ radar screens (an “unknown unknown”) is likely to really move the needle”.

That unknown unknown, a “black swan” event, has turned out to be a global viral pandemic on a scale not seen since the Spanish influenza pandemic of 1918-1919.

The coronavirus outbreak is now three months old but governments, central banks, corporates and households still face a critical known unknown, in our view, namely the total number people who had the coronavirus, acquired immunity and are no longer contagious and who currently carry the coronavirus and are thus potentially infectious.

This includes people who have not been clinically tested – more than 99.9% of the world’s population. We estimate that only 3.3 million people (4 out of every 10,000) have been tested for coronavirus, although testing data are patchy and often released with a lag. The main reason so few people have been tested is the still limited capacity to rapidly and reliably test a very large number of people.

In econometric terms that is a very small sample from which to extrapolate country-wide trends. One implication is that the actual mortality rate may be far smaller than reported.

The high number of tests-per-capita conducted in countries such as South Korea has been posited as an explanation for their relatively low number of coronavirus-related deaths. However, other factors have likely been at play, including the timing of clinical tests, demographics, national health systems’ capacity to treat infected patients and the timing and efficacy of self-isolation and self-distancing policies, including country “lockdowns”.

For now what policy-makers know they don’t know will likely continue to influence country-specific containment plans, as well as domestic measures to support economic growth while ensuring the functioning of financial markets.

3. Costs of and Response to COVID-19

Capture

As the epicentre of the coronavirus pandemic shifts from Europe to the US and the number of deaths and infection cases reach new highs, the costs of the crisis are beginning to be revealed. In Singapore economic activity contracted in 1Q20 at a faster pace than at the worst point during the GFC while Chinese industrial profits were down 38% in the first two months of the year. Despite this we are cautiously optimistic that Asian economic activity led by China will pick-up in the second half of the year. We are much more worried about advanced economies where policy mis-management threatens to tip the world economy into recession.

4. Huge Short Covering Last Week

Image

We take a look at the latest SFC data released today evening on short position reporting in Hong Kong for the week ended 20 March 2020.

Total short notional in Hong Kong decreased from HKD 430.33bn to HKD 382.05bn over the week due to lower stock prices and short covering.

Shorts decreased in all sectors led by Financials (US$375m), Real Estate (US$272m), Consumer Discretionary (US$216m), Information Technology (US$162m) and Consumer Staples (US$136m).

5. Fault Lines and Positive Surprises: Buy Car Makers

Image 74356928621585274600719

Where are the weakest points in the global economy that could send activity into a tailspin and threaten the banking system? Italy would seem to be the prime candidate for collapse. The economy was already flirting with recession but will definitely enter one when first quarter 2020 data are published. Weak economies are always the most vulnerable when an external shock hits. Italy’s banks are bound to require a bailout from either the government or the ECB – neither of which are well placed to provide the capital. 

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Hong Kong: London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint
  2. Wheelock’s Unexpected Two-Step Privatisation Proposal
  3. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery
  4. Wheelock’s Privatisation Offer

1. London Shanghai Stock Connect – The Dampest of Squibs. Inteqres Viewpoint

Image 41514005621582821543929

Despite the fanfare only one Chinese company listed (and raised money) in London after the announcement of the London Shanghai Connect.  There have been no listing of Chinese Depository Receipts by companies listed in London.  This is starting to look like a white elephant.  We have reviewed the successful Depository Receipt programmes around the world and conclude that the pull to issue Chinese Depository Receipts is only weak at present.  We do think that companies are reviewing the option of issuing CDRs but there is no intense pressure to do so.  By following the factors we have identified, authorities and exchanges could build a more successful programme.

2. Wheelock’s Unexpected Two-Step Privatisation Proposal

Precedents

Wheelock (20 HK) is one of the largest property developers in Hong Kong. On 27 February, its shares rose 40% on the back of a privatisation offer from the Woo family, its controlling shareholder. The Woo family is taking private Wheelock through a two-step transaction. First, Wheelock will distribute its equity holdings in Wharf Real Estate Investment (1997 HK) and Wharf Holdings (4 HK) by offering one share each of Wharf REIC and Wharf Holdings. Second, the Woo family will offer HK$12.00 cash per Wheelock scheme share. 

Overall, we believe that the offer is a reasonable but not a knockout bid. In combination with the bid’s small cash component, short-term investors/traders should lock in profits as we expect the value of the privatisation bid to creep downwards. 

3. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery

Macau chart

  • Melco is well positioned, it’s taken a big virus related hit but offers a very cheap entry point relative to peers.
  • Virus duration unknown, but we see a strong upside forming late Q3 to Q4 2020 from a low base.

2019 performance in mass subsection will ramp fast, but VIP will take longer to rebuild.

Buy when everyone sells, sell when everyone buys…”Warren Buffett

 As global markets precipitously dive over mounting fears that the coronavirus will evolve into a pandemic, we are reminded of the above quote attributed to Warren Buffett. It seems appropriate at this juncture to watch valuations crumble by the day and bear in mind that no matter the damage ultimately inflicted on stocks, at one point or another, the outbreak will peak and finally end.

 SARS, Swine Flu, Ebola and others as frightening as they were, ultimately peaked and faded around a 6 month time frame. We make no such forecasts here other than to stipulate we are using it as a benchmark duration only. Nine months or more cannot be ruled out. All that can be ruled out is that we are clearly not experiencing a revisit of the medieval black plague which swept through Europe and Asia for years during the 14th century and the latter day early 20th century Spanish flu pandemic which killed millions. World health authorities possess an armory of weapons to battle the virus that simply did not exist before. But the coronavirus will take its toll at all events.

 So the penultimate question now for investors is the same one raised through war, depression, recession, global financial crises or mass health emergencies. Do you take money off the table, run and hide until events play out? Or do you make bets now when good stocks are cheap and getting cheaper, then grit your teeth and twist the cork on a bottle of good champagne and hold it in place until macro disasters dissipate and send your bets now soaring with profits? And in the aftermath will you bask in the adulation of peers commending your genius for following that very penetrating notion of Warren Buffett at the top of this insight?

 The Asian gaming sector is rife with bargains now for those strong of heart and conviction in the longer term valuations

 The Asia gaming sector in particular has taken a huge beating and may well experience a continuing fall until the health scare passes and valuations return, or exceed pre-virus levels. The action on gaming stocks at first news of the virus breakout, puzzled many observers. Investors not only stood pat, but did some buying, keeping the sector remarkably immune from the unfolding health disaster—temporarily.

 It did not last. We now have a sector, along with broader markets, taking a major beating. Valuations have plunged. The cause and effect of the Asian sector in particular clearly shows a straight line between the collapse of the Macau customer flow and the anticipated damage it will in the end inflict on earnings and valuations this year.

 Added to that we have two days of plunge suggesting capitulation. Yet the virus doesn’t play by traditional market rules. Have we indeed experienced capitulation after a long bull trend? Whether after a standard bubble or a virus black swan we note that the market has left Asia gaming stocks at lows that invite serious consideration as entry points now for those with the risk profile.

 We have applied the Buffett principal to the situation and concluded that yes, for reasons we will detail here, we think It’s time to buy and buy strongly in the Asian casino sector. Valuations tumbled, but fundamentals are unchanged. It is in the interim period, between now and such a time when the virus finally abates and disappears, that the sector can expect to be hammered.

  As the sector get cheaper, the temptation to buy on the deep dips would normally kick in. Thus far we have noted in trading volume and various options plays the ongoing sentiment remains: Take money off the table and get out. The assumption: There will be plenty of time ahead where the sector will be cheap enough to dive back in when the waves of selling pressure begin to abate.

 Regardless of that well- worn attitude we see much value right now in the sector.

Consider Melco Resorts & Entertainment Inc.

Melco volatility and virus has brought the stock down to a bargain price.

We have selected one stock we believe offers the longest and most vibrant ramp up post virus: Melco Resorts & Entertainment Inc. (NASDAQ: MLCO). Overall we believe there is money to be made across the Macau sector as all the stocks have had their recent run ups destroyed. We have selected Melco as representative of a stock we believe has dropped to a level that makes it extremely attractive because of a friendly entry price compared with industry peers.

 Recovery from the virus disruption will be slow and steady but at some point in the process, pent up demand in mass will ignite and translate into a powerful earnings tide late this year. We like Melco’s low starting point, its quick response to the virus challenge, particularly in cutting Capex. The company announced it was postponing acquiring the second tranche of Crown Resorts(ASX:CWN) stock and making other judicious cuts which reduced its run rate during the crisis to around US$2.5M a day.

Macau has recovered from 2015 crackdowns and will find its way back by Q4 this year or before.

Furthermore, management has gone on record as promising to continue dividend payments for the knowable duration of the crisis. As a general sense, management is looking at a six month time line for a return to normal operations.

 Our thesis: Building a larger position pre-recovery at a smaller outlay. In theory you can now buy 3.5 shares of MLCO for every share of Las Vegas Sands Inc. (NYSE: LVS). You can also buy 6 shares of MLCO for every share of Wynn Resorts Ltd. at the price at writing. We expect the entire Macau gaming sector to ignite post recovery. All face the same headwinds, all will respond with similar forward momentum. But MLCO sits at a cheaper starting point with as sound a going forward recovery potential than any of its major peers.

 A quick glance at Melco (USD)

 Price at writing: $19.53

52wk range: $18.68 —$26.97

5 year high: Sept 2017: $31.21

Market cap: $8.982B

Beta: (5 yr monthly) 1.93

P/E: (ttm): 25.23

EPS: $0.77

Forward dividend and yield: $0.66 (3.38%)

 Our view: Based on its  global ambitions, surefooted asset allocation skills,  and operational flexibility, we believe MLCO has been undervalued even at its recent pre-virus highs.

 Pre-virus performance this month:

 Stock was at $22. 58

 This company’s 4Q19 and annual 2019 results are impressive:

 Q4 luck adjusted EBITDA hit a record, all time high propelled by a 17% increase in  the mass segment up 17% to $249M. Group wide EBITDA was $382M, but luck adjusted at $413M. MLCO played unlucky in Q4.

 A key metric we like: MLCO’s 2019 share of the Macau market rose 180bps to 16%—in a market showing a sector wide decline in VIP. Its properties proximity to the new light rail station is superior to many peers putting properties within 14 minutes of the ferry and 12 minutes from the airport. We believe this will contribute to an uptick in market share again once recovery begins probably in the back six months of this year.

 The company showed strong upsides in mass at all properties including its Manila operation yet at the same time it is facing market wide declines in VIP. The success of the Morpheus tower in Macau in premium mass in particular played a significant role in the solid performance.

City of Dreams Manila, a key player in vibrant growth in the Philippine gaming market.

 Capex going forward MLCO will continue to move ahead on its $1.35B investment in the Phase One expansion of Studio City, a project aimed directly at the heart of the mass and premium mass market segments by adding 600 rooms and a water park.

 Cyprus: MLCO’s EBITDA from its temporary casinos rose to $9M. The properties are a toe-dip into what is coming there in the integrated resort project with a large footprint expected to debut in late 2021. The property will be de facto the first ever, modern integrated casino resort built to service the European /Middle East market. City of Dreams Mediterranean will cost just over $617M to complete and the capex on the project will continue through the virus interregnum. The property will open with a modest game spread of 100 tables and 1,000 slot machines.

City of Dreams Cyprus coming in 2021 could be a game changer in Europe.

We think the Cyprus property will quickly absorb the capacity and provide a rationale to MLCO to scale. It will open with 500 rooms, but we note that the property will sit on 91 acres controlled by MLCO. It is a clear first mover advantage for the company in  the European facing market.

 Japan: MLCO has been among the most aggressive pursuers of one of the three Japan IR licenses to be issued late this year or early 2021. It has pivoted from an Osaka target to a Yokohama first strategy going head to head with Las Vegas Sands. In the last quarter it’s PL showed it had spent $18M on various initiatives in Japan. Our industry source on the ground in Tokyo believes that “it will be a tough down to the wire contest between the two companies. The estimates of sunk cost for a Yokohama IR have risen as high as $18B. It’s entirely possible that MLCO and LVS will wind up in some kind of joint venture with a third, Japan based partner.”

 MLCO cash and coronavirus burn rate

 At writing, MLCO is sitting on $900M in cash against $3B in long term debt exclusive of Studio City and the Cyprus project.

Management now estimates the burn rate during the virus challenge at $2.5M per day fixed expenses, inclusive of some cost cuts already made in both operations and capex expense.

 Their outlook at present foresees no substantive recovery beginning before Q3 this year. Cash reserves are considered more than adequate to meet that contingency. However, management sees a ramp up back to normalcy starting slower and not gaining powerful momentum until late in Q4 or early 1Q21. Our take: Most of the virus downside is already baked in.

 In effect management sees Q1 and Q2 as essentially lost in terms of contribution to annual results this year.

Lawrence Ho and President Duterte signals a continuing presence in a solid ramp up in Manila.

The takeaway

 Market consensus has put a $27.87 PT on the stock. Analysts believe that now within the virus context, it is trading at near fair value. My own view from an industry perspective is contrarian to these calls. I believe and have believed for two years that MLCO has remained undervalued trading in a very narrow range. Going through the history I found that much of the periodic downside volatility I discovered in the trade was related to unlucky play. And that was fueled by the company’s aggressive posture in marketing to VIPs and taking on a bit more risk in bad debts to support the arrival in 2018 of the Morpheus Tower $1.2B investment at City of Dreams.

 There is also the inherent volatility of the Macau market in general where since 2015, Beijing assaults on money laundering and junkets have bruised the VIP business. The macro China economic woes (pre-virus) likewise had their impact on the sector.

 CEO Lawrence Ho is among the industry’s most effective asset allocators. Yet his decisions at times, such as a sudden pull out from a highly touted deal in the Russian Far East., and a quick pivot to Cyprus have raised some eyebrows among investors. His more recent move to acquire James Packer’s stake in Crown Resorts for US$1.2B triggered several calls I had from hedge fund friends questioning the move on several grounds. Mostly they expressed concern about a growth trajectory in the Australian market with new capacity coming on line. Second, one associate, an admirer of Ho’s, questioned whether “Lawrence has the penchant to bite off more than he can chew”. He believes that these moves are part of what keeps the stock “hostage in a narrow range”.

 While I believe that MLCO may be fairly valued by traditional metrics, I think the potential of the stock based both on management effectiveness under pressure and the global vision of Lawrence Ho to move his asset base to places where he expects the highest risk/reward ratios is worth a premium to the stock.

 MLCO has always been relatively cheap among its peers for a company whose vision reaches beyond Asia. US based giants have fortress positions in Las Vegas. Ho has apparently bypassed opportunities there and pivoted to Cyprus and Australia beyond Macau and Manila. Therefore, in time, MLCO will be a strong contender in Asia and global in scope with its shares still “held hostage” as my hedge fund friend noted, by aspects of the company it has not valued.

 I believe post virus in full recovery mode in Macau, plus continuing strong growth trends in Manila and the possibilities both for the Cyprus project and Japan, that MLCO looks like it could be a $35 stock to me bought at a price now that could afford a larger opening position than many peers.

 

Everyone’s selling? Buy.

 

 

 

 

 

 

4. Wheelock’s Privatisation Offer

Image 33587937151582785130439

Wheelock (20 HK) has announced a privatisation Offer from Admiral Power (a wholly-owned vehicle of Peter Woo), by way of a Scheme, at an aggregate Scheme Offer Price of HK$71.90 (a 52.2% premium to last close), comprising one share in Wharf Holdings (4 HK), one share in Wharf Real Estate Investment (1997 HK) (WREIC) and HK$12, for every share of Wheelock.

The Offer price will not be increased. Apart from the distribution of any dividend for FY19, the Offer Price will be netted of any other distribution. A second interim dividend of HK$1.05/share was declared in FY18. 

There is no obligation to make a mandatory general offer for either Wharf or WREIC.

Disinterested shareholders comprise 624.9mn shares, or 30.44%. Therefore the blocking stake at the Scheme Meeting is 62.49mn shares or 3.044% of shares out. 

Wheelock is a Hong Kong-incorporated company, therefore the headcount test does not apply. 

This deal appears sufficiently structured to get up. 

As always, more below the fold.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Hong Kong: Governments and Policies Adapting to Critical Known Unknown and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. Governments and Policies Adapting to Critical Known Unknown
  2. Costs of and Response to COVID-19
  3. Huge Short Covering Last Week
  4. Fault Lines and Positive Surprises: Buy Car Makers
  5. Cafe De Coral (341): Time to Go Long

1. Governments and Policies Adapting to Critical Known Unknown

Chart%203c

We argued in Lack of US market & macro volatility both reassuring and troubling that “the market’s willingness to look through domestic political and geopolitical events suggests that only a significant exogenous or endogenous shock currently beyond markets’ radar screens (an “unknown unknown”) is likely to really move the needle”.

That unknown unknown, a “black swan” event, has turned out to be a global viral pandemic on a scale not seen since the Spanish influenza pandemic of 1918-1919.

The coronavirus outbreak is now three months old but governments, central banks, corporates and households still face a critical known unknown, in our view, namely the total number people who had the coronavirus, acquired immunity and are no longer contagious and who currently carry the coronavirus and are thus potentially infectious.

This includes people who have not been clinically tested – more than 99.9% of the world’s population. We estimate that only 3.3 million people (4 out of every 10,000) have been tested for coronavirus, although testing data are patchy and often released with a lag. The main reason so few people have been tested is the still limited capacity to rapidly and reliably test a very large number of people.

In econometric terms that is a very small sample from which to extrapolate country-wide trends. One implication is that the actual mortality rate may be far smaller than reported.

The high number of tests-per-capita conducted in countries such as South Korea has been posited as an explanation for their relatively low number of coronavirus-related deaths. However, other factors have likely been at play, including the timing of clinical tests, demographics, national health systems’ capacity to treat infected patients and the timing and efficacy of self-isolation and self-distancing policies, including country “lockdowns”.

For now what policy-makers know they don’t know will likely continue to influence country-specific containment plans, as well as domestic measures to support economic growth while ensuring the functioning of financial markets.

2. Costs of and Response to COVID-19

Capture

As the epicentre of the coronavirus pandemic shifts from Europe to the US and the number of deaths and infection cases reach new highs, the costs of the crisis are beginning to be revealed. In Singapore economic activity contracted in 1Q20 at a faster pace than at the worst point during the GFC while Chinese industrial profits were down 38% in the first two months of the year. Despite this we are cautiously optimistic that Asian economic activity led by China will pick-up in the second half of the year. We are much more worried about advanced economies where policy mis-management threatens to tip the world economy into recession.

3. Huge Short Covering Last Week

Image

We take a look at the latest SFC data released today evening on short position reporting in Hong Kong for the week ended 20 March 2020.

Total short notional in Hong Kong decreased from HKD 430.33bn to HKD 382.05bn over the week due to lower stock prices and short covering.

Shorts decreased in all sectors led by Financials (US$375m), Real Estate (US$272m), Consumer Discretionary (US$216m), Information Technology (US$162m) and Consumer Staples (US$136m).

4. Fault Lines and Positive Surprises: Buy Car Makers

Image 74356928621585274600719

Where are the weakest points in the global economy that could send activity into a tailspin and threaten the banking system? Italy would seem to be the prime candidate for collapse. The economy was already flirting with recession but will definitely enter one when first quarter 2020 data are published. Weak economies are always the most vulnerable when an external shock hits. Italy’s banks are bound to require a bailout from either the government or the ECB – neither of which are well placed to provide the capital. 

5. Cafe De Coral (341): Time to Go Long

Image 49219846321585213052495

The ongoing protests against China’s ruling power over Hong Kong were the chief reason why investors left Cafe de Coral. Fundamentally, the company is not out of the woods yet, however, with China’s lockdown is soon to be over and no overseas travel to start anytime soon, mainland Chinese tourists may flock to either Macau (therefore packing up Wynn Macau Ltd (1128 HK) and Melco International Development (200 HK) or Hong Kong.

Compared to the other chain restaurant names listed in Hong Kong Hang Seng Index (HSI INDEX) , Cafe de Coral is trading at the lowest valuation and it has the lowest exposure to hotpot menu. 

The soon-to-reopen China with pent up frustrations of being locked down and less likely able to travel overseas will provide the much-needed revenue increase for Cafe de Coral. Cover your shorts and start buying. 

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Hong Kong: Costs of and Response to COVID-19 and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. Costs of and Response to COVID-19
  2. Huge Short Covering Last Week
  3. Fault Lines and Positive Surprises: Buy Car Makers
  4. Cafe De Coral (341): Time to Go Long
  5. Tracking the Daily COVID-19 Cases for 10 Major Countries

1. Costs of and Response to COVID-19

Capture

As the epicentre of the coronavirus pandemic shifts from Europe to the US and the number of deaths and infection cases reach new highs, the costs of the crisis are beginning to be revealed. In Singapore economic activity contracted in 1Q20 at a faster pace than at the worst point during the GFC while Chinese industrial profits were down 38% in the first two months of the year. Despite this we are cautiously optimistic that Asian economic activity led by China will pick-up in the second half of the year. We are much more worried about advanced economies where policy mis-management threatens to tip the world economy into recession.

2. Huge Short Covering Last Week

Image

We take a look at the latest SFC data released today evening on short position reporting in Hong Kong for the week ended 20 March 2020.

Total short notional in Hong Kong decreased from HKD 430.33bn to HKD 382.05bn over the week due to lower stock prices and short covering.

Shorts decreased in all sectors led by Financials (US$375m), Real Estate (US$272m), Consumer Discretionary (US$216m), Information Technology (US$162m) and Consumer Staples (US$136m).

3. Fault Lines and Positive Surprises: Buy Car Makers

Image 74356928621585274600719

Where are the weakest points in the global economy that could send activity into a tailspin and threaten the banking system? Italy would seem to be the prime candidate for collapse. The economy was already flirting with recession but will definitely enter one when first quarter 2020 data are published. Weak economies are always the most vulnerable when an external shock hits. Italy’s banks are bound to require a bailout from either the government or the ECB – neither of which are well placed to provide the capital. 

4. Cafe De Coral (341): Time to Go Long

Image 49219846321585213052495

The ongoing protests against China’s ruling power over Hong Kong were the chief reason why investors left Cafe de Coral. Fundamentally, the company is not out of the woods yet, however, with China’s lockdown is soon to be over and no overseas travel to start anytime soon, mainland Chinese tourists may flock to either Macau (therefore packing up Wynn Macau Ltd (1128 HK) and Melco International Development (200 HK) or Hong Kong.

Compared to the other chain restaurant names listed in Hong Kong Hang Seng Index (HSI INDEX) , Cafe de Coral is trading at the lowest valuation and it has the lowest exposure to hotpot menu. 

The soon-to-reopen China with pent up frustrations of being locked down and less likely able to travel overseas will provide the much-needed revenue increase for Cafe de Coral. Cover your shorts and start buying. 

5. Tracking the Daily COVID-19 Cases for 10 Major Countries

Covid 19d

In this report, we provide an update of the new cases of COVID-19 among 10 major countries, including the top 10 countries with COVID-19 cases (excluding China). From our previous report, Tracking the Daily COVID-19 Cases for 7 Major Countries (More Hope!), we have added three more countries including Switzerland, U.K., and the Netherlands due to their rapid increase in new cases in the past week. 

A combination of the U.S. Fed’s “QE Infinity,” U.S.’s $2 trillion stimulus bill, and growing optimism that the new cases of COVID-19 can be controlled in the U.S. and Europe have helped to stage turnaround of major equity markets around the world including S&P500 and KOSPI. We continue to believe that the peak daily cases of COVID-19 in the U.S. are likely to be in this 2 week period from March 23rd to April 5th. Numerous European countries included in the top 10 countries for COVID-19 cases are also likely to experience their peak daily cases during this period.

The number of COVID-19 cases has surged in the U.S. in the past week. According to the COVID Tracking Project, there were 418,810 people that were tested for this virus as of March 25th, up nearly 10x from on March 16th. As of March 25th, 15.2% of the people that were tested had positive results, up from 10.0% on March 16th. 

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Hong Kong: Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery
  2. Wheelock’s Privatisation Offer
  3. HKEx – Management’s Art of Saying Nothing

1. Melco Resorts: This Asian Gaming Leader Will Ignite Fast Post Virus Recovery

Macau chart

  • Melco is well positioned, it’s taken a big virus related hit but offers a very cheap entry point relative to peers.
  • Virus duration unknown, but we see a strong upside forming late Q3 to Q4 2020 from a low base.

2019 performance in mass subsection will ramp fast, but VIP will take longer to rebuild.

Buy when everyone sells, sell when everyone buys…”Warren Buffett

 As global markets precipitously dive over mounting fears that the coronavirus will evolve into a pandemic, we are reminded of the above quote attributed to Warren Buffett. It seems appropriate at this juncture to watch valuations crumble by the day and bear in mind that no matter the damage ultimately inflicted on stocks, at one point or another, the outbreak will peak and finally end.

 SARS, Swine Flu, Ebola and others as frightening as they were, ultimately peaked and faded around a 6 month time frame. We make no such forecasts here other than to stipulate we are using it as a benchmark duration only. Nine months or more cannot be ruled out. All that can be ruled out is that we are clearly not experiencing a revisit of the medieval black plague which swept through Europe and Asia for years during the 14th century and the latter day early 20th century Spanish flu pandemic which killed millions. World health authorities possess an armory of weapons to battle the virus that simply did not exist before. But the coronavirus will take its toll at all events.

 So the penultimate question now for investors is the same one raised through war, depression, recession, global financial crises or mass health emergencies. Do you take money off the table, run and hide until events play out? Or do you make bets now when good stocks are cheap and getting cheaper, then grit your teeth and twist the cork on a bottle of good champagne and hold it in place until macro disasters dissipate and send your bets now soaring with profits? And in the aftermath will you bask in the adulation of peers commending your genius for following that very penetrating notion of Warren Buffett at the top of this insight?

 The Asian gaming sector is rife with bargains now for those strong of heart and conviction in the longer term valuations

 The Asia gaming sector in particular has taken a huge beating and may well experience a continuing fall until the health scare passes and valuations return, or exceed pre-virus levels. The action on gaming stocks at first news of the virus breakout, puzzled many observers. Investors not only stood pat, but did some buying, keeping the sector remarkably immune from the unfolding health disaster—temporarily.

 It did not last. We now have a sector, along with broader markets, taking a major beating. Valuations have plunged. The cause and effect of the Asian sector in particular clearly shows a straight line between the collapse of the Macau customer flow and the anticipated damage it will in the end inflict on earnings and valuations this year.

 Added to that we have two days of plunge suggesting capitulation. Yet the virus doesn’t play by traditional market rules. Have we indeed experienced capitulation after a long bull trend? Whether after a standard bubble or a virus black swan we note that the market has left Asia gaming stocks at lows that invite serious consideration as entry points now for those with the risk profile.

 We have applied the Buffett principal to the situation and concluded that yes, for reasons we will detail here, we think It’s time to buy and buy strongly in the Asian casino sector. Valuations tumbled, but fundamentals are unchanged. It is in the interim period, between now and such a time when the virus finally abates and disappears, that the sector can expect to be hammered.

  As the sector get cheaper, the temptation to buy on the deep dips would normally kick in. Thus far we have noted in trading volume and various options plays the ongoing sentiment remains: Take money off the table and get out. The assumption: There will be plenty of time ahead where the sector will be cheap enough to dive back in when the waves of selling pressure begin to abate.

 Regardless of that well- worn attitude we see much value right now in the sector.

Consider Melco Resorts & Entertainment Inc.

Melco volatility and virus has brought the stock down to a bargain price.

We have selected one stock we believe offers the longest and most vibrant ramp up post virus: Melco Resorts & Entertainment Inc. (NASDAQ: MLCO). Overall we believe there is money to be made across the Macau sector as all the stocks have had their recent run ups destroyed. We have selected Melco as representative of a stock we believe has dropped to a level that makes it extremely attractive because of a friendly entry price compared with industry peers.

 Recovery from the virus disruption will be slow and steady but at some point in the process, pent up demand in mass will ignite and translate into a powerful earnings tide late this year. We like Melco’s low starting point, its quick response to the virus challenge, particularly in cutting Capex. The company announced it was postponing acquiring the second tranche of Crown Resorts(ASX:CWN) stock and making other judicious cuts which reduced its run rate during the crisis to around US$2.5M a day.

Macau has recovered from 2015 crackdowns and will find its way back by Q4 this year or before.

Furthermore, management has gone on record as promising to continue dividend payments for the knowable duration of the crisis. As a general sense, management is looking at a six month time line for a return to normal operations.

 Our thesis: Building a larger position pre-recovery at a smaller outlay. In theory you can now buy 3.5 shares of MLCO for every share of Las Vegas Sands Inc. (NYSE: LVS). You can also buy 6 shares of MLCO for every share of Wynn Resorts Ltd. at the price at writing. We expect the entire Macau gaming sector to ignite post recovery. All face the same headwinds, all will respond with similar forward momentum. But MLCO sits at a cheaper starting point with as sound a going forward recovery potential than any of its major peers.

 A quick glance at Melco (USD)

 Price at writing: $19.53

52wk range: $18.68 —$26.97

5 year high: Sept 2017: $31.21

Market cap: $8.982B

Beta: (5 yr monthly) 1.93

P/E: (ttm): 25.23

EPS: $0.77

Forward dividend and yield: $0.66 (3.38%)

 Our view: Based on its  global ambitions, surefooted asset allocation skills,  and operational flexibility, we believe MLCO has been undervalued even at its recent pre-virus highs.

 Pre-virus performance this month:

 Stock was at $22. 58

 This company’s 4Q19 and annual 2019 results are impressive:

 Q4 luck adjusted EBITDA hit a record, all time high propelled by a 17% increase in  the mass segment up 17% to $249M. Group wide EBITDA was $382M, but luck adjusted at $413M. MLCO played unlucky in Q4.

 A key metric we like: MLCO’s 2019 share of the Macau market rose 180bps to 16%—in a market showing a sector wide decline in VIP. Its properties proximity to the new light rail station is superior to many peers putting properties within 14 minutes of the ferry and 12 minutes from the airport. We believe this will contribute to an uptick in market share again once recovery begins probably in the back six months of this year.

 The company showed strong upsides in mass at all properties including its Manila operation yet at the same time it is facing market wide declines in VIP. The success of the Morpheus tower in Macau in premium mass in particular played a significant role in the solid performance.

City of Dreams Manila, a key player in vibrant growth in the Philippine gaming market.

 Capex going forward MLCO will continue to move ahead on its $1.35B investment in the Phase One expansion of Studio City, a project aimed directly at the heart of the mass and premium mass market segments by adding 600 rooms and a water park.

 Cyprus: MLCO’s EBITDA from its temporary casinos rose to $9M. The properties are a toe-dip into what is coming there in the integrated resort project with a large footprint expected to debut in late 2021. The property will be de facto the first ever, modern integrated casino resort built to service the European /Middle East market. City of Dreams Mediterranean will cost just over $617M to complete and the capex on the project will continue through the virus interregnum. The property will open with a modest game spread of 100 tables and 1,000 slot machines.

City of Dreams Cyprus coming in 2021 could be a game changer in Europe.

We think the Cyprus property will quickly absorb the capacity and provide a rationale to MLCO to scale. It will open with 500 rooms, but we note that the property will sit on 91 acres controlled by MLCO. It is a clear first mover advantage for the company in  the European facing market.

 Japan: MLCO has been among the most aggressive pursuers of one of the three Japan IR licenses to be issued late this year or early 2021. It has pivoted from an Osaka target to a Yokohama first strategy going head to head with Las Vegas Sands. In the last quarter it’s PL showed it had spent $18M on various initiatives in Japan. Our industry source on the ground in Tokyo believes that “it will be a tough down to the wire contest between the two companies. The estimates of sunk cost for a Yokohama IR have risen as high as $18B. It’s entirely possible that MLCO and LVS will wind up in some kind of joint venture with a third, Japan based partner.”

 MLCO cash and coronavirus burn rate

 At writing, MLCO is sitting on $900M in cash against $3B in long term debt exclusive of Studio City and the Cyprus project.

Management now estimates the burn rate during the virus challenge at $2.5M per day fixed expenses, inclusive of some cost cuts already made in both operations and capex expense.

 Their outlook at present foresees no substantive recovery beginning before Q3 this year. Cash reserves are considered more than adequate to meet that contingency. However, management sees a ramp up back to normalcy starting slower and not gaining powerful momentum until late in Q4 or early 1Q21. Our take: Most of the virus downside is already baked in.

 In effect management sees Q1 and Q2 as essentially lost in terms of contribution to annual results this year.

Lawrence Ho and President Duterte signals a continuing presence in a solid ramp up in Manila.

The takeaway

 Market consensus has put a $27.87 PT on the stock. Analysts believe that now within the virus context, it is trading at near fair value. My own view from an industry perspective is contrarian to these calls. I believe and have believed for two years that MLCO has remained undervalued trading in a very narrow range. Going through the history I found that much of the periodic downside volatility I discovered in the trade was related to unlucky play. And that was fueled by the company’s aggressive posture in marketing to VIPs and taking on a bit more risk in bad debts to support the arrival in 2018 of the Morpheus Tower $1.2B investment at City of Dreams.

 There is also the inherent volatility of the Macau market in general where since 2015, Beijing assaults on money laundering and junkets have bruised the VIP business. The macro China economic woes (pre-virus) likewise had their impact on the sector.

 CEO Lawrence Ho is among the industry’s most effective asset allocators. Yet his decisions at times, such as a sudden pull out from a highly touted deal in the Russian Far East., and a quick pivot to Cyprus have raised some eyebrows among investors. His more recent move to acquire James Packer’s stake in Crown Resorts for US$1.2B triggered several calls I had from hedge fund friends questioning the move on several grounds. Mostly they expressed concern about a growth trajectory in the Australian market with new capacity coming on line. Second, one associate, an admirer of Ho’s, questioned whether “Lawrence has the penchant to bite off more than he can chew”. He believes that these moves are part of what keeps the stock “hostage in a narrow range”.

 While I believe that MLCO may be fairly valued by traditional metrics, I think the potential of the stock based both on management effectiveness under pressure and the global vision of Lawrence Ho to move his asset base to places where he expects the highest risk/reward ratios is worth a premium to the stock.

 MLCO has always been relatively cheap among its peers for a company whose vision reaches beyond Asia. US based giants have fortress positions in Las Vegas. Ho has apparently bypassed opportunities there and pivoted to Cyprus and Australia beyond Macau and Manila. Therefore, in time, MLCO will be a strong contender in Asia and global in scope with its shares still “held hostage” as my hedge fund friend noted, by aspects of the company it has not valued.

 I believe post virus in full recovery mode in Macau, plus continuing strong growth trends in Manila and the possibilities both for the Cyprus project and Japan, that MLCO looks like it could be a $35 stock to me bought at a price now that could afford a larger opening position than many peers.

 

Everyone’s selling? Buy.

 

 

 

 

 

 

2. Wheelock’s Privatisation Offer

Image 33587937151582785130439

Wheelock (20 HK) has announced a privatisation Offer from Admiral Power (a wholly-owned vehicle of Peter Woo), by way of a Scheme, at an aggregate Scheme Offer Price of HK$71.90 (a 52.2% premium to last close), comprising one share in Wharf Holdings (4 HK), one share in Wharf Real Estate Investment (1997 HK) (WREIC) and HK$12, for every share of Wheelock.

The Offer price will not be increased. Apart from the distribution of any dividend for FY19, the Offer Price will be netted of any other distribution. A second interim dividend of HK$1.05/share was declared in FY18. 

There is no obligation to make a mandatory general offer for either Wharf or WREIC.

Disinterested shareholders comprise 624.9mn shares, or 30.44%. Therefore the blocking stake at the Scheme Meeting is 62.49mn shares or 3.044% of shares out. 

Wheelock is a Hong Kong-incorporated company, therefore the headcount test does not apply. 

This deal appears sufficiently structured to get up. 

As always, more below the fold.

3. HKEx – Management’s Art of Saying Nothing

  • Weak Quarter:Hong Kong Exchanges and Clearing (388.HK) [HKEx] reported EPS results of HKD 1.57  – down 11% linked quarter.  The weak results are primarily be attributed to reduced investment income on the back of the lower interest rate environment, and higher operating expenses related to both staff and non-staff costs.  
  •  No Real Discussion of 2020:  Velocity and ADTV no doubt will decline, as tech IPOs get delayed and many large travel-related companies are more likely to file for bankruptcy. Mainland China’s debt-laden developers were already facing a cash-crunch prior to the corona virus pandemic and problems are now exacerbated. Most builders only have a cash buffer of just three months. The mainland Chinese government’s lockdown and travel restrictions are in month two – intimating that developer defaults will accelerate in March 2020. It’s probably fair to say that the 105% Northbound growth in 2019 was no more than a head fake.  
  • Focus, Focus, Focus: This is a management tea, who all too often, gets distracted and fails to meet both near and long-term targets. That outrageous London Stock Exchange bid of USD 39 bn alone should have cost Charles Li his CEO title. Nevertheless, we are hopeful that HKEx has learned that this failure/distraction has caused an enormous loss of market confidence. 

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.

Brief Hong Kong: Huge Short Covering Last Week and more

By | Daily Briefs, Hong Kong

In this briefing:

  1. Huge Short Covering Last Week
  2. Fault Lines and Positive Surprises: Buy Car Makers
  3. Cafe De Coral (341): Time to Go Long
  4. Tracking the Daily COVID-19 Cases for 10 Major Countries
  5. Cosco Shipping (517 HK): Stock +6% YTD; 74 Managers Should Start to Care About Unlocking Value

1. Huge Short Covering Last Week

Image

We take a look at the latest SFC data released today evening on short position reporting in Hong Kong for the week ended 20 March 2020.

Total short notional in Hong Kong decreased from HKD 430.33bn to HKD 382.05bn over the week due to lower stock prices and short covering.

Shorts decreased in all sectors led by Financials (US$375m), Real Estate (US$272m), Consumer Discretionary (US$216m), Information Technology (US$162m) and Consumer Staples (US$136m).

2. Fault Lines and Positive Surprises: Buy Car Makers

Image 16957330731585274683132

Where are the weakest points in the global economy that could send activity into a tailspin and threaten the banking system? Italy would seem to be the prime candidate for collapse. The economy was already flirting with recession but will definitely enter one when first quarter 2020 data are published. Weak economies are always the most vulnerable when an external shock hits. Italy’s banks are bound to require a bailout from either the government or the ECB – neither of which are well placed to provide the capital. 

3. Cafe De Coral (341): Time to Go Long

Image 26628375121585206598860

The ongoing protests against China’s ruling power over Hong Kong were the chief reason why investors left Cafe de Coral. Fundamentally, the company is not out of the woods yet, however, with China’s lockdown is soon to be over and no overseas travel to start anytime soon, mainland Chinese tourists may flock to either Macau (therefore packing up Wynn Macau Ltd (1128 HK) and Melco International Development (200 HK) or Hong Kong.

Compared to the other chain restaurant names listed in Hong Kong Hang Seng Index (HSI INDEX) , Cafe de Coral is trading at the lowest valuation and it has the lowest exposure to hotpot menu. 

The soon-to-reopen China with pent up frustrations of being locked down and less likely able to travel overseas will provide the much-needed revenue increase for Cafe de Coral. Cover your shorts and start buying. 

4. Tracking the Daily COVID-19 Cases for 10 Major Countries

Covid 19d

In this report, we provide an update of the new cases of COVID-19 among 10 major countries, including the top 10 countries with COVID-19 cases (excluding China). From our previous report, Tracking the Daily COVID-19 Cases for 7 Major Countries (More Hope!), we have added three more countries including Switzerland, U.K., and the Netherlands due to their rapid increase in new cases in the past week. 

A combination of the U.S. Fed’s “QE Infinity,” U.S.’s $2 trillion stimulus bill, and growing optimism that the new cases of COVID-19 can be controlled in the U.S. and Europe have helped to stage turnaround of major equity markets around the world including S&P500 and KOSPI. We continue to believe that the peak daily cases of COVID-19 in the U.S. are likely to be in this 2 week period from March 23rd to April 5th. Numerous European countries included in the top 10 countries for COVID-19 cases are also likely to experience their peak daily cases during this period.

The number of COVID-19 cases has surged in the U.S. in the past week. According to the COVID Tracking Project, there were 418,810 people that were tested for this virus as of March 25th, up nearly 10x from on March 16th. As of March 25th, 15.2% of the people that were tested had positive results, up from 10.0% on March 16th. 

5. Cosco Shipping (517 HK): Stock +6% YTD; 74 Managers Should Start to Care About Unlocking Value

2h19%20revenues%20comparison%20cosco%20shipping

Cosco International Holdings (517 HK) has been a dreadful performer for years. Many would refer to it as a classic HK value trap. However, YTD the stock is up 6% which is impressive given overall equity markets performance.

The company just published its FY19 results which saw a sharp fall in revenues (-66% YoY as a business line was discontinued) but a large increase in profits (+16% YoY as associate income from various JVs increased almost 400%).

Most importantly in times of crisis is Cosco’s cash position which remains extremely large at 6.3 billion HKD (4.08 HKD/share) vs its share price at 2.2 HKD. The dividend payout ratio will be 76% which is in-line with the percentage payout the past few years. The total annual dividend yield is 7.8%. NAV/share is 5.17 HKD which means the stock trades at 0.42x NAV.

Most importantly, the company has now announced the details of its option scheme for 74 of its managers. This is the first time an option program has been announced and it is linked to higher ROE, rising operating revenue and EVA. The entire option pool is valued at 67M HKD (8.6M USD) at today’s valuation. Shareholders will have to approve the option scheme in an SGM on 06/04/20.

The question is: will this finally incentivize management to unlock value? No complicated financial engineering is needed. It is extremely straight forward. The cash balance of the company is nearly 200% higher than its current stock price. Cosco’s International Enterprise Value is NEGATIVE 2.6 billion HKD. Management can do a few things to better utilize its cash: 1) accretive M&A; 2) special dividends and 3) buybacks. All of these should increase the stock price. The biggest risk to investors is that management keeps on twiddling their thumbs and does not use its cash to create shareholder value.

You are currently reading Executive Summaries of Smartkarma Insights.

Want to read on? Explore our tailored Smartkarma Solutions.