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Indonesia

Brief Indonesia: Leong Hup IPO: A Finger Licking Good Price and more

By | Daily Briefs, Indonesia

In this briefing:

  1. Leong Hup IPO: A Finger Licking Good Price
  2. Vietnam’s Big Investment Secret: Foreign Inflows Surge
  3. Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN
  4. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

1. Leong Hup IPO: A Finger Licking Good Price

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Leong Hup International (LEHUP MK) is one of the largest producers of poultry, eggs and livestock feeds in Southeast Asia. It has launched a downsized IPO to raise gross proceeds of RM275 million ($67 million). The IPO would be the biggest in Malaysia since Lotte Chemical Titan Holding (TTNP MK) listed in July 2017.

In our IPO initiation note, we noted that Leong Hup’s ability to command a premium rating of around 20x P/E faces challenges. In the event, Leong Hup has pared back its ambition and launched its IPO at a rating of 15x FY18 P/E, according to press reports. We believe Leong Hup’s fundamentals are mixed but would participate in the IPO due to the attractive valuation.

2. Vietnam’s Big Investment Secret: Foreign Inflows Surge

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  • March saw another strong month of cross-border capital inflows into Vietnam financial assets
  • Underlying flow index shows strong momentum hits value 76.9 (range 0-100)
  • Vietnam flows are moving with similar cross-border flow cycle as China and Asian EM

3. Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN

Prabowo persists in refusing to acknowledge the election outcome, while attempting to delegitimize electoral authorities.  He has rejected an emissary from the president and declared victory four times, while top figures in his campaign are issuing bellicose remarks about ‘no return’ and ‘total war’.  A Third Clerics Conference is undergoing preparation and Prabowo seems likely to eventually deploy Islamist demonstrators, who have proven their ability to inundate Jakarta.  Security forces are assembling personnel and preparing for confrontations, although these might not occur until late May or June.  Ultimately, a second term for Widodo is not in jeopardy.  But, in the meantime, disruptions seem likely to damage Indonesia’s image, spook investors (especially domestic) and pressure the exchange rate. 

Politics: Tensions remain elevated as Gerindra Chair Prabowo Subianto has shown no signs of wavering from his stance that he is the rightful winner of the presidential election.  He has conducted four victory celebrations to date, while rejecting Quick Count indications of the result, impugning the work of the General Election Commission (KPU) and refusing to meet with the president’s ‘emissary’ (Coordinating Maritime Affairs Minister Luhut Panjaitan).  Bellicose rhetoric has emanated from top aides: the chair of Prabowo’s official campaign team, former Military Chief Gen (ret) Djoko Santoso, insisted that the declaration of a win with 62 percent of the vote is a “point of no return”.  The Prabowo supporter Amien Rais, founder of the National Mandate Party (Pan), warned that, “If [the administration] wants to engage in ‘total war’, we are better able to wage it.”  Prabowo conducted a rally for campaigners on 24 April but prohibited journalists from covering it (when one activated a camera, he reportedly suffered a beating).  The Islamic Defenders Front (FPI) is calling for a Third Conference of Clerics to address election cheating.  Tensions could subside if Prabowo changes course – which, given his mercurial character – could occur at any time.  But indications to date suggest he will continue rejecting the Real Count, eventually reject the official count and finally reject a Constitutional Court ruling if it is adverse.  He would then likely mobilize strident Islamic groups to protest, with potential for disruptions in Jakarta (Page 2).  Security officials generated headlines by transferring several Police Mobil Brigade (Brimob) companies from remote provinces to Jakarta (p. 4).  Prabowo’s running mate, Sandiaga Uno, ruled out returning to the Jakarta vice‑governor post (p. 5).

Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news.  The writer is Kevin O’Rourke, author of the book Reformasi.  For subscription info please contact: <[email protected]>.

Justice: State Power Company (PLN) Chief Director Sofyan Basir became a suspect in the Riau-1 powerplant case.  Since 2014 he has dominated decisions on structuring pro­jects, and his removal may therefore trigger changes.  State Minister for State Enterprises Rini Soemarno will likely attempt to impose control through PLN’s interim head (p. 6).

Policy News: For the second time this month, the labor minister made uncharacteristic calls for regulatory reform to realize flexibility and encourage investment.  But he has also pledged to satisfy demands made during the campaign by labor unions (p. 8).

Vote Count: With 36% of the Real Count uploaded, Widodo has 56.1% (p. 11).

Economics:  GDP growth may have reached 5.2 percent during the first quarter, according to Bank Indonesia (BI).  First quarter revenues are low and budget cuts may receive consideration (p. 13). 

4. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

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  • World (gross) cross-border flows have rebounded strongly
  • Global Liquidity and World Business cycle are increasing driven by cross-border flows
  • Strong cross-border flows drive outperformance of cyclicals and non-US markets

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Brief Indonesia: Bank Central Asia (BBCA IJ) – Underlying Optimist – On the Ground in J-Town and more

By | Daily Briefs, Indonesia

In this briefing:

  1. Bank Central Asia (BBCA IJ) – Underlying Optimist – On the Ground in J-Town
  2. Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala
  3. All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin
  4. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal
  5. The Global Recovery Narrative Crumbles

1. Bank Central Asia (BBCA IJ) – Underlying Optimist – On the Ground in J-Town

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A conversation with Bank Central Asia (BBCA IJ) management revealed a relatively positive outlook after a strong start to the year, with politics and security being its red flag to this view.

The bank achieved +13% YoY loan growth in 1Q19 mainly driven by corporate lending, which grew by 15.8% and out of this investment-driven loans grew more quickly. 

Consumer lending was altogether more sluggish with +7.9% over the quarter, with mortgage loans outperforming with +11% growth, with some very attractive promotional rates beings offered, and motorcycle loans seeing a notable slowdown. 

Funding wise, the bank continues to shine with a CASA ratio of 76.8% and continues to grow in its CASA of over +7% in 1Q19, despite an overall tighter liquidity environment. This was reflected in an improvement in the banks NIM, which increased to 6.19% in 1Q18. 

Bank Central Asia (BBCA IJ) continues to innovate on its online offering, with a number of new initiatives. This helps the bank maintain its dominance in transactional banking in Indonesia.

BCA remains the best quality bank in Indonesia, in terms of service and management, which is conservative yet dynamic, with a keen focus on returns but always with the appropriate level of risk exposure in mind. It has the lowest cost of funds amongst the major banks, given its dominance in transactional banking, which means it has a high CASA ratio.  The bank has one of the lowest NPL ratios in the sector at 1.5% and with a provision/NPL coverage of 171%. According to Capital IQ Consensus, it trades on 21.0x FY20E PER and 18.5x FY21E PER, with forecast EPS growth of +12.4% and +13.4% for FY20E and FY21E respectively. It trades on a PBV of 3.5x FY20E with forecast ROE of 18% and ROA of 3.4%. Bank Central Asia (BBCA IJ) is a core holding in Indonesia and should be bought on any major correction in the overall market. 

2. Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala

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Last Week in Event SPACE …

  • As Nexon Co Ltd (3659 JP)‘s soap opera-esque “updates” on the control-change plod on, the “certainty” on this situation is less than great.
  • In the next six weeks, two important games (BTS World and Seven Deadly Sins) for Netmarble Games (251270 KS) will be launched; the final bidder(s) for NXC Corp/Nexon should be known plus there should be clarity on the timeline for the Netmarble Neo IPO. 
  • Trump Trade Wars provide a positive backdrop for Lynas Corp Ltd (LYC AU) in the near-medium-term.
  • From a tick-the-box perspective, Nissan Motor (7201 JP)‘s new board looks highly diverse.  If they take their jobs seriously and learn about auto manufacturing and sales, the board holds promise.
  • Harbin Electric Co Ltd H (1133 HK)‘s Offer is expected to get up after an unprecedented extension provides a last-minute reprieve.
  • The Murakami Tender Offer for Kosaido Co Ltd (7868 JP) fails. Spectacularly so.
  • Crane Co (CR US)‘s proposal for Circor International (CIR US) will fail unless it bumps and opens up a dialogue with Circor’s board.
  • Ayala Corporation (AC PM) buys back shares from Mitsubishi, removing the placement overhang.
  • Plus other events, CCASS movements and Mood Spins.

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

EVENTS

Nexon Co Ltd (3659 JP) (Mkt Cap: $14bn; Liquidity: $37mn)

A lot of the media coverage of the Nexon situation appears to be a kind of breathless updating of possible changes in situation trafficked by gossipmongers. The level of trustworthiness to the “news” is low and outlets rarely note that what is now being reported does not report with what was previously being reported as “likely.” Travis Lundy suggests the level of confidence one should have about the expectations the media is implying needs to be checked. There is simply not enough meat in the “facts” as reported to strongly inform market observers & participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even whether there could be a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

Delays were to be expected. and the possibility of significantly longer delays exists. The structure is convoluted – less easy than just buying Nexon outright. The structure could easily deter many buyers unless it is crystal clear that the rest of the stuff inside NXC is excluded from the sale. If delays are being implemented because major bidders can’t get the funds, that is either bad news on its own, or there is something else going on. If KJJ really wants a great premium when he decides to sell, he may turn this deal down – whoever the winning bid comes from.

  • The constant refrains about how Disney, EA, or Amazon might bid are probably misplaced. Travis Lundy doesn’t see any of them bidding. The US-China Trade War means US corporate buyers are not going to be the best buyers of game assets where 50% of revenue and 100% of profits come from China.
  • MBK/Tencent or KKR/Tencent is probably still the bidder to beat, as that consortium has been since the beginning. MBK would find it the easiest to take a sharp knife to costs. Tencent would find it easiest to buy 30-40% and then stay on the sidelines while someone else made it better. Neither Netmarble nor Kakao are likely to be the best buyers for this.
  •  This opportunity has been a great one to range-trade. In general, it has been “buy the dips, lighten up after it pops 5-10%. Rinse. Repeat.” Travis now views this as a low-quality Bullish trade. It is lower quality than it was 3-4 months ago because of reduced ability to range-trade and harvest gamma before a decision is made. The time decay is perceived to be quite strong now. That means sizing would probably be smaller now than it was at the same price or slightly lower in January. 

(link to Travis’ insight: Nexon: Continuing Question Marks)


Netmarble Games (251270 KS) (Mkt Cap: $7.9bn; Liquidity: $20mn)

The three major drivers of Netmarble’s stock price include the upcoming IPO of 80.6%-held Netmarble Neo (and the official global launch of the mobile RPG The King of Fighters Allstar game on May 9th), the launch of the BTS World game, and the eventual resolution of the NXC Corp/Nexon M&A situation. 

  • Douglas Kim believes a non-Netmarble Games entity such as MBK or Tencent Holdings (700 HK) will be the final bidder for Nexon. It was reported in early May that the Netmarble and MBK partnership broke off at the last minute as MBK determined it may not need a strategic investor to manage Nexon – key personnel in Nexon (excluding the founder Kim Jung-Joo) already play significant roles in directing and managing the company.
  • The market has been concerned about Netmarble potentially overpaying for NXC Corp with overstretched debt financing, and if Netmarble fails to be the final bidder for NXC Corp, this is probably a positive for the company. If the final bidder is MBK (only), this will also have an added positive impact on Netmarble as there have been fears that if Tencent acquires NXC Corp, this will potentially add to the competitive pressures of the gaming industry in Korea. 
  • These events, followed by an announcement of the Netmarble Neo IPO and a successful launch of the BTS World game should also positively impact Netmarble. In terms of earnings pickup, the consensus expects Netmarble to experience a turnaround starting 2Q19, with operating profit estimates of ₩46bn in 2Q19, up from ₩34bn in 1Q19. The consensus expects the company to further improve its operating profit to ₩100bn in 3Q19. 

(link to Douglas’ insight: Netmarble Games: The Upcoming Netmarble Neo IPO, Launch of BTS World Game, and the Nexon M&A)


Lynas Corp Ltd (LYC AU) (Mkt Cap: $1.1bn; Liquidity: $9mn)

Travis Lundy discusses the Lynas situation which appears to have changed dramatically this week. Lynas believes Malaysia will decide things the right way, which will mean the infamous December 4th Letter from the AELB (Atomic Energy Licensing Board) will be withdrawn, Malaysia approves the CondiSoil route for disposal of the WLP residue there now, and tthe license will get renewed with adequate transition time to enable continued buildup of WLP before sourcing of cracked and leached material exported from Australia can be arranged. This is the bet here. 

  • Travis thinks Lynas will need to create a new pricing system for its product. Its customers should be willing to pay a price which is not explicitly tied to Chinese onshore pricing with all the risk that entails. If its customers want to ensure Lynas stays in business, Lynas has to be able to charge what it needs to in order to stay in business. Western and Japanese companies with good technology to increase processing expertise to enable better product and higher margins will be happy/willing to engage with Lynas for the basic reason that Lynas is not Chinese. I’d note that they’d engage with the buyer of Lynas assets as well if Lynas went under, but the issue here is not bankruptcy but speed of increased capacity rollout.
  • This would suggest that partner companies with cash to invest should be willing to project-finance some portions of the capital and/or expansion. If Lynas needed or wanted to raise capital by issuing a convertible bond of a few hundred million dollars, Travis expects doing so would be “easy” in the near-term.
  • Travis is bullish the stock price near-term, not because of fundamentals, but due to the a) Trump Trade Wars being a good thing for product pricing and demand for access, and b) Geopolitical issues helping Malaysia come to the “right” decision regarding license renewal. He would not want to be short here anymore. Because the growth and value of long-term product pricing is so far out in the future, what constitutes “fair” for the stock is obviously tough to calculate with any confidence, so the “Bullish” label is really about covering the short.

(link to Travis’ insight: Trump Trade Means Lynas Capex Easier)


Nissan Motor (7201 JP) (Mkt Cap: $26bn; Liquidity: $115mn)

The new board of Nissan, as proposed by Nissan’s Provisional Nomination and Compensation Advisory Council established after the independent committee on governance proposed its measures in March, has 11 members, with two each nominated from Nissan and Renault SA (RNO FP) and seven coming in as independent directors.

  • The board is now set up to be Team Renault, Team Nissan, and seven (theoretically) independents. The important angle here is to try to understand where the chips might fall if push comes to shove, because the Revised Alliance Master Agreement requires that Renault not propose measures to the shareholders which are not supported by the Nissan board, and not vote against measures which are proposed by the board. Doing so would breach the RAMA and would allow Nissan to buy more Renault shares.
  • Only at the end of June – assuming all goes to plan – will the seven new members of the new Board take their seats. Renault pushing hard now when the majority of current board members will change in June seems to be insensitive to the nature of boards and board members’ responsibilities.  Should there be a strong dispute between Renault and Nissan about the process and timing of discussing deeper capital ties, Travis expects the ball to fall in the court of “Not Now” and “Not Yet.”
  • At 0.57x book on Nissan, it is difficult to be bearish. And it seemed pretty clear from the earnings meeting that Saikawa-san and others thought that the low forecast for FY19 (to March 2020) was reasonably conservative and was designed to flush out all the bad news. Nissan has decided to shrink its volume presence in the US to raise profitability per vehicle, and it is clear that there have been measures to reduce costs through redundancies. 
  • Travis remained inclined to think that RNO is the right trade to be long here compared to Nissan but is surprised that Renault is now down to such a low PBR. He was inclined to think that the significant slowdown in the Chinese market is a net headwind to both Nissan and Renault, but expects that the heightening of trade friction between China and the US could favour Japanese brands at the expense of US brands.

(link to Travis’ insight: Nissan’s New Board and Management Developments)


Briefly …

One Equity placed out 6.5mn shares of Celltrion Healthcare (091990 KS) at a final price of ₩60,100, an 8% discount to last close, similar to the discount back in September last year. There is a 90-day lockup on One Equity’s remaining 10% stake and it is possible Ion will reload. (link to Sanghyun Park‘s insight: Celltrion H Block Deals Priced at Floor: More Short Entry Points Should Be On the Way

M&A – ASIA-PAC

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $991mn; Liquidity: $3.5mn)

With acceptances totaling 85.84% of shares out as at the Closing Date (20 May), just short of the 90% acceptance condition, in an unprecedented move, the SFC granted an extension for Harbin’s Offer until the 19 July (Second Closing Date). If you’re going to set a precedent, then make it a bold one. Two months of additional time provides ample room to source, locate, and encourage shares not tendered (4.16% of shares out) to tender.

  • The withdrawal clause (Rule 17 of the Code) has now been clarified on the HKEx – the right-of-withdrawal of acceptances is triggered 21 days after the Closing Date (i.e. shares tendered are not irrevocable through to 19 July, as previously speculated in this insight). This is a voluntary right to withdraw – not compulsory – and assumes the Offer does not become unconditional before the expiry of the 21 days.
  • ~28mn shares are required to be tendered for the Offer to get up and 27.5mn have changed hands since the extension announcement.  The acceptance condition is likely to be satisfied shortly. An additional 5.7mn shares or 0.84% of shares out tendered on Friday.

(link to my insight: Harbin Electric: This Could Get Squeezy After Unprecedented Offer Extension)


Kosaido Co Ltd (7868 JP) (Mkt Cap: $164mn; Liquidity: $1.5mn)

The long extended close of the Tender Offer for Kosaido by renowned Japanese activist Yoshiaki Murakami and his affiliate companies, ended in failure. Travis had been bearish the stock once the Tender Offer was announced and the stock popped to the ¥850 area, and the shares did not trade below ¥750 (the Offer price) for much time at all after the announcement, but even he did not expect the result of only 427,000 shares tendered. That is less than 2% of the shares they did not hold. 85% of shares out did not tender.

  • Most people who bought in the past three and a half months are now (at the time of the insight) underwater on their investment, at a 70+% premium to the undisturbed price, after worse-than-expected results. And we have no resolution.
  • It would be tough to sell the funeral parlor business for 1x book because in its best year in the past five it earned a 5% ROE. To trade at book it should be able to do a little better than that.  The rest of the business has negative equity and a dire need for restructuring, which costs money. 
  • Travis is still bearish here and would not buy the dip in near-space. Even if the stock does not drop hard, it is pretty much dead money for a while. And while the stock trades below book, and there is a significant likelihood of bootstrap restructuring, Travis is inclined to think that transparency for shareholders will be no better than it has been for the last five years, which is pretty abysmal.

(link to Travis’ insight: Murakami Group Tender for Kosaido Fails… Spectacularly)


Asiana Airlines (020560 KS) (Mkt Cap: $1bn; Liquidity: $48mn)

More than a month has passed since Asiana Airlines was officially put up for sale by the Asiana Airlines’ main creditor (KDB) and Kumho Industrial (002990 KS), the leading shareholder of Asiana. Since then, a few chaebols that were initially mentioned as potential acquirers of Asiana including SK, Hanwha, CJ, Lotte, Hanjin, and Shinsegae groups – all have been very quiet in their willingness to purchase the company. 

  • Among these chaebols, Aekyung has shown the highest initial interest. It may require nearly ₩2.0tn to ₩2.5tn to acquire Asiana Airlines, which will likely involve additional rights offering/debt financing.
  • Because of the uncertainty on timing and potential buyers wary of the high debt amount and lofty purchase price, expect Asiana to continue to trend lower in the next few weeks. There is a strong support in the low ₩5,000 level, meaning there could be a further 10-15% downside risk. 

(link to Douglas’ insight: Korea M&A Spotlight: Aekyung – The Leading Candidate to Acquire Asiana Airlines at Reduced Prices?)

M&A – US

Circor International (CIR US) (Mkt Cap: $850mn; Liquidity: $8mn)

Crane Co (CR US) announced a proposal to acquire Circor, a manufacturer of pumps, valves, regulators, actuators, and related engineered components for $45/share (cash), for a total equity value of $895mn and an EV of $1.55bn ($1.7bn if net pension liability is included). The proposal represents a 47% premium to last close. Circor rejected the proposal on the 13 May, so Crane has gone public to “make our proposal known to Circor shareholders so they can express their views directly to the Circor Board.”

  • Circor’s EBITDA margins are lower than the mean/median of the comps and are the lowest of any company in the entire group, giving credence to Crane’s criticisms of Circor’s operating performance. From Crane’s presentation, Circor is the worst performer amongst its peer group and also missed all five-year targets (set in 2014).
  • John DeMasi reckons this deal will be an uphill battle for Crane if it decides to go “hostile” with a formal offer – it would fail without a board recommendation. The next step would be to increase their proposal to give Circor’s board an opportunity to show it is not totally intransigent. A $4 bump to $49 would be a meaningful interim increase (8.9%). If that doesn’t get Circor talking, the board would come under pressure from shareholders.  Other bidders could be drawn out if it gets Circor talking.
  • Even though this is a highly speculative situation (with downside of ~29% using Friday’s close), John liked it (sized appropriately at the then-current price $41.37) because of the potential upside and confidence that an independent, competent board will listen to its shareholders if enough of them are loud enough for long enough.

(link to John’s insight: Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted)


Mellanox Technologies Ltd (MLNX US) (Mkt Cap: $850mn; Liquidity: $8mn)

The past two weeks have seen a significant widening of the merger spread to 14% amid a re-ratcheting up of trade tensions between the US and China – Nvidia Corp (NVDA US)‘s $125/share Offer is conditional on the receipt of antitrust clearance from China.  Financial media and pundits have been quick to reference Qualcomm Inc (QCOM US)‘s failed bid for  Nxp Semiconductors Nv (NXPI US) last year as why this may not bode well for the NVDA/MLNX transaction. But Robert Sassoon sets out a case as to why this deal may not be the right reference.

  • He believes the Marvell Technology Group Ltd (MRVL US)/Cavium Inc (CAVM US) deal provides a more positive perspective on the prospects for NVDA/CAVM deal completion than QCOM/NXPI. Furthermore, the merger agreement expires on December 10, 2019, which also accommodates two three-month extensions. This leaves a long runway for the deal to obtain the required regulatory approvals, and a time buffer for the current political heat to cool down either through some type of trade agreement between US and China or progress towards one. 
  • Friday’s closing price of $109.80 is only slightly above the pre-announcement price. In August-September 2018 period when speculation of a possible MLNX buy-out began, shares were trading in the $70-$80 range, at a valuation multiple of 9x-10x & 14x-16x prospective Non-GAAP 2018 EBITDA & PE.  However, consensus estimates for 2019 are projecting a ~30% increase in both EBITDA and EPS, indicating little fundamental justification for a return to that range. This suggests limited downside for the shares of a fast-growing company that is trading at below peer multiples. On balance, the risk-reward profile of MLNX looks attractive from our standpoint. 

(link to Robert’s insight: MergerTalk: NVIDIA/Mellanox – Why We Think There Is More Opportunity Than Risk In The Widened Spread)


Briefly …

Sprint Corp (S US) has received approval from the FCC for the merger with T-Mobile to proceed following concessions. The Justice Department approval is outstanding and Sebastian Ashton, CFA believes the outcome remains uncertain. He reiterates investors should look to exit the bonds at current valuations given they are trading at a premium to par, in order to mitigate deal risk exposure. If the merger fails, the company may face liquidity issues over the medium term given their deteriorating fundamental performance and negative free cash flow. (link to Sebastian’s insight: Sprint Corp – One Regulatory Approval, Another to Go, How Likely?)

STUBS & HOLDCOS

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

JCNC’s discount to NAV of 14.4% is around its narrowest in the past 12-months and compares to an average of ~20%.  The key trigger for JCNC’s recent outperformance appears to be the cancellation of the offer for Bank Permata (BNLI IJ).

  • Both Standard Chartered Bank and Astra hold 44.56% in BNLI, leaving minorities with 10.88%. First rumoured back in November/December, state-owned Bank Mandiri Persero (BMRI IJ) was understood to be the frontrunner to acquire the stakes held by Astra and St Chart. 
  • The speculated price sought by BNLI was 1.8x P/B, dropping to 1.6x, then 1.4x, before talks were allegedly abandoned last week. There has been no official announcement/comment (and in my own correspondence with the IR) from Astra on this sale. Astra’s stake in BNLI accounts for 3.6% of its market cap – not a material %.  
  • JCNC is prodding its narrowest discount to NAV in the past year, having all-but reversed its 4Q18 lows. There may be further upside for JCNC, but it appears limited. BNLI is for sale and is currently trading at 1.0x P/B. I would not be surprised to see further dialogue initiated on a proposed sale.

Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

Ayala Corp’s discount (at the time of my insight) to NAV had bounced off a 12-month low but still traded 2Stdevs+ from the average, and below the 12.9% level when I previously discussed this Holdco in greater detail in late April. ACs 1Q19 figures released on the 10 May did not endear investors to the stub ops.  

  • Mitsubishi’s 6.58% stake remains an overhang – however, there appears no urgency for another placement with AC trading a YTD lows. On the assumption these share placements bolster full-year results (March year-end), Mitsubishi can afford to wait for a recovery in the share price.  However, this assumes there is a near-term recovery with respect to this placement.
  • This recent set of quarterly results at the parent level is not positive. Expect the discount to NAV to drift sideways, if not lower without the benefit of any positive newsflow at the stub ops – or on the placement – until 1H results announced around mid-August clarify the earnings direction for 2019. 
  • If Mitsubishi is indifferent to selling as its in-cost is a fraction of the current price, the spectre of declining (& a protracted decline in) stub earnings may tilt them to place shares earlier.
    • UPDATE: AC announced it had bought back 3.8m shares from Mitsubishi Corp at PHP 838, a 1.5% discount to the prior day’s close. “This transaction completes their portfolio rebalancing exercise with regard to their Ayala holdings, which now stands and will remain at around six percent (6%).”  Positive news for Ayala and a nice bounce – it closed the week at 11.5% discount to NAV against a 12-month low of 16% on the 21 May.

(link to my insight: StubWorld: JCNC In Unwind Territory As Astra’s Bank Stake Stalls; Poor Stub Results Send Ayala Lower)

SPIN-OFFS – HONG KONG

A number of Hong Kong spin-offs, including  Haitong UniTrust International Leasing Co Ltd (1905 HK) (HUIL) and Xinyi Energy Holdings Ltd (3868 HK), have been announced recently. Legend Holdings Corp H (3396 HK), Kerry Logistics Network (636 HK) and Tianneng Power Intl (819 HK) have also made announcements to spin-off certain divisions, although these remain subject to Exchange approvals and market conditions. Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

  • Haitong Securities Co Ltd (H) (6837 HK)‘s implied stub ops appear slightly expensive versus peers. Haitong Sec has underperformed both its peers and HSI since the initial spin-off announcement back in March 2017. However, stub income halved in FY18 compared to a 28% decline on average for peers. At ~15% of market cap, this is a weak Holdco/subsidiary relationship. HUIL is expected to commence trading on the 3 June. 
  • Xinyi Solar Holdings (968 HK)‘s performance and valuation (with reference to its stubs ops) relative to peers, appears overextended, notably for operations with declining growth and net margins. The implied stub is near a 52-week high. At between 35-45% of market cap, this will be a new Holdco/subsidiary relationship to follow, depending on XEH’s volume. XEH is expected to commence trading on the 28 May.
  • Legend Holdings Corp H (3396 HK)‘s proposed spin-off of Zhengqi Financial has all the hallmarks of being a weak Holdco/subsidiary relationship; as does Kerry Logistics Network (636 HK)‘s proposed spin-off and separate listing of Kerry Express (Thailand) on the stock exchange of Thailand. Tianneng Power Intl (819 HK)‘s spin-off of its battery manufacturer may result in a stub to watch, however financial details of the spin-off are minimal, it still requires PRC approval, and the spin-off was previously attempted back in 2015.

links to insights:
SPINOFF: Haitong Securities Spinoff of Haitong UniTrust Int’l Leasing
SPINOFF: Xinyi Solar Spinoff of Xinyi Energy

SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power

OTHER M&A UPDATES

CCASS

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

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

Name

% chg

Into

Out of

19.81%
GS
Core Pac
17.14%
Anue
Kim Eng
Zhongchang (859 HK)
74.98%
Cinda
Bocom
TUS International
19.41%
China Sec
Outside CCASS
26.75%
China Ind
Outside CCASS
Source: HKEx

3. All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin

Idr%2019 05 24

Long-awaited demonstrations on behalf of Prabowo proved far smaller than the Gerindra chair needed — meanwhile, police exposed how some 2,000 paid thugs rioted on his behalf, which discredits his cause.   Tensions are likely to subside as the denouement of a court appeal unfolds through 28 June.  Despite some 8 deaths in the rioting, Widodo has maintained the all-important moral high ground.  Official election results show Widodo having won by an 11.0% margin.  A breakdown by province suggests that identity politics was indeed at the fore. 

Politics: As many as eight fatalities occurred in two nights of rioting on 21-23 May – but the bulk of those actively rioting were clearly professional thugs hired to attack police.  A different group consisted of peaceful and orderly demonstrators complaining of supposed election fraud – but these numbered no more than 10,000, which pales in comparison to the one million that Islamic groups mobilized in Jakarta last December.  Police claim that several pro‑Isis militants carried handguns.  Police used assertive public communications to expose the sordid characteristics of rioters, which has discredited Gerindra Chair Prabowo Subianto.  There were over 700 casualties and 257 arrests.  Events portray the Prabowo camp as having stooped to paying goons to run amok, tarnishing Indonesia’s democracy.  Consequently, motivating genuine supporters to publicly protest far‑fetched claims of fraud will be even more difficult for Prabowo.  But much still depends on explanations for the deaths of rioters: at least one reportedly died of a bullet wound, but police are adamant that none in their ranks used live rounds (Page 2).  Authorities arrested a pro‑Prabowo former Special Forces (Kopassus) commander, Maj Gen (ret) Soenarko, for having allegedly smuggled M4 carbines into Indonesia (p. 7).

Election Results: The General Election Commission (KPU) disclosed the official final vote count for both contests.  Widodo’s margin was 11.0 percent (p. 9).  Prabowo finally decided to lodge an electoral appeal with the Constitutional Court, which aims to issue a verdict on 28 June.  Justices are highly unlikely to overturn Widodo’s win (p. 14). 

Justice: The president formed a Selection Committee (Pansel) for nominees for the Anti-Corruption Commission (KPK).  The roster is strong overall and concern from critics may be overdone (p. 15).  State Sports Minister Imam Nahrowi faced court testimony from witnesses who say they made kickback payments to him totaling Rp11.5 billion (p. 15).

Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news.  The writer is Kevin O’Rourke, author of the book Reformasi.  For subscription info please contact: <[email protected]>.

Economics: The rupiah has been sliding amid international uncertainties and the  persis­tent current account deficit, but pressure from domestic political tensions may lift (p. 16). 

Outlook: Despite deaths of eight rioters, Prabowo suffered disgrace from demonstra­tions in Jakarta.  Peaceful ralliers were few in number, while police produced compelling evidence that the Prabowo camp hired hoodlums to wreak havoc.  When Prabowo finally called on protesters to retire and rest, he was – in effect – finally acknowledging his election defeat.  Any additional demonstrations seem unlikely to be significant and Prabowo’s court appeal may be an uneventful dénouement (p. 18).

4. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal

Highlights9

Copley Fund Research analyse the holdings of long-only equity funds.  This analysis is taken from our GEM research product, covering 189 global emerging market funds with a combined AUM of $350bn. 

In this month’s Positioning Monthly, we highlight an increasing exposure towards Indonesian Financial stocks, with Bank Rakyat Indonesia Perser (BBRI IJ) and Bank Central Asia (BBCA IJ) the key overweight positions.  We analyse holdings in the food and beverages industry groups as ownership reaches peak levels in both.  Finally, we explore the sharp reversal in Lenovo (992 HK) sentiment as more and more GEM funds buy into the stock.

5. The Global Recovery Narrative Crumbles

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The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

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Brief Indonesia: Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper and more

By | Daily Briefs, Indonesia

In this briefing:

  1. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper

1. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper

Growth in indonesia picked up while malaysia and singapore slowed yoy 2016 2017 6m18 10m18 chartbuilder

Leong Hup International (LEHUP MK) plans to raise up to US$250m in its Malaysian IPO. The deal seems to have been downsized from the earlier touted US$400m raising. Although the company has managed to get cornerstone investors to take up 45% of the deal.

I’ve covered the fundamental aspects of the deal in my earlier insight:

In this insight, I’ll talk about the updates since the previous filing, comment on valuations and run the deal through our ECM framework.

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Brief Indonesia: Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala and more

By | Daily Briefs, Indonesia

In this briefing:

  1. Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala
  2. All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin
  3. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal
  4. The Global Recovery Narrative Crumbles
  5. Bitcoin, Revisited

1. Last Week in Event SPACE: Nexon, Netmarble, Nissan/Renault, Lynas, Harbin, Kosaido, Circor, Ayala

Got

Last Week in Event SPACE …

  • As Nexon Co Ltd (3659 JP)‘s soap opera-esque “updates” on the control-change plod on, the “certainty” on this situation is less than great.
  • In the next six weeks, two important games (BTS World and Seven Deadly Sins) for Netmarble Games (251270 KS) will be launched; the final bidder(s) for NXC Corp/Nexon should be known plus there should be clarity on the timeline for the Netmarble Neo IPO. 
  • Trump Trade Wars provide a positive backdrop for Lynas Corp Ltd (LYC AU) in the near-medium-term.
  • From a tick-the-box perspective, Nissan Motor (7201 JP)‘s new board looks highly diverse.  If they take their jobs seriously and learn about auto manufacturing and sales, the board holds promise.
  • Harbin Electric Co Ltd H (1133 HK)‘s Offer is expected to get up after an unprecedented extension provides a last-minute reprieve.
  • The Murakami Tender Offer for Kosaido Co Ltd (7868 JP) fails. Spectacularly so.
  • Crane Co (CR US)‘s proposal for Circor International (CIR US) will fail unless it bumps and opens up a dialogue with Circor’s board.
  • Ayala Corporation (AC PM) buys back shares from Mitsubishi, removing the placement overhang.
  • Plus other events, CCASS movements and Mood Spins.

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

EVENTS

Nexon Co Ltd (3659 JP) (Mkt Cap: $14bn; Liquidity: $37mn)

A lot of the media coverage of the Nexon situation appears to be a kind of breathless updating of possible changes in situation trafficked by gossipmongers. The level of trustworthiness to the “news” is low and outlets rarely note that what is now being reported does not report with what was previously being reported as “likely.” Travis Lundy suggests the level of confidence one should have about the expectations the media is implying needs to be checked. There is simply not enough meat in the “facts” as reported to strongly inform market observers & participants about the considerations which would influence a certain kind of pricing, or bidder strength, outcome, or even whether there could be a decision by Mr Kim Jung-Ju to walk away from the current process and re-start it at some point in the future.

Delays were to be expected. and the possibility of significantly longer delays exists. The structure is convoluted – less easy than just buying Nexon outright. The structure could easily deter many buyers unless it is crystal clear that the rest of the stuff inside NXC is excluded from the sale. If delays are being implemented because major bidders can’t get the funds, that is either bad news on its own, or there is something else going on. If KJJ really wants a great premium when he decides to sell, he may turn this deal down – whoever the winning bid comes from.

  • The constant refrains about how Disney, EA, or Amazon might bid are probably misplaced. Travis Lundy doesn’t see any of them bidding. The US-China Trade War means US corporate buyers are not going to be the best buyers of game assets where 50% of revenue and 100% of profits come from China.
  • MBK/Tencent or KKR/Tencent is probably still the bidder to beat, as that consortium has been since the beginning. MBK would find it the easiest to take a sharp knife to costs. Tencent would find it easiest to buy 30-40% and then stay on the sidelines while someone else made it better. Neither Netmarble nor Kakao are likely to be the best buyers for this.
  •  This opportunity has been a great one to range-trade. In general, it has been “buy the dips, lighten up after it pops 5-10%. Rinse. Repeat.” Travis now views this as a low-quality Bullish trade. It is lower quality than it was 3-4 months ago because of reduced ability to range-trade and harvest gamma before a decision is made. The time decay is perceived to be quite strong now. That means sizing would probably be smaller now than it was at the same price or slightly lower in January. 

(link to Travis’ insight: Nexon: Continuing Question Marks)


Netmarble Games (251270 KS) (Mkt Cap: $7.9bn; Liquidity: $20mn)

The three major drivers of Netmarble’s stock price include the upcoming IPO of 80.6%-held Netmarble Neo (and the official global launch of the mobile RPG The King of Fighters Allstar game on May 9th), the launch of the BTS World game, and the eventual resolution of the NXC Corp/Nexon M&A situation. 

  • Douglas Kim believes a non-Netmarble Games entity such as MBK or Tencent Holdings (700 HK) will be the final bidder for Nexon. It was reported in early May that the Netmarble and MBK partnership broke off at the last minute as MBK determined it may not need a strategic investor to manage Nexon – key personnel in Nexon (excluding the founder Kim Jung-Joo) already play significant roles in directing and managing the company.
  • The market has been concerned about Netmarble potentially overpaying for NXC Corp with overstretched debt financing, and if Netmarble fails to be the final bidder for NXC Corp, this is probably a positive for the company. If the final bidder is MBK (only), this will also have an added positive impact on Netmarble as there have been fears that if Tencent acquires NXC Corp, this will potentially add to the competitive pressures of the gaming industry in Korea. 
  • These events, followed by an announcement of the Netmarble Neo IPO and a successful launch of the BTS World game should also positively impact Netmarble. In terms of earnings pickup, the consensus expects Netmarble to experience a turnaround starting 2Q19, with operating profit estimates of ₩46bn in 2Q19, up from ₩34bn in 1Q19. The consensus expects the company to further improve its operating profit to ₩100bn in 3Q19. 

(link to Douglas’ insight: Netmarble Games: The Upcoming Netmarble Neo IPO, Launch of BTS World Game, and the Nexon M&A)


Lynas Corp Ltd (LYC AU) (Mkt Cap: $1.1bn; Liquidity: $9mn)

Travis Lundy discusses the Lynas situation which appears to have changed dramatically this week. Lynas believes Malaysia will decide things the right way, which will mean the infamous December 4th Letter from the AELB (Atomic Energy Licensing Board) will be withdrawn, Malaysia approves the CondiSoil route for disposal of the WLP residue there now, and tthe license will get renewed with adequate transition time to enable continued buildup of WLP before sourcing of cracked and leached material exported from Australia can be arranged. This is the bet here. 

  • Travis thinks Lynas will need to create a new pricing system for its product. Its customers should be willing to pay a price which is not explicitly tied to Chinese onshore pricing with all the risk that entails. If its customers want to ensure Lynas stays in business, Lynas has to be able to charge what it needs to in order to stay in business. Western and Japanese companies with good technology to increase processing expertise to enable better product and higher margins will be happy/willing to engage with Lynas for the basic reason that Lynas is not Chinese. I’d note that they’d engage with the buyer of Lynas assets as well if Lynas went under, but the issue here is not bankruptcy but speed of increased capacity rollout.
  • This would suggest that partner companies with cash to invest should be willing to project-finance some portions of the capital and/or expansion. If Lynas needed or wanted to raise capital by issuing a convertible bond of a few hundred million dollars, Travis expects doing so would be “easy” in the near-term.
  • Travis is bullish the stock price near-term, not because of fundamentals, but due to the a) Trump Trade Wars being a good thing for product pricing and demand for access, and b) Geopolitical issues helping Malaysia come to the “right” decision regarding license renewal. He would not want to be short here anymore. Because the growth and value of long-term product pricing is so far out in the future, what constitutes “fair” for the stock is obviously tough to calculate with any confidence, so the “Bullish” label is really about covering the short.

(link to Travis’ insight: Trump Trade Means Lynas Capex Easier)


Nissan Motor (7201 JP) (Mkt Cap: $26bn; Liquidity: $115mn)

The new board of Nissan, as proposed by Nissan’s Provisional Nomination and Compensation Advisory Council established after the independent committee on governance proposed its measures in March, has 11 members, with two each nominated from Nissan and Renault SA (RNO FP) and seven coming in as independent directors.

  • The board is now set up to be Team Renault, Team Nissan, and seven (theoretically) independents. The important angle here is to try to understand where the chips might fall if push comes to shove, because the Revised Alliance Master Agreement requires that Renault not propose measures to the shareholders which are not supported by the Nissan board, and not vote against measures which are proposed by the board. Doing so would breach the RAMA and would allow Nissan to buy more Renault shares.
  • Only at the end of June – assuming all goes to plan – will the seven new members of the new Board take their seats. Renault pushing hard now when the majority of current board members will change in June seems to be insensitive to the nature of boards and board members’ responsibilities.  Should there be a strong dispute between Renault and Nissan about the process and timing of discussing deeper capital ties, Travis expects the ball to fall in the court of “Not Now” and “Not Yet.”
  • At 0.57x book on Nissan, it is difficult to be bearish. And it seemed pretty clear from the earnings meeting that Saikawa-san and others thought that the low forecast for FY19 (to March 2020) was reasonably conservative and was designed to flush out all the bad news. Nissan has decided to shrink its volume presence in the US to raise profitability per vehicle, and it is clear that there have been measures to reduce costs through redundancies. 
  • Travis remained inclined to think that RNO is the right trade to be long here compared to Nissan but is surprised that Renault is now down to such a low PBR. He was inclined to think that the significant slowdown in the Chinese market is a net headwind to both Nissan and Renault, but expects that the heightening of trade friction between China and the US could favour Japanese brands at the expense of US brands.

(link to Travis’ insight: Nissan’s New Board and Management Developments)


Briefly …

One Equity placed out 6.5mn shares of Celltrion Healthcare (091990 KS) at a final price of ₩60,100, an 8% discount to last close, similar to the discount back in September last year. There is a 90-day lockup on One Equity’s remaining 10% stake and it is possible Ion will reload. (link to Sanghyun Park‘s insight: Celltrion H Block Deals Priced at Floor: More Short Entry Points Should Be On the Way

M&A – ASIA-PAC

Harbin Electric Co Ltd H (1133 HK) (Mkt Cap: $991mn; Liquidity: $3.5mn)

With acceptances totaling 85.84% of shares out as at the Closing Date (20 May), just short of the 90% acceptance condition, in an unprecedented move, the SFC granted an extension for Harbin’s Offer until the 19 July (Second Closing Date). If you’re going to set a precedent, then make it a bold one. Two months of additional time provides ample room to source, locate, and encourage shares not tendered (4.16% of shares out) to tender.

  • The withdrawal clause (Rule 17 of the Code) has now been clarified on the HKEx – the right-of-withdrawal of acceptances is triggered 21 days after the Closing Date (i.e. shares tendered are not irrevocable through to 19 July, as previously speculated in this insight). This is a voluntary right to withdraw – not compulsory – and assumes the Offer does not become unconditional before the expiry of the 21 days.
  • ~28mn shares are required to be tendered for the Offer to get up and 27.5mn have changed hands since the extension announcement.  The acceptance condition is likely to be satisfied shortly. An additional 5.7mn shares or 0.84% of shares out tendered on Friday.

(link to my insight: Harbin Electric: This Could Get Squeezy After Unprecedented Offer Extension)


Kosaido Co Ltd (7868 JP) (Mkt Cap: $164mn; Liquidity: $1.5mn)

The long extended close of the Tender Offer for Kosaido by renowned Japanese activist Yoshiaki Murakami and his affiliate companies, ended in failure. Travis had been bearish the stock once the Tender Offer was announced and the stock popped to the ¥850 area, and the shares did not trade below ¥750 (the Offer price) for much time at all after the announcement, but even he did not expect the result of only 427,000 shares tendered. That is less than 2% of the shares they did not hold. 85% of shares out did not tender.

  • Most people who bought in the past three and a half months are now (at the time of the insight) underwater on their investment, at a 70+% premium to the undisturbed price, after worse-than-expected results. And we have no resolution.
  • It would be tough to sell the funeral parlor business for 1x book because in its best year in the past five it earned a 5% ROE. To trade at book it should be able to do a little better than that.  The rest of the business has negative equity and a dire need for restructuring, which costs money. 
  • Travis is still bearish here and would not buy the dip in near-space. Even if the stock does not drop hard, it is pretty much dead money for a while. And while the stock trades below book, and there is a significant likelihood of bootstrap restructuring, Travis is inclined to think that transparency for shareholders will be no better than it has been for the last five years, which is pretty abysmal.

(link to Travis’ insight: Murakami Group Tender for Kosaido Fails… Spectacularly)


Asiana Airlines (020560 KS) (Mkt Cap: $1bn; Liquidity: $48mn)

More than a month has passed since Asiana Airlines was officially put up for sale by the Asiana Airlines’ main creditor (KDB) and Kumho Industrial (002990 KS), the leading shareholder of Asiana. Since then, a few chaebols that were initially mentioned as potential acquirers of Asiana including SK, Hanwha, CJ, Lotte, Hanjin, and Shinsegae groups – all have been very quiet in their willingness to purchase the company. 

  • Among these chaebols, Aekyung has shown the highest initial interest. It may require nearly ₩2.0tn to ₩2.5tn to acquire Asiana Airlines, which will likely involve additional rights offering/debt financing.
  • Because of the uncertainty on timing and potential buyers wary of the high debt amount and lofty purchase price, expect Asiana to continue to trend lower in the next few weeks. There is a strong support in the low ₩5,000 level, meaning there could be a further 10-15% downside risk. 

(link to Douglas’ insight: Korea M&A Spotlight: Aekyung – The Leading Candidate to Acquire Asiana Airlines at Reduced Prices?)

M&A – US

Circor International (CIR US) (Mkt Cap: $850mn; Liquidity: $8mn)

Crane Co (CR US) announced a proposal to acquire Circor, a manufacturer of pumps, valves, regulators, actuators, and related engineered components for $45/share (cash), for a total equity value of $895mn and an EV of $1.55bn ($1.7bn if net pension liability is included). The proposal represents a 47% premium to last close. Circor rejected the proposal on the 13 May, so Crane has gone public to “make our proposal known to Circor shareholders so they can express their views directly to the Circor Board.”

  • Circor’s EBITDA margins are lower than the mean/median of the comps and are the lowest of any company in the entire group, giving credence to Crane’s criticisms of Circor’s operating performance. From Crane’s presentation, Circor is the worst performer amongst its peer group and also missed all five-year targets (set in 2014).
  • John DeMasi reckons this deal will be an uphill battle for Crane if it decides to go “hostile” with a formal offer – it would fail without a board recommendation. The next step would be to increase their proposal to give Circor’s board an opportunity to show it is not totally intransigent. A $4 bump to $49 would be a meaningful interim increase (8.9%). If that doesn’t get Circor talking, the board would come under pressure from shareholders.  Other bidders could be drawn out if it gets Circor talking.
  • Even though this is a highly speculative situation (with downside of ~29% using Friday’s close), John liked it (sized appropriately at the then-current price $41.37) because of the potential upside and confidence that an independent, competent board will listen to its shareholders if enough of them are loud enough for long enough.

(link to John’s insight: Crane Co. Proposal to Acquire CIRCOR International – Actuator Wanted)


Mellanox Technologies Ltd (MLNX US) (Mkt Cap: $850mn; Liquidity: $8mn)

The past two weeks have seen a significant widening of the merger spread to 14% amid a re-ratcheting up of trade tensions between the US and China – Nvidia Corp (NVDA US)‘s $125/share Offer is conditional on the receipt of antitrust clearance from China.  Financial media and pundits have been quick to reference Qualcomm Inc (QCOM US)‘s failed bid for  Nxp Semiconductors Nv (NXPI US) last year as why this may not bode well for the NVDA/MLNX transaction. But Robert Sassoon sets out a case as to why this deal may not be the right reference.

  • He believes the Marvell Technology Group Ltd (MRVL US)/Cavium Inc (CAVM US) deal provides a more positive perspective on the prospects for NVDA/CAVM deal completion than QCOM/NXPI. Furthermore, the merger agreement expires on December 10, 2019, which also accommodates two three-month extensions. This leaves a long runway for the deal to obtain the required regulatory approvals, and a time buffer for the current political heat to cool down either through some type of trade agreement between US and China or progress towards one. 
  • Friday’s closing price of $109.80 is only slightly above the pre-announcement price. In August-September 2018 period when speculation of a possible MLNX buy-out began, shares were trading in the $70-$80 range, at a valuation multiple of 9x-10x & 14x-16x prospective Non-GAAP 2018 EBITDA & PE.  However, consensus estimates for 2019 are projecting a ~30% increase in both EBITDA and EPS, indicating little fundamental justification for a return to that range. This suggests limited downside for the shares of a fast-growing company that is trading at below peer multiples. On balance, the risk-reward profile of MLNX looks attractive from our standpoint. 

(link to Robert’s insight: MergerTalk: NVIDIA/Mellanox – Why We Think There Is More Opportunity Than Risk In The Widened Spread)


Briefly …

Sprint Corp (S US) has received approval from the FCC for the merger with T-Mobile to proceed following concessions. The Justice Department approval is outstanding and Sebastian Ashton, CFA believes the outcome remains uncertain. He reiterates investors should look to exit the bonds at current valuations given they are trading at a premium to par, in order to mitigate deal risk exposure. If the merger fails, the company may face liquidity issues over the medium term given their deteriorating fundamental performance and negative free cash flow. (link to Sebastian’s insight: Sprint Corp – One Regulatory Approval, Another to Go, How Likely?)

STUBS & HOLDCOS

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

JCNC’s discount to NAV of 14.4% is around its narrowest in the past 12-months and compares to an average of ~20%.  The key trigger for JCNC’s recent outperformance appears to be the cancellation of the offer for Bank Permata (BNLI IJ).

  • Both Standard Chartered Bank and Astra hold 44.56% in BNLI, leaving minorities with 10.88%. First rumoured back in November/December, state-owned Bank Mandiri Persero (BMRI IJ) was understood to be the frontrunner to acquire the stakes held by Astra and St Chart. 
  • The speculated price sought by BNLI was 1.8x P/B, dropping to 1.6x, then 1.4x, before talks were allegedly abandoned last week. There has been no official announcement/comment (and in my own correspondence with the IR) from Astra on this sale. Astra’s stake in BNLI accounts for 3.6% of its market cap – not a material %.  
  • JCNC is prodding its narrowest discount to NAV in the past year, having all-but reversed its 4Q18 lows. There may be further upside for JCNC, but it appears limited. BNLI is for sale and is currently trading at 1.0x P/B. I would not be surprised to see further dialogue initiated on a proposed sale.

Ayala Corporation (AC PM) / Ayala Land Inc (ALI PM)

Ayala Corp’s discount (at the time of my insight) to NAV had bounced off a 12-month low but still traded 2Stdevs+ from the average, and below the 12.9% level when I previously discussed this Holdco in greater detail in late April. ACs 1Q19 figures released on the 10 May did not endear investors to the stub ops.  

  • Mitsubishi’s 6.58% stake remains an overhang – however, there appears no urgency for another placement with AC trading a YTD lows. On the assumption these share placements bolster full-year results (March year-end), Mitsubishi can afford to wait for a recovery in the share price.  However, this assumes there is a near-term recovery with respect to this placement.
  • This recent set of quarterly results at the parent level is not positive. Expect the discount to NAV to drift sideways, if not lower without the benefit of any positive newsflow at the stub ops – or on the placement – until 1H results announced around mid-August clarify the earnings direction for 2019. 
  • If Mitsubishi is indifferent to selling as its in-cost is a fraction of the current price, the spectre of declining (& a protracted decline in) stub earnings may tilt them to place shares earlier.
    • UPDATE: AC announced it had bought back 3.8m shares from Mitsubishi Corp at PHP 838, a 1.5% discount to the prior day’s close. “This transaction completes their portfolio rebalancing exercise with regard to their Ayala holdings, which now stands and will remain at around six percent (6%).”  Positive news for Ayala and a nice bounce – it closed the week at 11.5% discount to NAV against a 12-month low of 16% on the 21 May.

(link to my insight: StubWorld: JCNC In Unwind Territory As Astra’s Bank Stake Stalls; Poor Stub Results Send Ayala Lower)

SPIN-OFFS – HONG KONG

A number of Hong Kong spin-offs, including  Haitong UniTrust International Leasing Co Ltd (1905 HK) (HUIL) and Xinyi Energy Holdings Ltd (3868 HK), have been announced recently. Legend Holdings Corp H (3396 HK), Kerry Logistics Network (636 HK) and Tianneng Power Intl (819 HK) have also made announcements to spin-off certain divisions, although these remain subject to Exchange approvals and market conditions. Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

  • Haitong Securities Co Ltd (H) (6837 HK)‘s implied stub ops appear slightly expensive versus peers. Haitong Sec has underperformed both its peers and HSI since the initial spin-off announcement back in March 2017. However, stub income halved in FY18 compared to a 28% decline on average for peers. At ~15% of market cap, this is a weak Holdco/subsidiary relationship. HUIL is expected to commence trading on the 3 June. 
  • Xinyi Solar Holdings (968 HK)‘s performance and valuation (with reference to its stubs ops) relative to peers, appears overextended, notably for operations with declining growth and net margins. The implied stub is near a 52-week high. At between 35-45% of market cap, this will be a new Holdco/subsidiary relationship to follow, depending on XEH’s volume. XEH is expected to commence trading on the 28 May.
  • Legend Holdings Corp H (3396 HK)‘s proposed spin-off of Zhengqi Financial has all the hallmarks of being a weak Holdco/subsidiary relationship; as does Kerry Logistics Network (636 HK)‘s proposed spin-off and separate listing of Kerry Express (Thailand) on the stock exchange of Thailand. Tianneng Power Intl (819 HK)‘s spin-off of its battery manufacturer may result in a stub to watch, however financial details of the spin-off are minimal, it still requires PRC approval, and the spin-off was previously attempted back in 2015.

links to insights:
SPINOFF: Haitong Securities Spinoff of Haitong UniTrust Int’l Leasing
SPINOFF: Xinyi Solar Spinoff of Xinyi Energy

SPINOFF: Three Announced but Unconfirmed HK Spinoffs: Legend, Kerry Logistics, Tianneng Power

OTHER M&A UPDATES

CCASS

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

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

Name

% chg

Into

Out of

19.81%
GS
Core Pac
17.14%
Anue
Kim Eng
Zhongchang (859 HK)
74.98%
Cinda
Bocom
TUS International
19.41%
China Sec
Outside CCASS
26.75%
China Ind
Outside CCASS
Source: HKEx

2. All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin

Idr%2019 05 24

Long-awaited demonstrations on behalf of Prabowo proved far smaller than the Gerindra chair needed — meanwhile, police exposed how some 2,000 paid thugs rioted on his behalf, which discredits his cause.   Tensions are likely to subside as the denouement of a court appeal unfolds through 28 June.  Despite some 8 deaths in the rioting, Widodo has maintained the all-important moral high ground.  Official election results show Widodo having won by an 11.0% margin.  A breakdown by province suggests that identity politics was indeed at the fore. 

Politics: As many as eight fatalities occurred in two nights of rioting on 21-23 May – but the bulk of those actively rioting were clearly professional thugs hired to attack police.  A different group consisted of peaceful and orderly demonstrators complaining of supposed election fraud – but these numbered no more than 10,000, which pales in comparison to the one million that Islamic groups mobilized in Jakarta last December.  Police claim that several pro‑Isis militants carried handguns.  Police used assertive public communications to expose the sordid characteristics of rioters, which has discredited Gerindra Chair Prabowo Subianto.  There were over 700 casualties and 257 arrests.  Events portray the Prabowo camp as having stooped to paying goons to run amok, tarnishing Indonesia’s democracy.  Consequently, motivating genuine supporters to publicly protest far‑fetched claims of fraud will be even more difficult for Prabowo.  But much still depends on explanations for the deaths of rioters: at least one reportedly died of a bullet wound, but police are adamant that none in their ranks used live rounds (Page 2).  Authorities arrested a pro‑Prabowo former Special Forces (Kopassus) commander, Maj Gen (ret) Soenarko, for having allegedly smuggled M4 carbines into Indonesia (p. 7).

Election Results: The General Election Commission (KPU) disclosed the official final vote count for both contests.  Widodo’s margin was 11.0 percent (p. 9).  Prabowo finally decided to lodge an electoral appeal with the Constitutional Court, which aims to issue a verdict on 28 June.  Justices are highly unlikely to overturn Widodo’s win (p. 14). 

Justice: The president formed a Selection Committee (Pansel) for nominees for the Anti-Corruption Commission (KPK).  The roster is strong overall and concern from critics may be overdone (p. 15).  State Sports Minister Imam Nahrowi faced court testimony from witnesses who say they made kickback payments to him totaling Rp11.5 billion (p. 15).

Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news.  The writer is Kevin O’Rourke, author of the book Reformasi.  For subscription info please contact: <[email protected]>.

Economics: The rupiah has been sliding amid international uncertainties and the  persis­tent current account deficit, but pressure from domestic political tensions may lift (p. 16). 

Outlook: Despite deaths of eight rioters, Prabowo suffered disgrace from demonstra­tions in Jakarta.  Peaceful ralliers were few in number, while police produced compelling evidence that the Prabowo camp hired hoodlums to wreak havoc.  When Prabowo finally called on protesters to retire and rest, he was – in effect – finally acknowledging his election defeat.  Any additional demonstrations seem unlikely to be significant and Prabowo’s court appeal may be an uneventful dénouement (p. 18).

3. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal

Highlights3

Copley Fund Research analyse the holdings of long-only equity funds.  This analysis is taken from our GEM research product, covering 189 global emerging market funds with a combined AUM of $350bn. 

In this month’s Positioning Monthly, we highlight an increasing exposure towards Indonesian Financial stocks, with Bank Rakyat Indonesia Perser (BBRI IJ) and Bank Central Asia (BBCA IJ) the key overweight positions.  We analyse holdings in the food and beverages industry groups as ownership reaches peak levels in both.  Finally, we explore the sharp reversal in Lenovo (992 HK) sentiment as more and more GEM funds buy into the stock.

4. The Global Recovery Narrative Crumbles

1

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

5. Bitcoin, Revisited

Bitcoin volatility ratio of bitcoin volatility to stocks volatility chartbuilder 3

Bitcoin and the block chain were created just over ten years ago, as a means to create peer to peer transactions without the need to use financial institutions to process the payments. 

However, frequent hacks of Bitcoin exchanges, in addition to the significant past fluctuations of Bitcoin prices, have put mainstream usage off and slowed the adoption of the cryptocurrency.

Is this about to change now?

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Indonesia: All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin and more

By | Daily Briefs, Indonesia

In this briefing:

  1. All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin
  2. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal
  3. The Global Recovery Narrative Crumbles
  4. Bitcoin, Revisited
  5. StubWorld: JCNC In Unwind Territory As Astra’s Bank Stake Stalls; Poor Stub Results Send Ayala Lower

1. All’s Well That Ends Riotously / Paid Hoods Discredit Prabowo / Risks Subside / 11% Official Margin

Trade%2019 05 24

Long-awaited demonstrations on behalf of Prabowo proved far smaller than the Gerindra chair needed — meanwhile, police exposed how some 2,000 paid thugs rioted on his behalf, which discredits his cause.   Tensions are likely to subside as the denouement of a court appeal unfolds through 28 June.  Despite some 8 deaths in the rioting, Widodo has maintained the all-important moral high ground.  Official election results show Widodo having won by an 11.0% margin.  A breakdown by province suggests that identity politics was indeed at the fore. 

Politics: As many as eight fatalities occurred in two nights of rioting on 21-23 May – but the bulk of those actively rioting were clearly professional thugs hired to attack police.  A different group consisted of peaceful and orderly demonstrators complaining of supposed election fraud – but these numbered no more than 10,000, which pales in comparison to the one million that Islamic groups mobilized in Jakarta last December.  Police claim that several pro‑Isis militants carried handguns.  Police used assertive public communications to expose the sordid characteristics of rioters, which has discredited Gerindra Chair Prabowo Subianto.  There were over 700 casualties and 257 arrests.  Events portray the Prabowo camp as having stooped to paying goons to run amok, tarnishing Indonesia’s democracy.  Consequently, motivating genuine supporters to publicly protest far‑fetched claims of fraud will be even more difficult for Prabowo.  But much still depends on explanations for the deaths of rioters: at least one reportedly died of a bullet wound, but police are adamant that none in their ranks used live rounds (Page 2).  Authorities arrested a pro‑Prabowo former Special Forces (Kopassus) commander, Maj Gen (ret) Soenarko, for having allegedly smuggled M4 carbines into Indonesia (p. 7).

Election Results: The General Election Commission (KPU) disclosed the official final vote count for both contests.  Widodo’s margin was 11.0 percent (p. 9).  Prabowo finally decided to lodge an electoral appeal with the Constitutional Court, which aims to issue a verdict on 28 June.  Justices are highly unlikely to overturn Widodo’s win (p. 14). 

Justice: The president formed a Selection Committee (Pansel) for nominees for the Anti-Corruption Commission (KPK).  The roster is strong overall and concern from critics may be overdone (p. 15).  State Sports Minister Imam Nahrowi faced court testimony from witnesses who say they made kickback payments to him totaling Rp11.5 billion (p. 15).

Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news.  The writer is Kevin O’Rourke, author of the book Reformasi.  For subscription info please contact: <[email protected]>.

Economics: The rupiah has been sliding amid international uncertainties and the  persis­tent current account deficit, but pressure from domestic political tensions may lift (p. 16). 

Outlook: Despite deaths of eight rioters, Prabowo suffered disgrace from demonstra­tions in Jakarta.  Peaceful ralliers were few in number, while police produced compelling evidence that the Prabowo camp hired hoodlums to wreak havoc.  When Prabowo finally called on protesters to retire and rest, he was – in effect – finally acknowledging his election defeat.  Any additional demonstrations seem unlikely to be significant and Prabowo’s court appeal may be an uneventful dénouement (p. 18).

2. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal

Highlights15

Copley Fund Research analyse the holdings of long-only equity funds.  This analysis is taken from our GEM research product, covering 189 global emerging market funds with a combined AUM of $350bn. 

In this month’s Positioning Monthly, we highlight an increasing exposure towards Indonesian Financial stocks, with Bank Rakyat Indonesia Perser (BBRI IJ) and Bank Central Asia (BBCA IJ) the key overweight positions.  We analyse holdings in the food and beverages industry groups as ownership reaches peak levels in both.  Finally, we explore the sharp reversal in Lenovo (992 HK) sentiment as more and more GEM funds buy into the stock.

3. The Global Recovery Narrative Crumbles

2%20 %20copy

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

4. Bitcoin, Revisited

Screenshot%202019 05 23%20at%2020.26.51

Bitcoin and the block chain were created just over ten years ago, as a means to create peer to peer transactions without the need to use financial institutions to process the payments. 

However, frequent hacks of Bitcoin exchanges, in addition to the significant past fluctuations of Bitcoin prices, have put mainstream usage off and slowed the adoption of the cryptocurrency.

Is this about to change now?

5. StubWorld: JCNC In Unwind Territory As Astra’s Bank Stake Stalls; Poor Stub Results Send Ayala Lower

Implied

This week in StubWorld …

Preceding my comments on JCNCF, Ayala and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Indonesia: Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN and more

By | Daily Briefs, Indonesia

In this briefing:

  1. Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN
  2. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows
  3. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue
  4. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper

1. Refusniks Vs KPU / Tension Persists / Slow Count / Minister Talks Labor Regs “Reform” / Headless PLN

Prabowo persists in refusing to acknowledge the election outcome, while attempting to delegitimize electoral authorities.  He has rejected an emissary from the president and declared victory four times, while top figures in his campaign are issuing bellicose remarks about ‘no return’ and ‘total war’.  A Third Clerics Conference is undergoing preparation and Prabowo seems likely to eventually deploy Islamist demonstrators, who have proven their ability to inundate Jakarta.  Security forces are assembling personnel and preparing for confrontations, although these might not occur until late May or June.  Ultimately, a second term for Widodo is not in jeopardy.  But, in the meantime, disruptions seem likely to damage Indonesia’s image, spook investors (especially domestic) and pressure the exchange rate. 

Politics: Tensions remain elevated as Gerindra Chair Prabowo Subianto has shown no signs of wavering from his stance that he is the rightful winner of the presidential election.  He has conducted four victory celebrations to date, while rejecting Quick Count indications of the result, impugning the work of the General Election Commission (KPU) and refusing to meet with the president’s ‘emissary’ (Coordinating Maritime Affairs Minister Luhut Panjaitan).  Bellicose rhetoric has emanated from top aides: the chair of Prabowo’s official campaign team, former Military Chief Gen (ret) Djoko Santoso, insisted that the declaration of a win with 62 percent of the vote is a “point of no return”.  The Prabowo supporter Amien Rais, founder of the National Mandate Party (Pan), warned that, “If [the administration] wants to engage in ‘total war’, we are better able to wage it.”  Prabowo conducted a rally for campaigners on 24 April but prohibited journalists from covering it (when one activated a camera, he reportedly suffered a beating).  The Islamic Defenders Front (FPI) is calling for a Third Conference of Clerics to address election cheating.  Tensions could subside if Prabowo changes course – which, given his mercurial character – could occur at any time.  But indications to date suggest he will continue rejecting the Real Count, eventually reject the official count and finally reject a Constitutional Court ruling if it is adverse.  He would then likely mobilize strident Islamic groups to protest, with potential for disruptions in Jakarta (Page 2).  Security officials generated headlines by transferring several Police Mobil Brigade (Brimob) companies from remote provinces to Jakarta (p. 4).  Prabowo’s running mate, Sandiaga Uno, ruled out returning to the Jakarta vice‑governor post (p. 5).

Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news.  The writer is Kevin O’Rourke, author of the book Reformasi.  For subscription info please contact: <[email protected]>.

Justice: State Power Company (PLN) Chief Director Sofyan Basir became a suspect in the Riau-1 powerplant case.  Since 2014 he has dominated decisions on structuring pro­jects, and his removal may therefore trigger changes.  State Minister for State Enterprises Rini Soemarno will likely attempt to impose control through PLN’s interim head (p. 6).

Policy News: For the second time this month, the labor minister made uncharacteristic calls for regulatory reform to realize flexibility and encourage investment.  But he has also pledged to satisfy demands made during the campaign by labor unions (p. 8).

Vote Count: With 36% of the Real Count uploaded, Widodo has 56.1% (p. 11).

Economics:  GDP growth may have reached 5.2 percent during the first quarter, according to Bank Indonesia (BI).  First quarter revenues are low and budget cuts may receive consideration (p. 13). 

2. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

Cbfgdp

  • World (gross) cross-border flows have rebounded strongly
  • Global Liquidity and World Business cycle are increasing driven by cross-border flows
  • Strong cross-border flows drive outperformance of cyclicals and non-US markets

3. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

Changing mix

The 50th JCNC AGM was all about cars, cows and cement. Investors questioned the board on various topics. 

Jardine Cycle & Carriage Ltd (JCNC SP) is an interesting play on Astra (at a discount), and now offers you exposure to some other large companies in Vietnam and Thailand. The increased investments have impacted the balance sheet which now carries $1.3 billion in holding debt. This is high by historical Jardine standards, another rights issue is therefore increasingly likely and is probably only a matter of time.

4. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper

Growth in indonesia picked up while malaysia and singapore slowed yoy 2016 2017 6m18 10m18 chartbuilder

Leong Hup International (LEHUP MK) plans to raise up to US$250m in its Malaysian IPO. The deal seems to have been downsized from the earlier touted US$400m raising. Although the company has managed to get cornerstone investors to take up 45% of the deal.

I’ve covered the fundamental aspects of the deal in my earlier insight:

In this insight, I’ll talk about the updates since the previous filing, comment on valuations and run the deal through our ECM framework.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Indonesia: GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal and more

By | Daily Briefs, Indonesia

In this briefing:

  1. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal
  2. The Global Recovery Narrative Crumbles
  3. Bitcoin, Revisited
  4. StubWorld: JCNC In Unwind Territory As Astra’s Bank Stake Stalls; Poor Stub Results Send Ayala Lower
  5. High Stakes Huawei Gamble a Weight on US and Global Equities

1. GEM Positioning Monthly:  Indonesian Financials, Food & Beverages, Lenovo Sentiment Reversal

Highlights15

Copley Fund Research analyse the holdings of long-only equity funds.  This analysis is taken from our GEM research product, covering 189 global emerging market funds with a combined AUM of $350bn. 

In this month’s Positioning Monthly, we highlight an increasing exposure towards Indonesian Financial stocks, with Bank Rakyat Indonesia Perser (BBRI IJ) and Bank Central Asia (BBCA IJ) the key overweight positions.  We analyse holdings in the food and beverages industry groups as ownership reaches peak levels in both.  Finally, we explore the sharp reversal in Lenovo (992 HK) sentiment as more and more GEM funds buy into the stock.

2. The Global Recovery Narrative Crumbles

3%20 %20copy

The US equity market was running with an optimistic assessment that there is a Trump and Fed put, that a trade deal and Chinese policy stimulus would generate a recovery in the global economy and the US economy was largely immune to a slowdown in activity abroad. However, the tariffs have been increased, trade talks have stalled, and the US has rolled out bans on Chinese tech companies.  The evidence grows that there is a structural rift in US-China trade relations. The rebound in Chinese economic activity in March was not backed up by data in other Asian exporter nations or Europe through April.  Chinese activity data slumped again in April, and the latest PMI data in the Eurozone, Japan and the USA for May are weak. Oil and copper prices have turned lower, suggesting that industrial activity remains weak.  We continue to see downside risk for still elevated US equities.  The strength in the USD to date is contributing to downward pressure on US equities.  The gains in the USD may have become over-extended.  China may pursue a more stable CNY for a period and lower US yields should support safe haven currencies, JPY, CHF and gold.

3. Bitcoin, Revisited

Bitcoin volatility ratio of bitcoin volatility to stocks volatility chartbuilder 3

Bitcoin and the block chain were created just over ten years ago, as a means to create peer to peer transactions without the need to use financial institutions to process the payments. 

However, frequent hacks of Bitcoin exchanges, in addition to the significant past fluctuations of Bitcoin prices, have put mainstream usage off and slowed the adoption of the cryptocurrency.

Is this about to change now?

4. StubWorld: JCNC In Unwind Territory As Astra’s Bank Stake Stalls; Poor Stub Results Send Ayala Lower

Implied

This week in StubWorld …

Preceding my comments on JCNCF, Ayala and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

5. High Stakes Huawei Gamble a Weight on US and Global Equities

1%20 %20copy

The Huawei Entity Listing appears to be a high stakes gamble by the US administration to counter the rise in Chinese economic power in an industry that is critical to the global economy.  It is evidence that the broader economic and trade dispute will be hard to resolve, and makes it harder for China and the US to resume trade negotiations.  This suggests that punitive tariffs may remain in place for much longer than expected and indeed may be expanded further.  Global trade and manufacturing activity appears to have been undermined by the trade dispute, and hopes of a recovery later in the year may continue to fade.  China is likely to retaliate; weakening the outlook for US companies.  It may also weaponise its exchange rate, allowing it to weaken further, adding to strength in the USD, dampening US equities. The market might assume that the Fed will cut rates to support the equity market, but this is unlikely until US financial conditions deteriorate further.  As such, we see a high risk of a weaker global equity market, and under-performance in EM and commodity currencies against safe havens, gold and JPY.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Indonesia: Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows and more

By | Daily Briefs, Indonesia

In this briefing:

  1. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows
  2. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue
  3. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper

1. Buy Cyclicals? US Fed Hijacked By Big Jump In Global Capital Flows

Cbfgdp

  • World (gross) cross-border flows have rebounded strongly
  • Global Liquidity and World Business cycle are increasing driven by cross-border flows
  • Strong cross-border flows drive outperformance of cyclicals and non-US markets

2. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

Changing mix

The 50th JCNC AGM was all about cars, cows and cement. Investors questioned the board on various topics. 

Jardine Cycle & Carriage Ltd (JCNC SP) is an interesting play on Astra (at a discount), and now offers you exposure to some other large companies in Vietnam and Thailand. The increased investments have impacted the balance sheet which now carries $1.3 billion in holding debt. This is high by historical Jardine standards, another rights issue is therefore increasingly likely and is probably only a matter of time.

3. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper

Growth in indonesia picked up while malaysia and singapore slowed yoy 2016 2017 6m18 10m18 chartbuilder

Leong Hup International (LEHUP MK) plans to raise up to US$250m in its Malaysian IPO. The deal seems to have been downsized from the earlier touted US$400m raising. Although the company has managed to get cornerstone investors to take up 45% of the deal.

I’ve covered the fundamental aspects of the deal in my earlier insight:

In this insight, I’ll talk about the updates since the previous filing, comment on valuations and run the deal through our ECM framework.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Indonesia: AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue and more

By | Daily Briefs, Indonesia

In this briefing:

  1. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue
  2. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper
  3. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?

1. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

Changing mix

The 50th JCNC AGM was all about cars, cows and cement. Investors questioned the board on various topics. 

Jardine Cycle & Carriage Ltd (JCNC SP) is an interesting play on Astra (at a discount), and now offers you exposure to some other large companies in Vietnam and Thailand. The increased investments have impacted the balance sheet which now carries $1.3 billion in holding debt. This is high by historical Jardine standards, another rights issue is therefore increasingly likely and is probably only a matter of time.

2. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper

Growth in indonesia picked up while malaysia and singapore slowed yoy 2016 2017 6m18 10m18 chartbuilder

Leong Hup International (LEHUP MK) plans to raise up to US$250m in its Malaysian IPO. The deal seems to have been downsized from the earlier touted US$400m raising. Although the company has managed to get cornerstone investors to take up 45% of the deal.

I’ve covered the fundamental aspects of the deal in my earlier insight:

In this insight, I’ll talk about the updates since the previous filing, comment on valuations and run the deal through our ECM framework.

3. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?

  • MimbleWimble is a powerful, positive technological development in the crypto space. There is an increasing possibility that MimbleWimble protocol may become a sidechain to Bitcoin in the future. The launch of Beam and Grin cryptocurrencies in January 2019 is likely to be just the start of many more MimbleWimble protocol based cryptos that may gain greater market acceptance. From a fundamental perspective, as an increasing number of people realize the benefits of using MimbleWimble alongside Bitcoin, this could be one of the reasons helping to drive Bitcoin price higher this year. 
  • MimbleWimble is a privacy-oriented blockchain protocol which attempts to make transactions very anonymous, while still allowing for external verification on a highly scalable basis and maintaining quick verification.  

  • MimbleWimble has its share of weaknesses including potential government crackdown, slow adoption of MimbleWimble based cryptos by major exchanges, and lack of scripting language.
  • However, the clear superiority in anonymity, scalability, and fungibility of MimbleWimble may outweigh its negatives. All in all, MimbleWimble is one the key technological trends that will impact the cryptocurrencies/blockchain sector this year and it is worthwhile paying close attention on this technology. 

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Brief Indonesia: AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue and more

By | Daily Briefs, Indonesia

In this briefing:

  1. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue
  2. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper
  3. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?
  4. Using BORUC to Pick Asian Growth Stocks

1. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

Changing mix

The 50th JCNC AGM was all about cars, cows and cement. Investors questioned the board on various topics. 

Jardine Cycle & Carriage Ltd (JCNC SP) is an interesting play on Astra (at a discount), and now offers you exposure to some other large companies in Vietnam and Thailand. The increased investments have impacted the balance sheet which now carries $1.3 billion in holding debt. This is high by historical Jardine standards, another rights issue is therefore increasingly likely and is probably only a matter of time.

2. Leong Hup IPO – Privatization Was at Lower Multiples and Key Subsidiary Too Is Trading Cheaper

Growth in indonesia picked up while malaysia and singapore slowed yoy 2016 2017 6m18 10m18 chartbuilder

Leong Hup International (LEHUP MK) plans to raise up to US$250m in its Malaysian IPO. The deal seems to have been downsized from the earlier touted US$400m raising. Although the company has managed to get cornerstone investors to take up 45% of the deal.

I’ve covered the fundamental aspects of the deal in my earlier insight:

In this insight, I’ll talk about the updates since the previous filing, comment on valuations and run the deal through our ECM framework.

3. This Week in Blockchain & Cryptos: MimbleWimble – A Friend or Foe to Bitcoin?

  • MimbleWimble is a powerful, positive technological development in the crypto space. There is an increasing possibility that MimbleWimble protocol may become a sidechain to Bitcoin in the future. The launch of Beam and Grin cryptocurrencies in January 2019 is likely to be just the start of many more MimbleWimble protocol based cryptos that may gain greater market acceptance. From a fundamental perspective, as an increasing number of people realize the benefits of using MimbleWimble alongside Bitcoin, this could be one of the reasons helping to drive Bitcoin price higher this year. 
  • MimbleWimble is a privacy-oriented blockchain protocol which attempts to make transactions very anonymous, while still allowing for external verification on a highly scalable basis and maintaining quick verification.  

  • MimbleWimble has its share of weaknesses including potential government crackdown, slow adoption of MimbleWimble based cryptos by major exchanges, and lack of scripting language.
  • However, the clear superiority in anonymity, scalability, and fungibility of MimbleWimble may outweigh its negatives. All in all, MimbleWimble is one the key technological trends that will impact the cryptocurrencies/blockchain sector this year and it is worthwhile paying close attention on this technology. 

4. Using BORUC to Pick Asian Growth Stocks

Introducing the Bucephalus Operating Return on Utilised Capital

We created BORUC, to reveal the true operating performance of businesses because ‘traditional’ measures (ROE, ROCE etc.) are easy to manipulate. Struggling companies often resort to creative accounting to obscure their problems and hide their decline. This alters the numerator in ROE, ROCE etc. and disguises their investment and capex cycles.

Get Straight to the Source on Smartkarma

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