Korea

In this briefing:

1. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma
2. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

1. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma

TW3 NORTH ASIA 10-16TH JUNE

Smartkarma’s North Asian Insight providers were overwhelmingly bullish this week. In the Event-Driven space, Sanghyun Park provided an update on the Nexon Sale, and Michael Causton gave an excellent overview of the M&A permutations for Japan’s listed Drugstore companies. Douglas Kim reviews SKC’s purchase of KCFT and suggests that the SK Group appears intent on making more big M&A deals where it wants to have a leading presence – in this case in vertically integrating the lithium-ion batteries/components/materials.  Also in Korea, KCGI’s move on Hanjin Kal is running into funding problems, while a 3% stake has recently by purchased by Goldman Sachs, with the rumoured end-buyer being Delta Airlines.  

Only one IPO was commented on – Oshadhi Kumarasiri casts a dubious eye over the upcoming Shin-nihon-seiyaku Co Ltd (4931 JP) deal and suggests that management maybe selling out ahead of the peaking of the company main, and so-far only brand, Perfect One.

Bullish Equity Bottom-Up comments were published on Nissan (7201 JP), Renesas Electronics (6723 JP), Rakuten (4755 JP), Hitachi (6501 JP), Modec(6269 JP), Nintendo (7974 JP), and Life (8194 JP). Only ZOZO (3092 JP) saw (another) bearish call.

Bullish Thematic & Strategy Insights were released on Japanese Telcos from Kirk Boodry – highlighting another regulatory-driven boost for Rakuten, while Sanghyun Park delved into the murky world of high-speed trading (HST) in Korea where Citadel and Merrill Lynch have made some controversial moves. In Japan, HST has recently been regulated with all operators required to establish an onshore entity or appoint a local agent and meet stringent reporting requirements governing their trading activities. Perhaps Korea should follow this example? Lastly, this author updated his Relative Price Score data, although these Insights are not summarised below.  

Nexon Sale: Current Status Checkup

Drug-Fuelled Marriages and Macho Shachos in Japan

Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion

Hanjin Kal Special Situation: KCGI’s Takeover Is Tougher than Previously Appeared

Shinnihonseiyaku IPO: Perfect One, Not So Perfect Afterall

Nissan: Chances of the Alliance Surviving Have Dimmed Greatly

Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

Rakuten Pay Winning the Japanese Cashless War?

Hitachi Ltd. (6501 JP): Share Price Up on Restructuring News

MODEC: On Track to Win Roughly Half of Its Bids

Switch Production to Move From China; Nintendo Plunges After Dull E3 Presentation

Life Corp Ties with Amazon Japan

Zozo: The Underlying Operating Metrics Worry Us

Japan Telcos – Lower Cap for Early Cancellation: Positive for Rakuten

Algorithm Trading on KOSDAQ: Citadel Fund Case Checkup

🇯🇵 Japan • June Relative Price Scores: Market, Sectors & Peer Groups – More of The Same

🇯🇵 Japan • Relative Price Scores – Overbought & Oversold Companies – June 2019

2. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

Last Week in Event SPACE …

• The Huatai Securities Co Ltd (A) (601688 CH) GDR is the one single trade that everyone is looking at.
• Death and taxes – but there is no urgency for the Cho family to sell their shares in Hanjin Kal Corp (180640 KS).
• AGL Energy Ltd (AGL AU) goes off-script and joins an ever-growing list of suitors for Vocus Communications (VOC AU).
• Drug-fuelled marriages and macho shachos amidst Cocokara Fine (3098 JP)‘s two or three-way merger.
• A potential divestment of stores may be required to allay ACCC’s merchandising concerns triggered by the Ruralco Holdings (RHL AU) / Nutrien Ltd (NTR CN) deal.
• KKR makes a (large) fast buck selling its 100% stake in KCF Technologies to Skc Co Ltd (011790 KS) for US$1bn. 

• 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)

Huatai Securities Co Ltd (A) (601688 CH) (Mkt Cap: $20.7bn; Liquidity: $234mn)

The Huatai Sec GDR (Global Depositary Receipt) pricing came out the 11th of June at US$20.00 to US$24.50 per GDR, conveniently after a day with a 5% gain in both the H-share and the A-share issues, announcing the deal at a then 12.5-28+% discount, which was wider than most seemed to have expected.  Now with the deal well-subscribed at the low end, there are warnings investors need to be bid higher than the bottom end to get any paper. 

• There is widespread scepticism as to why the deal needs to be done in the first place, and that gives many people some pause. Because of the discount and the liquidity on the A-shares, and the fact that the low end priced at a four to five year low, the margin of safety people perceive is quite high. 
• There is a lot of talk about how the shares haven’t seen the bottom end price even in the trough post June 2015 A-share crash so that provides a kind of “virtual floor” at around RMB 14/share. The 2015 low price of around RMB 14/share in late Q3 early Q4 2015, was almost exactly one year after they were trading at RMB 8/share in 2014 before the margin-trading bubble-induced runup. 
• Travis Lundy is bullish the GDRs Huatai Securities Co Ltd (HTSC LI) and not necessarily the A shares. He thinks the trade will end up making money for people, whether perfectly hedged or not. As of now, he would expect some softness in the As on the unwind. He also expected those with patience to go past 140 days could see the As rebound a bit after everyone assumes the GDR converters are out of their trade.

(link to Travis’ insight: Huatai GDRs – Prices Lower, Then Sooner, Then Later, Then Higher)

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.9bn; Liquidity: $95mn)

KCGI has accumulated 15.95% in Hanjin at a cost of ₩270bn, the last 1% at a 5.3% premium to last close. KCGI appears to be angling for management takeover. The question is whether the Cho family – holding 28.93% of the common shares and 3.02% of the prefs – are willing/forced sellers. And there are also rumours Mirae is asking KCGI for full repayment on ₩40bn worth of stock collateral loans.

• Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of  ₩230~240bn.
• But that need not be paid at once, and can be paid over 5 years, with that clock starting in October. Taking into account Cho’s severance pay (net of inheritance tax) and stock collateral loans (up to 50% of their stock value), there doesn’t appear to be any urgency on the Cho family’s behalf to unload shares in Hanjin Kal to foot the tax bill.
• At the time of Sanghyun’s note, Hanjin Kal was trading at a 28% premium to NAV. The trade approach was pretty straightforward – short it. That was the right call. I see the premium now at 6%.

links to Sanghyun’s insights: 
Hanjin Kal Special Situation: KCGI’s Takeover Attempt Is Tougher than Previously Appeared
Hanjin Kal Special Situation: Market Wide Shorting Looming

Vocus Communications (VOC AU)  (Mkt Cap: $1.9bn; Liquidity: $10mn)

Vocus has announced it has received an A$3.02bn (US$2.1bn) non-binding, indicative proposal from Aussie energy outfit AGL Energy Ltd (AGL AU) by way of a Scheme, at A$4.85/share in cash, a 26.63% premium to last close. This proposal arrives one week after Swedish PE outfit EQT and Vocus terminated takeover talks – and just two weeks since that lofty $5.25/share indicative offer was first announced.

• For EQT’s “hairy” pre-event proposal, I said that there was value; and there (potentially) were/are multiple players out there who could look at this situation, given Vocus’ fibre network offers efficient scale characteristics.
• AGL views Vocus as providing a stronger product set/mix to its customers in the long-term. The opposing view is that AGL is getting desperate in the face of increased scrutiny of its electricity prices forcing a shift away from its core competence. AGL was down 7.2% on the news, although this was probably compounded by a reduced profit guidance announcement after an extended unit outage.
• IF a deal does get done – this may complete around mid-November. That remains a big “IF”. Currently trading at A$4.36, which shows a return/risk of 11% up to the indicative offer vs. 12% down, roughly similar to where shares traded in response to EQT’s proposal.

(link to my insight: AGL Takes A Turn At Vocus)

Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)

Japan’s drugstore industry began a new era of consolidation after a decade of already unprecedented growth at the top. Cocokara Fine, the seventh-ranked drugstore retailer in Japan announced it was not only in talks with fourth-ranked Matsumotokiyoshi (Matsukiyo), as it had already confirmed a month before, but had now also begun negotiations with Sugi Holdings (7649 JP), the sixth largest firm. This was also discussed in Travis’ Insight Cocokara Fine は Cocokara いいね.

• Unlike supermarkets and home centres, drugstore consolidation is not just about melding regional power into a national chain but is also about the additional pressure to acquire share in drugstore merchandise categories where the acquirer is weak. 
• Michael Causton believes a merger between Sugi and Cocokara Fine is a natural fit because of the synergistic regional coverage but also their differing merchandise strengths. But, Matsukiyo also needs to acquire or merge, and fast. While it has stores in 45 of 47 prefectures, its presence outside the Tokyo region is minimal and it has dropped from first place to fourth in just three years, with even more headwinds going forward.
• If there is a two or three-way merger, Aeon and Tsuruha are unlikely to stand still since even just a Sugi/Cocokara deal would create a new sector leader by sales. Aeon and Tsuruha already work together on sourcing and private brands through the Aeon-led Hapicom buying group. If the pressure builds and Aeon tries to force a merger on Tsuruha as it did with CFS in 2007-8, Tsuruha and Matsukiyo may find common cause and arrange partial merger.

(link to Michael’s insight: Drug-Fuelled Marriages and Macho Shachos* in Japan)

Ruralco Holdings (RHL AU) (Mkt Cap: $302mn; Liquidity: $1mn)

Although the release of the ACCC’s Statement of Issues (SOI) is less than ideal development in the Nutrien Ltd (NTR CN) / Ruralco merger – an informal clearance from the ACCC would have been preferable – it was not an unforeseen development, nor is it viewed as a deal breaker. The ACCC’s concerns are not definitive or strongly worded, therefore the possibility of a formal clearance remains. But on balance, my read is that there is sufficient weight surrounding merchandising issues such that a divestment of stores is likely required for this deal to get up.

• The ACCC highlighted 7 areas (one each in WA and NSW, two in Queensland and three in the Northern Territories) where the remaining competition – subsequent to a successful merger – is limited. The ACCC also flagged some regional centres only source wholesale supplied from either Ruralco or Nutrien. This may lead to the amalgamated company discriminating on prices and supplies to stores within its own network compared to independent stores in the same catchment.

• To this, Nutrien could lodge a proposed undertaking with the ACCC to divest certain stores in the 7 highlighted (by the ACCC) catchments to address competition concerns. Such a submission would likely be premised on the ACCC accepting the court-enforceable divestment proposal, and a rescheduled Scheme Meeting could probably be reconvened in around a month after the undertaking proposal. Should this transpire, I would expect no change to the Scheme Offer Price.
• Currently trading at a gross/annualised spread of 5.5%/21% – with the annualised % roughly in line with the figure prior to the SOI announcement, suggesting a positive remedy to the issues raised by the ACCC is expected. The risk/reward looks attractive here.

(link to my insight: ACCC Raises Concerns With Ruralco/Nutrien)

Skc Co Ltd (011790 KS) (Mkt Cap: $1.1bn; Liquidity: $4mn)

SKC has agreed to acquire a 100% stake in KCFT (KCF Technologies) for ₩1tn (US$1bn) from KKR. SKC plans to use about ₩400bn-₩500bn of its own equity capital to fund the transaction with the remaining ₩700bn-₩800bn sourced from debt financing. KKR will make a tidy profit from the deal – in February 2018, it acquired a 100% stake of LS Mtron’s copper foil and thin film business for ₩300bn and renamed it KCFT. 

• KCFT has the number one market share globally (15% share) for making copper foil and thin film products used in lithium ion battery based EVs. 
• SK Group is currently the third largest player in the EV batteries and related components/materials in Korea, after LG Chem Ltd (051910 KS) and Samsung Sdi (006400 KS). The acquisition of KCFT should accelerate SK Group’s efforts to vertically integrate the value chain of the lithium ion batteries/components/materials.
• KCFT’s finances are mainly kept under wraps, however, based on the acquisition price, this suggests 4x P/S and 40x P/E, using estimated sales and net profits in 2018.

(link to  Douglas Kim‘s insight: Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion)

Briefly …

Reportedly LG Corp (003550 KS) plans to sell a 35% or more stake of LG CNS for about ₩1tn. LG CNS is the system integration IT service unit of the LG Group. Douglas believes this sale will provide a positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends. (link to Douglas’ insight: Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won)

United Technologies (UTX US)  (Mkt Cap: $108bn; Liquidity: $100mn)

The market raction to the proposed ‘merger of equals’ between aerospace giant UTX and US defense  contractor Raytheon Company (RTN US) announced at the beginning of the week, has so far been underwhelming. 

• Robert Sassoon believes the major complicating factor in this situation is that UTX is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price.
• This has significant ramifications for an all-stock deal in which the substantially undervalued UTX stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which he assesses should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected.

(link to Robert’s insight: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms)

Italian Banks

The Italian banking system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A. Yet prospective Italian banking M&A activity has more recently been domestic, largely due to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically.

• Victor Galliano believes Italian bank stock valuations are driven by the challenging domestic macro-economic and political outlook; yet for the longer term, he likes UniCredit SpA (UCG IM) with its attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks.
• In M&A land, Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; and Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are confined to being acquisition targets for banks with high risk appetites

(link to Victor’s insight: Italian Banks M&A – The Complex Italian Job)

• Three weeks have now elapsed since the Offer for Harbin Electric Co Ltd H (1133 HK) was extended. That means shareholders who had previously tendered are now entitled to withdraw their acceptances, if they so choose, which takes about 10 days. I estimate ~9.2mn shares have additionally tendered since the extension, or 1.4%, giving a total acceptance level of 87.2%. But, 9.5mn shares or ~1.4% have now moved back into CCASS – which appear to be shares to be withdrawn. Shares closed Friday at $4.41, the lowest since the extension announcement. ~5.8% of issued shares have changed hands since the extension, more than enough for the deal to get up.

• Shortly after publishing my insight, Netcomm Wireless (NTC AU) released the supplementary disclosure. The directors reaffirm their recommendation to vote for the Scheme. The disclosure sought to clarify how the directors can recommend the Offer yet maintain a bright future. In short, the directors consider the Scheme crystalises value now. There doesn’t appear to be any news out of the ordinary here. But delaying the vote so as to make this disclosure is unusual. Shares closed firm at $1.08 compared to the $1.10/share Scheme Offer. The Scheme Meeting will be held on the 18th June.

• Indofood Agri Resources (IFAR SP) issued a notice which simply reiterates the final Offer Price and the closing date (25 June – 60th day from dispatch). No update to the % tendered was provided.

• DuluxGroup Ltd (DLX AU)‘s Scheme Meeting will be held on the 31 July.

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.   

For the past fifteen months, I’ve flagged 345 large moves (>10%) in my weekly Event SPACE insights. So I analysed those moves across 112 brokers. Some of the observations include:

• Overall, 50% of stocks demonstrating a large CCASS movement underperformed the HSI in the first week after the share transfer, which is neither here nor there, however, this number gradually increased over time, touching 70% one-year after the share transfer.
• Share transfers involving stocks with a market capitalisation of less than US$250mn AND between US$500mn to US$1bn, were the worst performers, in absolute terms and relative to the HSI.
• When combining the % CCASS change and market capitalisation, stocks with a market capitalisation in excess of US$1bn at the time of the shares transferred displayed a reduced tendency to underperform. 

(link to my insight: CCASS: Why Large Moves Matter Redux)

In this briefing:

1. The Role of Election Polls, Credit Ratings, & KOSPI on Pressuring Moon Jae-In to Change His Mind
2. Nexon Sale: MBK Behind Scene Stories
3. Are Risky Assets Overvalued?
4. Taking Off: Vietnamese Exports Are Rocking and Rolling
5. WDC Impact from Toshiba Power Outage

1. The Role of Election Polls, Credit Ratings, & KOSPI on Pressuring Moon Jae-In to Change His Mind

In this report, we provide a detailed analysis of the key factors/events that could cause Moon Jae-In to change his mind to become more friendly with Japan instead of maintaining his hostile position.

2. Nexon Sale: MBK Behind Scene Stories

MBK was one of the three leading horses in the Nexon sale race. It was the only FI in this group. You know this is MBK, the king of deals. It’s hard to believe, but even this MBK didn’t know KJJ’s cancellation until the last minute. One local news outlet “Chosun” put out a report that gives us a rare detailed picture of what had been going at MBK until the last minute regarding this deal. I found what’s contained in this report very informative and interesting for Nexon investors even after the deal got wrapped up in an unexpected way.

In this post, I summarize some of the key happenings at MBK regarding the Nexon deal. I need to make this very clear that this post is mainly based on this Chosun report, but it also includes what I heard and found from other sources, mainly local stock investment online communities.

Here is the link of the Chosun report if you want to read the original.

3. Are Risky Assets Overvalued?

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

4. Taking Off: Vietnamese Exports Are Rocking and Rolling

Whisper it quietly but not all Asian exporters are struggling. In the first six months of 2019 the dollar value of exports from Korea dropped 8.5% YoY. Taiwanese exports were down 3.6% YoY . Meanwhile, Chinese exports, the country at the heart of the trade war, were down just 0.1% YoY.  

5. WDC Impact from Toshiba Power Outage

Toshiba’s Mid-June power outage raised some alarm about potential product shortfalls for Western Digital (WDC).  This Insight evaluates the likely outcome of the event and finds that its timing in the industry cycle will dull its impact, if there is any impact at all.

In this briefing:

1. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

1. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

Last Week in Event SPACE …

• The Huatai Securities Co Ltd (A) (601688 CH) GDR is the one single trade that everyone is looking at.
• Death and taxes – but there is no urgency for the Cho family to sell their shares in Hanjin Kal Corp (180640 KS).
• AGL Energy Ltd (AGL AU) goes off-script and joins an ever-growing list of suitors for Vocus Communications (VOC AU).
• Drug-fuelled marriages and macho shachos amidst Cocokara Fine (3098 JP)‘s two or three-way merger.
• A potential divestment of stores may be required to allay ACCC’s merchandising concerns triggered by the Ruralco Holdings (RHL AU) / Nutrien Ltd (NTR CN) deal.
• KKR makes a (large) fast buck selling its 100% stake in KCF Technologies to Skc Co Ltd (011790 KS) for US$1bn. 

• 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)

Huatai Securities Co Ltd (A) (601688 CH) (Mkt Cap: $20.7bn; Liquidity: $234mn)

The Huatai Sec GDR (Global Depositary Receipt) pricing came out the 11th of June at US$20.00 to US$24.50 per GDR, conveniently after a day with a 5% gain in both the H-share and the A-share issues, announcing the deal at a then 12.5-28+% discount, which was wider than most seemed to have expected.  Now with the deal well-subscribed at the low end, there are warnings investors need to be bid higher than the bottom end to get any paper. 

• There is widespread scepticism as to why the deal needs to be done in the first place, and that gives many people some pause. Because of the discount and the liquidity on the A-shares, and the fact that the low end priced at a four to five year low, the margin of safety people perceive is quite high. 
• There is a lot of talk about how the shares haven’t seen the bottom end price even in the trough post June 2015 A-share crash so that provides a kind of “virtual floor” at around RMB 14/share. The 2015 low price of around RMB 14/share in late Q3 early Q4 2015, was almost exactly one year after they were trading at RMB 8/share in 2014 before the margin-trading bubble-induced runup. 
• Travis Lundy is bullish the GDRs Huatai Securities Co Ltd (HTSC LI) and not necessarily the A shares. He thinks the trade will end up making money for people, whether perfectly hedged or not. As of now, he would expect some softness in the As on the unwind. He also expected those with patience to go past 140 days could see the As rebound a bit after everyone assumes the GDR converters are out of their trade.

(link to Travis’ insight: Huatai GDRs – Prices Lower, Then Sooner, Then Later, Then Higher)

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.9bn; Liquidity: $95mn)

KCGI has accumulated 15.95% in Hanjin at a cost of ₩270bn, the last 1% at a 5.3% premium to last close. KCGI appears to be angling for management takeover. The question is whether the Cho family – holding 28.93% of the common shares and 3.02% of the prefs – are willing/forced sellers. And there are also rumours Mirae is asking KCGI for full repayment on ₩40bn worth of stock collateral loans.

• Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of  ₩230~240bn.
• But that need not be paid at once, and can be paid over 5 years, with that clock starting in October. Taking into account Cho’s severance pay (net of inheritance tax) and stock collateral loans (up to 50% of their stock value), there doesn’t appear to be any urgency on the Cho family’s behalf to unload shares in Hanjin Kal to foot the tax bill.
• At the time of Sanghyun’s note, Hanjin Kal was trading at a 28% premium to NAV. The trade approach was pretty straightforward – short it. That was the right call. I see the premium now at 6%.

links to Sanghyun’s insights: 
Hanjin Kal Special Situation: KCGI’s Takeover Attempt Is Tougher than Previously Appeared
Hanjin Kal Special Situation: Market Wide Shorting Looming

Vocus Communications (VOC AU)  (Mkt Cap: $1.9bn; Liquidity: $10mn)

Vocus has announced it has received an A$3.02bn (US$2.1bn) non-binding, indicative proposal from Aussie energy outfit AGL Energy Ltd (AGL AU) by way of a Scheme, at A$4.85/share in cash, a 26.63% premium to last close. This proposal arrives one week after Swedish PE outfit EQT and Vocus terminated takeover talks – and just two weeks since that lofty $5.25/share indicative offer was first announced.

• For EQT’s “hairy” pre-event proposal, I said that there was value; and there (potentially) were/are multiple players out there who could look at this situation, given Vocus’ fibre network offers efficient scale characteristics.
• AGL views Vocus as providing a stronger product set/mix to its customers in the long-term. The opposing view is that AGL is getting desperate in the face of increased scrutiny of its electricity prices forcing a shift away from its core competence. AGL was down 7.2% on the news, although this was probably compounded by a reduced profit guidance announcement after an extended unit outage.
• IF a deal does get done – this may complete around mid-November. That remains a big “IF”. Currently trading at A$4.36, which shows a return/risk of 11% up to the indicative offer vs. 12% down, roughly similar to where shares traded in response to EQT’s proposal.

(link to my insight: AGL Takes A Turn At Vocus)

Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)

Japan’s drugstore industry began a new era of consolidation after a decade of already unprecedented growth at the top. Cocokara Fine, the seventh-ranked drugstore retailer in Japan announced it was not only in talks with fourth-ranked Matsumotokiyoshi (Matsukiyo), as it had already confirmed a month before, but had now also begun negotiations with Sugi Holdings (7649 JP), the sixth largest firm. This was also discussed in Travis’ Insight Cocokara Fine は Cocokara いいね.

• Unlike supermarkets and home centres, drugstore consolidation is not just about melding regional power into a national chain but is also about the additional pressure to acquire share in drugstore merchandise categories where the acquirer is weak. 
• Michael Causton believes a merger between Sugi and Cocokara Fine is a natural fit because of the synergistic regional coverage but also their differing merchandise strengths. But, Matsukiyo also needs to acquire or merge, and fast. While it has stores in 45 of 47 prefectures, its presence outside the Tokyo region is minimal and it has dropped from first place to fourth in just three years, with even more headwinds going forward.
• If there is a two or three-way merger, Aeon and Tsuruha are unlikely to stand still since even just a Sugi/Cocokara deal would create a new sector leader by sales. Aeon and Tsuruha already work together on sourcing and private brands through the Aeon-led Hapicom buying group. If the pressure builds and Aeon tries to force a merger on Tsuruha as it did with CFS in 2007-8, Tsuruha and Matsukiyo may find common cause and arrange partial merger.

(link to Michael’s insight: Drug-Fuelled Marriages and Macho Shachos* in Japan)

Ruralco Holdings (RHL AU) (Mkt Cap: $302mn; Liquidity: $1mn)

Although the release of the ACCC’s Statement of Issues (SOI) is less than ideal development in the Nutrien Ltd (NTR CN) / Ruralco merger – an informal clearance from the ACCC would have been preferable – it was not an unforeseen development, nor is it viewed as a deal breaker. The ACCC’s concerns are not definitive or strongly worded, therefore the possibility of a formal clearance remains. But on balance, my read is that there is sufficient weight surrounding merchandising issues such that a divestment of stores is likely required for this deal to get up.

• The ACCC highlighted 7 areas (one each in WA and NSW, two in Queensland and three in the Northern Territories) where the remaining competition – subsequent to a successful merger – is limited. The ACCC also flagged some regional centres only source wholesale supplied from either Ruralco or Nutrien. This may lead to the amalgamated company discriminating on prices and supplies to stores within its own network compared to independent stores in the same catchment.

• To this, Nutrien could lodge a proposed undertaking with the ACCC to divest certain stores in the 7 highlighted (by the ACCC) catchments to address competition concerns. Such a submission would likely be premised on the ACCC accepting the court-enforceable divestment proposal, and a rescheduled Scheme Meeting could probably be reconvened in around a month after the undertaking proposal. Should this transpire, I would expect no change to the Scheme Offer Price.
• Currently trading at a gross/annualised spread of 5.5%/21% – with the annualised % roughly in line with the figure prior to the SOI announcement, suggesting a positive remedy to the issues raised by the ACCC is expected. The risk/reward looks attractive here.

(link to my insight: ACCC Raises Concerns With Ruralco/Nutrien)

Skc Co Ltd (011790 KS) (Mkt Cap: $1.1bn; Liquidity: $4mn)

SKC has agreed to acquire a 100% stake in KCFT (KCF Technologies) for ₩1tn (US$1bn) from KKR. SKC plans to use about ₩400bn-₩500bn of its own equity capital to fund the transaction with the remaining ₩700bn-₩800bn sourced from debt financing. KKR will make a tidy profit from the deal – in February 2018, it acquired a 100% stake of LS Mtron’s copper foil and thin film business for ₩300bn and renamed it KCFT. 

• KCFT has the number one market share globally (15% share) for making copper foil and thin film products used in lithium ion battery based EVs. 
• SK Group is currently the third largest player in the EV batteries and related components/materials in Korea, after LG Chem Ltd (051910 KS) and Samsung Sdi (006400 KS). The acquisition of KCFT should accelerate SK Group’s efforts to vertically integrate the value chain of the lithium ion batteries/components/materials.
• KCFT’s finances are mainly kept under wraps, however, based on the acquisition price, this suggests 4x P/S and 40x P/E, using estimated sales and net profits in 2018.

(link to  Douglas Kim‘s insight: Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion)

Briefly …

Reportedly LG Corp (003550 KS) plans to sell a 35% or more stake of LG CNS for about ₩1tn. LG CNS is the system integration IT service unit of the LG Group. Douglas believes this sale will provide a positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends. (link to Douglas’ insight: Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won)

United Technologies (UTX US)  (Mkt Cap: $108bn; Liquidity: $100mn)

The market raction to the proposed ‘merger of equals’ between aerospace giant UTX and US defense  contractor Raytheon Company (RTN US) announced at the beginning of the week, has so far been underwhelming. 

• Robert Sassoon believes the major complicating factor in this situation is that UTX is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price.
• This has significant ramifications for an all-stock deal in which the substantially undervalued UTX stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which he assesses should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected.

(link to Robert’s insight: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms)

Italian Banks

The Italian banking system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A. Yet prospective Italian banking M&A activity has more recently been domestic, largely due to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically.

• Victor Galliano believes Italian bank stock valuations are driven by the challenging domestic macro-economic and political outlook; yet for the longer term, he likes UniCredit SpA (UCG IM) with its attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks.
• In M&A land, Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; and Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are confined to being acquisition targets for banks with high risk appetites

(link to Victor’s insight: Italian Banks M&A – The Complex Italian Job)

• Three weeks have now elapsed since the Offer for Harbin Electric Co Ltd H (1133 HK) was extended. That means shareholders who had previously tendered are now entitled to withdraw their acceptances, if they so choose, which takes about 10 days. I estimate ~9.2mn shares have additionally tendered since the extension, or 1.4%, giving a total acceptance level of 87.2%. But, 9.5mn shares or ~1.4% have now moved back into CCASS – which appear to be shares to be withdrawn. Shares closed Friday at $4.41, the lowest since the extension announcement. ~5.8% of issued shares have changed hands since the extension, more than enough for the deal to get up.

• Shortly after publishing my insight, Netcomm Wireless (NTC AU) released the supplementary disclosure. The directors reaffirm their recommendation to vote for the Scheme. The disclosure sought to clarify how the directors can recommend the Offer yet maintain a bright future. In short, the directors consider the Scheme crystalises value now. There doesn’t appear to be any news out of the ordinary here. But delaying the vote so as to make this disclosure is unusual. Shares closed firm at $1.08 compared to the $1.10/share Scheme Offer. The Scheme Meeting will be held on the 18th June.

• Indofood Agri Resources (IFAR SP) issued a notice which simply reiterates the final Offer Price and the closing date (25 June – 60th day from dispatch). No update to the % tendered was provided.

• DuluxGroup Ltd (DLX AU)‘s Scheme Meeting will be held on the 31 July.

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.   

For the past fifteen months, I’ve flagged 345 large moves (>10%) in my weekly Event SPACE insights. So I analysed those moves across 112 brokers. Some of the observations include:

• Overall, 50% of stocks demonstrating a large CCASS movement underperformed the HSI in the first week after the share transfer, which is neither here nor there, however, this number gradually increased over time, touching 70% one-year after the share transfer.
• Share transfers involving stocks with a market capitalisation of less than US$250mn AND between US$500mn to US$1bn, were the worst performers, in absolute terms and relative to the HSI.
• When combining the % CCASS change and market capitalisation, stocks with a market capitalisation in excess of US$1bn at the time of the shares transferred displayed a reduced tendency to underperform. 

(link to my insight: CCASS: Why Large Moves Matter Redux)

In this briefing:

1. Nexon Sale: MBK Behind Scene Stories
2. Are Risky Assets Overvalued?
3. Taking Off: Vietnamese Exports Are Rocking and Rolling
4. WDC Impact from Toshiba Power Outage
5. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)

1. Nexon Sale: MBK Behind Scene Stories

MBK was one of the three leading horses in the Nexon sale race. It was the only FI in this group. You know this is MBK, the king of deals. It’s hard to believe, but even this MBK didn’t know KJJ’s cancellation until the last minute. One local news outlet “Chosun” put out a report that gives us a rare detailed picture of what had been going at MBK until the last minute regarding this deal. I found what’s contained in this report very informative and interesting for Nexon investors even after the deal got wrapped up in an unexpected way.

In this post, I summarize some of the key happenings at MBK regarding the Nexon deal. I need to make this very clear that this post is mainly based on this Chosun report, but it also includes what I heard and found from other sources, mainly local stock investment online communities.

Here is the link of the Chosun report if you want to read the original.

2. Are Risky Assets Overvalued?

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

3. Taking Off: Vietnamese Exports Are Rocking and Rolling

Whisper it quietly but not all Asian exporters are struggling. In the first six months of 2019 the dollar value of exports from Korea dropped 8.5% YoY. Taiwanese exports were down 3.6% YoY . Meanwhile, Chinese exports, the country at the heart of the trade war, were down just 0.1% YoY.  

4. WDC Impact from Toshiba Power Outage

Toshiba’s Mid-June power outage raised some alarm about potential product shortfalls for Western Digital (WDC).  This Insight evaluates the likely outcome of the event and finds that its timing in the industry cycle will dull its impact, if there is any impact at all.

5. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)

It has been more than 20 years that I’ve been covering the Korean markets and never has the political climate between Japan and South Korea been this terrible to the extent that the Japanese government has imposed the first round of significant economic sanctions on South Korea. 

In our view, there will likely be no major positive news next week that could dramatically result in the reconciliation between Japan and South Korea. Rather, we believe this heated political battle between Japan and South Korea appears to be just starting and that the Japanese government could impose the SECOND ROUND of economic sanctions on South Korea some time in August/September. 

While all these economic sanctions and restrictions of key chemical/semiconductor materials are occurring, the story of the “Joseon white porcelains” came to my mind. All in all, the current restrictions of key chemical materials from Japan such as fluorine-containing polyimide, resists, and etching gas are reminiscent of the trade restrictions on imported items such as cobalt during the Joseon dynasty hundreds of years ago.  They are also a keen reminder that in order for Korea to have a vibrant, flourishing economy, excellent political relationships with its close, powerful neighbors including China and Japan is a must. 

In this briefing:

1. Are Risky Assets Overvalued?
2. Taking Off: Vietnamese Exports Are Rocking and Rolling
3. WDC Impact from Toshiba Power Outage
4. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)
5. Key Impact of 2.9% Minimum Wage Hike in Korea for 2020 – Who Are Major Beneficiaries?

1. Are Risky Assets Overvalued?

US stocks are significantly overvalued and we should expect lower than average returns going forward, unless there is going to be a substantial increase in earnings growth.

In the credit space, corporate bonds are expensive, and leveraged loans unattractive.

As risky assets become less attractive and expensive, that leaves investors mostly with Government Bonds.

2. Taking Off: Vietnamese Exports Are Rocking and Rolling

Whisper it quietly but not all Asian exporters are struggling. In the first six months of 2019 the dollar value of exports from Korea dropped 8.5% YoY. Taiwanese exports were down 3.6% YoY . Meanwhile, Chinese exports, the country at the heart of the trade war, were down just 0.1% YoY.  

3. WDC Impact from Toshiba Power Outage

Toshiba’s Mid-June power outage raised some alarm about potential product shortfalls for Western Digital (WDC).  This Insight evaluates the likely outcome of the event and finds that its timing in the industry cycle will dull its impact, if there is any impact at all.

4. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)

It has been more than 20 years that I’ve been covering the Korean markets and never has the political climate between Japan and South Korea been this terrible to the extent that the Japanese government has imposed the first round of significant economic sanctions on South Korea. 

In our view, there will likely be no major positive news next week that could dramatically result in the reconciliation between Japan and South Korea. Rather, we believe this heated political battle between Japan and South Korea appears to be just starting and that the Japanese government could impose the SECOND ROUND of economic sanctions on South Korea some time in August/September. 

While all these economic sanctions and restrictions of key chemical/semiconductor materials are occurring, the story of the “Joseon white porcelains” came to my mind. All in all, the current restrictions of key chemical materials from Japan such as fluorine-containing polyimide, resists, and etching gas are reminiscent of the trade restrictions on imported items such as cobalt during the Joseon dynasty hundreds of years ago.  They are also a keen reminder that in order for Korea to have a vibrant, flourishing economy, excellent political relationships with its close, powerful neighbors including China and Japan is a must. 

5. Key Impact of 2.9% Minimum Wage Hike in Korea for 2020 – Who Are Major Beneficiaries?

This morning, the South Korean government announced the minimum wages effective January 1st, 2020 which will be 8,590 won (US$7.30) (up 2.9% YoY). This will be the smallest hike in minimum wages in Korea since 2010 when they rose 2.8% YoY. The minimum wages in Korea were raised so much in the past two years (up 16.4% YoY in 2018 and up 10.9% YoY in 2019). This was the highest increase in minimum wages among the OECD countries in the past two years.

There were some fears that the minimum wages in Korea would be raised in the high single digits next year. The fact that the minimum wages growth has been capped at 2.9% will be viewed positively by the market. The incumbent administration has finally realized that the excessive minimum wage growth has negatively impacted the domestic economy and has reduced the minimum wage growth. 

The following are the major companies among the top 100 market cap stocks in Korea that should be positively impacted by the 2.9% minimum wage hikes in 2020:

• E Mart Inc (139480 KS)
• BGF Retail (282330 KS) 
• Cj Logistics (000120 KS)
• Gs Retail (007070 KS) 
• Shinsegae (004170 KS) 

In this briefing:

1. This Week in Blockchain & Cryptos: Visa, Ubisoft, GM, Target, FB & Apple Reveal Blockchain Plans
2. Nexon Sale: Kakao Is Emerging as the Leading Horse
3. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma
4. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

1. This Week in Blockchain & Cryptos: Visa, Ubisoft, GM, Target, FB & Apple Reveal Blockchain Plans

• Bitcoin saw a correction during the first week of June but has recovered quickly. Bitcoin’s leading indicators remain positive, giving a bullish outlook for the market.  
• A number of public companies, including Visa Inc (V US), UBISOFT Entertainment (UBI FP), Legal & General (LGEN LN),  General Motors Co (GM US), Target Corp (TGT US), Panalpina Welttransport Holding (PWTN SW), Facebook Inc A (FB US) and Apple Inc (AAPL US) revealed their blockchain plans/initiatives during the past two weeks. 
• In other news, Justin Sun, the founder of the cryptocurrency company Tron, was the winner of this year’s “Power Lunch” with Warren Buffet, while major Korean banks show an appetite for blockchain based solutions.

2. Nexon Sale: Kakao Is Emerging as the Leading Horse

Yeah, Nexon event is very quiet. Even we didn’t have rumor report from local media lately since the main bid closing. So, we are hearing all kinds of worrying voices that the deal may be falling apart. Then, MK, one of Korea’s top tier economic daily, put out a follow-up report on this event late today. MK quoted someone familiar with the matter, possibly a banker working on this deal or a Nexon insider, but MK doesn’t specify the identity further. This “someone” told MK that the deal is still very much alive. Just, it now seems that KKR and Bain are no longer in the race. According to MK (well actually this “someone”), it is now a three-horse race between Kakao, Netmarble and MBK. Is this a surprise? Of course, it is not. What’s really bothering me is why this “someone inside” has always been leaking inside info and mood to local media, mainly MK and HK. Is Nexon doing it on purpose to buttress the share price so that they can keep having the upper hand in the deal talking? Well, it may be, or I don’t know for sure. Alright, let’s put this intention thing aside for now, and let’s first take a look at what this “someone” told MK.

BTW, this is the link of this latest MK report. (Title is quite provocative…)

3. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma

TW3 NORTH ASIA 10-16TH JUNE

Smartkarma’s North Asian Insight providers were overwhelmingly bullish this week. In the Event-Driven space, Sanghyun Park provided an update on the Nexon Sale, and Michael Causton gave an excellent overview of the M&A permutations for Japan’s listed Drugstore companies. Douglas Kim reviews SKC’s purchase of KCFT and suggests that the SK Group appears intent on making more big M&A deals where it wants to have a leading presence – in this case in vertically integrating the lithium-ion batteries/components/materials.  Also in Korea, KCGI’s move on Hanjin Kal is running into funding problems, while a 3% stake has recently by purchased by Goldman Sachs, with the rumoured end-buyer being Delta Airlines.  

Only one IPO was commented on – Oshadhi Kumarasiri casts a dubious eye over the upcoming Shin-nihon-seiyaku Co Ltd (4931 JP) deal and suggests that management maybe selling out ahead of the peaking of the company main, and so-far only brand, Perfect One.

Bullish Equity Bottom-Up comments were published on Nissan (7201 JP), Renesas Electronics (6723 JP), Rakuten (4755 JP), Hitachi (6501 JP), Modec(6269 JP), Nintendo (7974 JP), and Life (8194 JP). Only ZOZO (3092 JP) saw (another) bearish call.

Bullish Thematic & Strategy Insights were released on Japanese Telcos from Kirk Boodry – highlighting another regulatory-driven boost for Rakuten, while Sanghyun Park delved into the murky world of high-speed trading (HST) in Korea where Citadel and Merrill Lynch have made some controversial moves. In Japan, HST has recently been regulated with all operators required to establish an onshore entity or appoint a local agent and meet stringent reporting requirements governing their trading activities. Perhaps Korea should follow this example? Lastly, this author updated his Relative Price Score data, although these Insights are not summarised below.  

Nexon Sale: Current Status Checkup

Drug-Fuelled Marriages and Macho Shachos in Japan

Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion

Hanjin Kal Special Situation: KCGI’s Takeover Is Tougher than Previously Appeared

Shinnihonseiyaku IPO: Perfect One, Not So Perfect Afterall

Nissan: Chances of the Alliance Surviving Have Dimmed Greatly

Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

Rakuten Pay Winning the Japanese Cashless War?

Hitachi Ltd. (6501 JP): Share Price Up on Restructuring News

MODEC: On Track to Win Roughly Half of Its Bids

Switch Production to Move From China; Nintendo Plunges After Dull E3 Presentation

Life Corp Ties with Amazon Japan

Zozo: The Underlying Operating Metrics Worry Us

Japan Telcos – Lower Cap for Early Cancellation: Positive for Rakuten

Algorithm Trading on KOSDAQ: Citadel Fund Case Checkup

🇯🇵 Japan • June Relative Price Scores: Market, Sectors & Peer Groups – More of The Same

🇯🇵 Japan • Relative Price Scores – Overbought & Oversold Companies – June 2019

4. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

Last Week in Event SPACE …

• The Huatai Securities Co Ltd (A) (601688 CH) GDR is the one single trade that everyone is looking at.
• Death and taxes – but there is no urgency for the Cho family to sell their shares in Hanjin Kal Corp (180640 KS).
• AGL Energy Ltd (AGL AU) goes off-script and joins an ever-growing list of suitors for Vocus Communications (VOC AU).
• Drug-fuelled marriages and macho shachos amidst Cocokara Fine (3098 JP)‘s two or three-way merger.
• A potential divestment of stores may be required to allay ACCC’s merchandising concerns triggered by the Ruralco Holdings (RHL AU) / Nutrien Ltd (NTR CN) deal.
• KKR makes a (large) fast buck selling its 100% stake in KCF Technologies to Skc Co Ltd (011790 KS) for US$1bn. 

• 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)

Huatai Securities Co Ltd (A) (601688 CH) (Mkt Cap: $20.7bn; Liquidity: $234mn)

The Huatai Sec GDR (Global Depositary Receipt) pricing came out the 11th of June at US$20.00 to US$24.50 per GDR, conveniently after a day with a 5% gain in both the H-share and the A-share issues, announcing the deal at a then 12.5-28+% discount, which was wider than most seemed to have expected.  Now with the deal well-subscribed at the low end, there are warnings investors need to be bid higher than the bottom end to get any paper. 

• There is widespread scepticism as to why the deal needs to be done in the first place, and that gives many people some pause. Because of the discount and the liquidity on the A-shares, and the fact that the low end priced at a four to five year low, the margin of safety people perceive is quite high. 
• There is a lot of talk about how the shares haven’t seen the bottom end price even in the trough post June 2015 A-share crash so that provides a kind of “virtual floor” at around RMB 14/share. The 2015 low price of around RMB 14/share in late Q3 early Q4 2015, was almost exactly one year after they were trading at RMB 8/share in 2014 before the margin-trading bubble-induced runup. 
• Travis Lundy is bullish the GDRs Huatai Securities Co Ltd (HTSC LI) and not necessarily the A shares. He thinks the trade will end up making money for people, whether perfectly hedged or not. As of now, he would expect some softness in the As on the unwind. He also expected those with patience to go past 140 days could see the As rebound a bit after everyone assumes the GDR converters are out of their trade.

(link to Travis’ insight: Huatai GDRs – Prices Lower, Then Sooner, Then Later, Then Higher)

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.9bn; Liquidity: $95mn)

KCGI has accumulated 15.95% in Hanjin at a cost of ₩270bn, the last 1% at a 5.3% premium to last close. KCGI appears to be angling for management takeover. The question is whether the Cho family – holding 28.93% of the common shares and 3.02% of the prefs – are willing/forced sellers. And there are also rumours Mirae is asking KCGI for full repayment on ₩40bn worth of stock collateral loans.

• Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of  ₩230~240bn.
• But that need not be paid at once, and can be paid over 5 years, with that clock starting in October. Taking into account Cho’s severance pay (net of inheritance tax) and stock collateral loans (up to 50% of their stock value), there doesn’t appear to be any urgency on the Cho family’s behalf to unload shares in Hanjin Kal to foot the tax bill.
• At the time of Sanghyun’s note, Hanjin Kal was trading at a 28% premium to NAV. The trade approach was pretty straightforward – short it. That was the right call. I see the premium now at 6%.

links to Sanghyun’s insights: 
Hanjin Kal Special Situation: KCGI’s Takeover Attempt Is Tougher than Previously Appeared
Hanjin Kal Special Situation: Market Wide Shorting Looming

Vocus Communications (VOC AU)  (Mkt Cap: $1.9bn; Liquidity: $10mn)

Vocus has announced it has received an A$3.02bn (US$2.1bn) non-binding, indicative proposal from Aussie energy outfit AGL Energy Ltd (AGL AU) by way of a Scheme, at A$4.85/share in cash, a 26.63% premium to last close. This proposal arrives one week after Swedish PE outfit EQT and Vocus terminated takeover talks – and just two weeks since that lofty $5.25/share indicative offer was first announced.

• For EQT’s “hairy” pre-event proposal, I said that there was value; and there (potentially) were/are multiple players out there who could look at this situation, given Vocus’ fibre network offers efficient scale characteristics.
• AGL views Vocus as providing a stronger product set/mix to its customers in the long-term. The opposing view is that AGL is getting desperate in the face of increased scrutiny of its electricity prices forcing a shift away from its core competence. AGL was down 7.2% on the news, although this was probably compounded by a reduced profit guidance announcement after an extended unit outage.
• IF a deal does get done – this may complete around mid-November. That remains a big “IF”. Currently trading at A$4.36, which shows a return/risk of 11% up to the indicative offer vs. 12% down, roughly similar to where shares traded in response to EQT’s proposal.

(link to my insight: AGL Takes A Turn At Vocus)

Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)

Japan’s drugstore industry began a new era of consolidation after a decade of already unprecedented growth at the top. Cocokara Fine, the seventh-ranked drugstore retailer in Japan announced it was not only in talks with fourth-ranked Matsumotokiyoshi (Matsukiyo), as it had already confirmed a month before, but had now also begun negotiations with Sugi Holdings (7649 JP), the sixth largest firm. This was also discussed in Travis’ Insight Cocokara Fine は Cocokara いいね.

• Unlike supermarkets and home centres, drugstore consolidation is not just about melding regional power into a national chain but is also about the additional pressure to acquire share in drugstore merchandise categories where the acquirer is weak. 
• Michael Causton believes a merger between Sugi and Cocokara Fine is a natural fit because of the synergistic regional coverage but also their differing merchandise strengths. But, Matsukiyo also needs to acquire or merge, and fast. While it has stores in 45 of 47 prefectures, its presence outside the Tokyo region is minimal and it has dropped from first place to fourth in just three years, with even more headwinds going forward.
• If there is a two or three-way merger, Aeon and Tsuruha are unlikely to stand still since even just a Sugi/Cocokara deal would create a new sector leader by sales. Aeon and Tsuruha already work together on sourcing and private brands through the Aeon-led Hapicom buying group. If the pressure builds and Aeon tries to force a merger on Tsuruha as it did with CFS in 2007-8, Tsuruha and Matsukiyo may find common cause and arrange partial merger.

(link to Michael’s insight: Drug-Fuelled Marriages and Macho Shachos* in Japan)

Ruralco Holdings (RHL AU) (Mkt Cap: $302mn; Liquidity: $1mn)

Although the release of the ACCC’s Statement of Issues (SOI) is less than ideal development in the Nutrien Ltd (NTR CN) / Ruralco merger – an informal clearance from the ACCC would have been preferable – it was not an unforeseen development, nor is it viewed as a deal breaker. The ACCC’s concerns are not definitive or strongly worded, therefore the possibility of a formal clearance remains. But on balance, my read is that there is sufficient weight surrounding merchandising issues such that a divestment of stores is likely required for this deal to get up.

• The ACCC highlighted 7 areas (one each in WA and NSW, two in Queensland and three in the Northern Territories) where the remaining competition – subsequent to a successful merger – is limited. The ACCC also flagged some regional centres only source wholesale supplied from either Ruralco or Nutrien. This may lead to the amalgamated company discriminating on prices and supplies to stores within its own network compared to independent stores in the same catchment.

• To this, Nutrien could lodge a proposed undertaking with the ACCC to divest certain stores in the 7 highlighted (by the ACCC) catchments to address competition concerns. Such a submission would likely be premised on the ACCC accepting the court-enforceable divestment proposal, and a rescheduled Scheme Meeting could probably be reconvened in around a month after the undertaking proposal. Should this transpire, I would expect no change to the Scheme Offer Price.
• Currently trading at a gross/annualised spread of 5.5%/21% – with the annualised % roughly in line with the figure prior to the SOI announcement, suggesting a positive remedy to the issues raised by the ACCC is expected. The risk/reward looks attractive here.

(link to my insight: ACCC Raises Concerns With Ruralco/Nutrien)

Skc Co Ltd (011790 KS) (Mkt Cap: $1.1bn; Liquidity: $4mn)

SKC has agreed to acquire a 100% stake in KCFT (KCF Technologies) for ₩1tn (US$1bn) from KKR. SKC plans to use about ₩400bn-₩500bn of its own equity capital to fund the transaction with the remaining ₩700bn-₩800bn sourced from debt financing. KKR will make a tidy profit from the deal – in February 2018, it acquired a 100% stake of LS Mtron’s copper foil and thin film business for ₩300bn and renamed it KCFT. 

• KCFT has the number one market share globally (15% share) for making copper foil and thin film products used in lithium ion battery based EVs. 
• SK Group is currently the third largest player in the EV batteries and related components/materials in Korea, after LG Chem Ltd (051910 KS) and Samsung Sdi (006400 KS). The acquisition of KCFT should accelerate SK Group’s efforts to vertically integrate the value chain of the lithium ion batteries/components/materials.
• KCFT’s finances are mainly kept under wraps, however, based on the acquisition price, this suggests 4x P/S and 40x P/E, using estimated sales and net profits in 2018.

(link to  Douglas Kim‘s insight: Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion)

Briefly …

Reportedly LG Corp (003550 KS) plans to sell a 35% or more stake of LG CNS for about ₩1tn. LG CNS is the system integration IT service unit of the LG Group. Douglas believes this sale will provide a positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends. (link to Douglas’ insight: Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won)

United Technologies (UTX US)  (Mkt Cap: $108bn; Liquidity: $100mn)

The market raction to the proposed ‘merger of equals’ between aerospace giant UTX and US defense  contractor Raytheon Company (RTN US) announced at the beginning of the week, has so far been underwhelming. 

• Robert Sassoon believes the major complicating factor in this situation is that UTX is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price.
• This has significant ramifications for an all-stock deal in which the substantially undervalued UTX stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which he assesses should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected.

(link to Robert’s insight: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms)

Italian Banks

The Italian banking system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A. Yet prospective Italian banking M&A activity has more recently been domestic, largely due to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically.

• Victor Galliano believes Italian bank stock valuations are driven by the challenging domestic macro-economic and political outlook; yet for the longer term, he likes UniCredit SpA (UCG IM) with its attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks.
• In M&A land, Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; and Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are confined to being acquisition targets for banks with high risk appetites

(link to Victor’s insight: Italian Banks M&A – The Complex Italian Job)

• Three weeks have now elapsed since the Offer for Harbin Electric Co Ltd H (1133 HK) was extended. That means shareholders who had previously tendered are now entitled to withdraw their acceptances, if they so choose, which takes about 10 days. I estimate ~9.2mn shares have additionally tendered since the extension, or 1.4%, giving a total acceptance level of 87.2%. But, 9.5mn shares or ~1.4% have now moved back into CCASS – which appear to be shares to be withdrawn. Shares closed Friday at $4.41, the lowest since the extension announcement. ~5.8% of issued shares have changed hands since the extension, more than enough for the deal to get up.

• Shortly after publishing my insight, Netcomm Wireless (NTC AU) released the supplementary disclosure. The directors reaffirm their recommendation to vote for the Scheme. The disclosure sought to clarify how the directors can recommend the Offer yet maintain a bright future. In short, the directors consider the Scheme crystalises value now. There doesn’t appear to be any news out of the ordinary here. But delaying the vote so as to make this disclosure is unusual. Shares closed firm at $1.08 compared to the $1.10/share Scheme Offer. The Scheme Meeting will be held on the 18th June.

• Indofood Agri Resources (IFAR SP) issued a notice which simply reiterates the final Offer Price and the closing date (25 June – 60th day from dispatch). No update to the % tendered was provided.

• DuluxGroup Ltd (DLX AU)‘s Scheme Meeting will be held on the 31 July.

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.   

For the past fifteen months, I’ve flagged 345 large moves (>10%) in my weekly Event SPACE insights. So I analysed those moves across 112 brokers. Some of the observations include:

• Overall, 50% of stocks demonstrating a large CCASS movement underperformed the HSI in the first week after the share transfer, which is neither here nor there, however, this number gradually increased over time, touching 70% one-year after the share transfer.
• Share transfers involving stocks with a market capitalisation of less than US$250mn AND between US$500mn to US$1bn, were the worst performers, in absolute terms and relative to the HSI.
• When combining the % CCASS change and market capitalisation, stocks with a market capitalisation in excess of US$1bn at the time of the shares transferred displayed a reduced tendency to underperform. 

(link to my insight: CCASS: Why Large Moves Matter Redux)

In this briefing:

1. Taking Off: Vietnamese Exports Are Rocking and Rolling
2. WDC Impact from Toshiba Power Outage
3. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)
4. Key Impact of 2.9% Minimum Wage Hike in Korea for 2020 – Who Are Major Beneficiaries?
5. Samsung Situation: Stella Chemifa Dilemma & Recent Price Movement

1. Taking Off: Vietnamese Exports Are Rocking and Rolling

Whisper it quietly but not all Asian exporters are struggling. In the first six months of 2019 the dollar value of exports from Korea dropped 8.5% YoY. Taiwanese exports were down 3.6% YoY . Meanwhile, Chinese exports, the country at the heart of the trade war, were down just 0.1% YoY.  

2. WDC Impact from Toshiba Power Outage

Toshiba’s Mid-June power outage raised some alarm about potential product shortfalls for Western Digital (WDC).  This Insight evaluates the likely outcome of the event and finds that its timing in the industry cycle will dull its impact, if there is any impact at all.

3. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)

It has been more than 20 years that I’ve been covering the Korean markets and never has the political climate between Japan and South Korea been this terrible to the extent that the Japanese government has imposed the first round of significant economic sanctions on South Korea. 

In our view, there will likely be no major positive news next week that could dramatically result in the reconciliation between Japan and South Korea. Rather, we believe this heated political battle between Japan and South Korea appears to be just starting and that the Japanese government could impose the SECOND ROUND of economic sanctions on South Korea some time in August/September. 

While all these economic sanctions and restrictions of key chemical/semiconductor materials are occurring, the story of the “Joseon white porcelains” came to my mind. All in all, the current restrictions of key chemical materials from Japan such as fluorine-containing polyimide, resists, and etching gas are reminiscent of the trade restrictions on imported items such as cobalt during the Joseon dynasty hundreds of years ago.  They are also a keen reminder that in order for Korea to have a vibrant, flourishing economy, excellent political relationships with its close, powerful neighbors including China and Japan is a must. 

4. Key Impact of 2.9% Minimum Wage Hike in Korea for 2020 – Who Are Major Beneficiaries?

This morning, the South Korean government announced the minimum wages effective January 1st, 2020 which will be 8,590 won (US$7.30) (up 2.9% YoY). This will be the smallest hike in minimum wages in Korea since 2010 when they rose 2.8% YoY. The minimum wages in Korea were raised so much in the past two years (up 16.4% YoY in 2018 and up 10.9% YoY in 2019). This was the highest increase in minimum wages among the OECD countries in the past two years.

There were some fears that the minimum wages in Korea would be raised in the high single digits next year. The fact that the minimum wages growth has been capped at 2.9% will be viewed positively by the market. The incumbent administration has finally realized that the excessive minimum wage growth has negatively impacted the domestic economy and has reduced the minimum wage growth. 

The following are the major companies among the top 100 market cap stocks in Korea that should be positively impacted by the 2.9% minimum wage hikes in 2020:

• E Mart Inc (139480 KS)
• BGF Retail (282330 KS) 
• Cj Logistics (000120 KS)
• Gs Retail (007070 KS) 
• Shinsegae (004170 KS) 

5. Samsung Situation: Stella Chemifa Dilemma & Recent Price Movement

Samsung LJY is still in Japan. What is he still doing there? Apparently, he is trying to secure etching gas as much as possible. Now, it’s all about etching gas. In this post, I will do some checkups on LJY’s current Japan trip and the recent price movement on Samsung.

In this briefing:

1. Nexon Sale: Kakao Is Emerging as the Leading Horse
2. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma
3. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

1. Nexon Sale: Kakao Is Emerging as the Leading Horse

Yeah, Nexon event is very quiet. Even we didn’t have rumor report from local media lately since the main bid closing. So, we are hearing all kinds of worrying voices that the deal may be falling apart. Then, MK, one of Korea’s top tier economic daily, put out a follow-up report on this event late today. MK quoted someone familiar with the matter, possibly a banker working on this deal or a Nexon insider, but MK doesn’t specify the identity further. This “someone” told MK that the deal is still very much alive. Just, it now seems that KKR and Bain are no longer in the race. According to MK (well actually this “someone”), it is now a three-horse race between Kakao, Netmarble and MBK. Is this a surprise? Of course, it is not. What’s really bothering me is why this “someone inside” has always been leaking inside info and mood to local media, mainly MK and HK. Is Nexon doing it on purpose to buttress the share price so that they can keep having the upper hand in the deal talking? Well, it may be, or I don’t know for sure. Alright, let’s put this intention thing aside for now, and let’s first take a look at what this “someone” told MK.

BTW, this is the link of this latest MK report. (Title is quite provocative…)

2. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma

TW3 NORTH ASIA 10-16TH JUNE

Smartkarma’s North Asian Insight providers were overwhelmingly bullish this week. In the Event-Driven space, Sanghyun Park provided an update on the Nexon Sale, and Michael Causton gave an excellent overview of the M&A permutations for Japan’s listed Drugstore companies. Douglas Kim reviews SKC’s purchase of KCFT and suggests that the SK Group appears intent on making more big M&A deals where it wants to have a leading presence – in this case in vertically integrating the lithium-ion batteries/components/materials.  Also in Korea, KCGI’s move on Hanjin Kal is running into funding problems, while a 3% stake has recently by purchased by Goldman Sachs, with the rumoured end-buyer being Delta Airlines.  

Only one IPO was commented on – Oshadhi Kumarasiri casts a dubious eye over the upcoming Shin-nihon-seiyaku Co Ltd (4931 JP) deal and suggests that management maybe selling out ahead of the peaking of the company main, and so-far only brand, Perfect One.

Bullish Equity Bottom-Up comments were published on Nissan (7201 JP), Renesas Electronics (6723 JP), Rakuten (4755 JP), Hitachi (6501 JP), Modec(6269 JP), Nintendo (7974 JP), and Life (8194 JP). Only ZOZO (3092 JP) saw (another) bearish call.

Bullish Thematic & Strategy Insights were released on Japanese Telcos from Kirk Boodry – highlighting another regulatory-driven boost for Rakuten, while Sanghyun Park delved into the murky world of high-speed trading (HST) in Korea where Citadel and Merrill Lynch have made some controversial moves. In Japan, HST has recently been regulated with all operators required to establish an onshore entity or appoint a local agent and meet stringent reporting requirements governing their trading activities. Perhaps Korea should follow this example? Lastly, this author updated his Relative Price Score data, although these Insights are not summarised below.  

Nexon Sale: Current Status Checkup

Drug-Fuelled Marriages and Macho Shachos in Japan

Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion

Hanjin Kal Special Situation: KCGI’s Takeover Is Tougher than Previously Appeared

Shinnihonseiyaku IPO: Perfect One, Not So Perfect Afterall

Nissan: Chances of the Alliance Surviving Have Dimmed Greatly

Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

Rakuten Pay Winning the Japanese Cashless War?

Hitachi Ltd. (6501 JP): Share Price Up on Restructuring News

MODEC: On Track to Win Roughly Half of Its Bids

Switch Production to Move From China; Nintendo Plunges After Dull E3 Presentation

Life Corp Ties with Amazon Japan

Zozo: The Underlying Operating Metrics Worry Us

Japan Telcos – Lower Cap for Early Cancellation: Positive for Rakuten

Algorithm Trading on KOSDAQ: Citadel Fund Case Checkup

🇯🇵 Japan • June Relative Price Scores: Market, Sectors & Peer Groups – More of The Same

🇯🇵 Japan • Relative Price Scores – Overbought & Oversold Companies – June 2019

3. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

Last Week in Event SPACE …

• The Huatai Securities Co Ltd (A) (601688 CH) GDR is the one single trade that everyone is looking at.
• Death and taxes – but there is no urgency for the Cho family to sell their shares in Hanjin Kal Corp (180640 KS).
• AGL Energy Ltd (AGL AU) goes off-script and joins an ever-growing list of suitors for Vocus Communications (VOC AU).
• Drug-fuelled marriages and macho shachos amidst Cocokara Fine (3098 JP)‘s two or three-way merger.
• A potential divestment of stores may be required to allay ACCC’s merchandising concerns triggered by the Ruralco Holdings (RHL AU) / Nutrien Ltd (NTR CN) deal.
• KKR makes a (large) fast buck selling its 100% stake in KCF Technologies to Skc Co Ltd (011790 KS) for US$1bn. 

• 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)

Huatai Securities Co Ltd (A) (601688 CH) (Mkt Cap: $20.7bn; Liquidity: $234mn)

The Huatai Sec GDR (Global Depositary Receipt) pricing came out the 11th of June at US$20.00 to US$24.50 per GDR, conveniently after a day with a 5% gain in both the H-share and the A-share issues, announcing the deal at a then 12.5-28+% discount, which was wider than most seemed to have expected.  Now with the deal well-subscribed at the low end, there are warnings investors need to be bid higher than the bottom end to get any paper. 

• There is widespread scepticism as to why the deal needs to be done in the first place, and that gives many people some pause. Because of the discount and the liquidity on the A-shares, and the fact that the low end priced at a four to five year low, the margin of safety people perceive is quite high. 
• There is a lot of talk about how the shares haven’t seen the bottom end price even in the trough post June 2015 A-share crash so that provides a kind of “virtual floor” at around RMB 14/share. The 2015 low price of around RMB 14/share in late Q3 early Q4 2015, was almost exactly one year after they were trading at RMB 8/share in 2014 before the margin-trading bubble-induced runup. 
• Travis Lundy is bullish the GDRs Huatai Securities Co Ltd (HTSC LI) and not necessarily the A shares. He thinks the trade will end up making money for people, whether perfectly hedged or not. As of now, he would expect some softness in the As on the unwind. He also expected those with patience to go past 140 days could see the As rebound a bit after everyone assumes the GDR converters are out of their trade.

(link to Travis’ insight: Huatai GDRs – Prices Lower, Then Sooner, Then Later, Then Higher)

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.9bn; Liquidity: $95mn)

KCGI has accumulated 15.95% in Hanjin at a cost of ₩270bn, the last 1% at a 5.3% premium to last close. KCGI appears to be angling for management takeover. The question is whether the Cho family – holding 28.93% of the common shares and 3.02% of the prefs – are willing/forced sellers. And there are also rumours Mirae is asking KCGI for full repayment on ₩40bn worth of stock collateral loans.

• Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of  ₩230~240bn.
• But that need not be paid at once, and can be paid over 5 years, with that clock starting in October. Taking into account Cho’s severance pay (net of inheritance tax) and stock collateral loans (up to 50% of their stock value), there doesn’t appear to be any urgency on the Cho family’s behalf to unload shares in Hanjin Kal to foot the tax bill.
• At the time of Sanghyun’s note, Hanjin Kal was trading at a 28% premium to NAV. The trade approach was pretty straightforward – short it. That was the right call. I see the premium now at 6%.

links to Sanghyun’s insights: 
Hanjin Kal Special Situation: KCGI’s Takeover Attempt Is Tougher than Previously Appeared
Hanjin Kal Special Situation: Market Wide Shorting Looming

Vocus Communications (VOC AU)  (Mkt Cap: $1.9bn; Liquidity: $10mn)

Vocus has announced it has received an A$3.02bn (US$2.1bn) non-binding, indicative proposal from Aussie energy outfit AGL Energy Ltd (AGL AU) by way of a Scheme, at A$4.85/share in cash, a 26.63% premium to last close. This proposal arrives one week after Swedish PE outfit EQT and Vocus terminated takeover talks – and just two weeks since that lofty $5.25/share indicative offer was first announced.

• For EQT’s “hairy” pre-event proposal, I said that there was value; and there (potentially) were/are multiple players out there who could look at this situation, given Vocus’ fibre network offers efficient scale characteristics.
• AGL views Vocus as providing a stronger product set/mix to its customers in the long-term. The opposing view is that AGL is getting desperate in the face of increased scrutiny of its electricity prices forcing a shift away from its core competence. AGL was down 7.2% on the news, although this was probably compounded by a reduced profit guidance announcement after an extended unit outage.
• IF a deal does get done – this may complete around mid-November. That remains a big “IF”. Currently trading at A$4.36, which shows a return/risk of 11% up to the indicative offer vs. 12% down, roughly similar to where shares traded in response to EQT’s proposal.

(link to my insight: AGL Takes A Turn At Vocus)

Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)

Japan’s drugstore industry began a new era of consolidation after a decade of already unprecedented growth at the top. Cocokara Fine, the seventh-ranked drugstore retailer in Japan announced it was not only in talks with fourth-ranked Matsumotokiyoshi (Matsukiyo), as it had already confirmed a month before, but had now also begun negotiations with Sugi Holdings (7649 JP), the sixth largest firm. This was also discussed in Travis’ Insight Cocokara Fine は Cocokara いいね.

• Unlike supermarkets and home centres, drugstore consolidation is not just about melding regional power into a national chain but is also about the additional pressure to acquire share in drugstore merchandise categories where the acquirer is weak. 
• Michael Causton believes a merger between Sugi and Cocokara Fine is a natural fit because of the synergistic regional coverage but also their differing merchandise strengths. But, Matsukiyo also needs to acquire or merge, and fast. While it has stores in 45 of 47 prefectures, its presence outside the Tokyo region is minimal and it has dropped from first place to fourth in just three years, with even more headwinds going forward.
• If there is a two or three-way merger, Aeon and Tsuruha are unlikely to stand still since even just a Sugi/Cocokara deal would create a new sector leader by sales. Aeon and Tsuruha already work together on sourcing and private brands through the Aeon-led Hapicom buying group. If the pressure builds and Aeon tries to force a merger on Tsuruha as it did with CFS in 2007-8, Tsuruha and Matsukiyo may find common cause and arrange partial merger.

(link to Michael’s insight: Drug-Fuelled Marriages and Macho Shachos* in Japan)

Ruralco Holdings (RHL AU) (Mkt Cap: $302mn; Liquidity: $1mn)

Although the release of the ACCC’s Statement of Issues (SOI) is less than ideal development in the Nutrien Ltd (NTR CN) / Ruralco merger – an informal clearance from the ACCC would have been preferable – it was not an unforeseen development, nor is it viewed as a deal breaker. The ACCC’s concerns are not definitive or strongly worded, therefore the possibility of a formal clearance remains. But on balance, my read is that there is sufficient weight surrounding merchandising issues such that a divestment of stores is likely required for this deal to get up.

• The ACCC highlighted 7 areas (one each in WA and NSW, two in Queensland and three in the Northern Territories) where the remaining competition – subsequent to a successful merger – is limited. The ACCC also flagged some regional centres only source wholesale supplied from either Ruralco or Nutrien. This may lead to the amalgamated company discriminating on prices and supplies to stores within its own network compared to independent stores in the same catchment.

• To this, Nutrien could lodge a proposed undertaking with the ACCC to divest certain stores in the 7 highlighted (by the ACCC) catchments to address competition concerns. Such a submission would likely be premised on the ACCC accepting the court-enforceable divestment proposal, and a rescheduled Scheme Meeting could probably be reconvened in around a month after the undertaking proposal. Should this transpire, I would expect no change to the Scheme Offer Price.
• Currently trading at a gross/annualised spread of 5.5%/21% – with the annualised % roughly in line with the figure prior to the SOI announcement, suggesting a positive remedy to the issues raised by the ACCC is expected. The risk/reward looks attractive here.

(link to my insight: ACCC Raises Concerns With Ruralco/Nutrien)

Skc Co Ltd (011790 KS) (Mkt Cap: $1.1bn; Liquidity: $4mn)

SKC has agreed to acquire a 100% stake in KCFT (KCF Technologies) for ₩1tn (US$1bn) from KKR. SKC plans to use about ₩400bn-₩500bn of its own equity capital to fund the transaction with the remaining ₩700bn-₩800bn sourced from debt financing. KKR will make a tidy profit from the deal – in February 2018, it acquired a 100% stake of LS Mtron’s copper foil and thin film business for ₩300bn and renamed it KCFT. 

• KCFT has the number one market share globally (15% share) for making copper foil and thin film products used in lithium ion battery based EVs. 
• SK Group is currently the third largest player in the EV batteries and related components/materials in Korea, after LG Chem Ltd (051910 KS) and Samsung Sdi (006400 KS). The acquisition of KCFT should accelerate SK Group’s efforts to vertically integrate the value chain of the lithium ion batteries/components/materials.
• KCFT’s finances are mainly kept under wraps, however, based on the acquisition price, this suggests 4x P/S and 40x P/E, using estimated sales and net profits in 2018.

(link to  Douglas Kim‘s insight: Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion)

Briefly …

Reportedly LG Corp (003550 KS) plans to sell a 35% or more stake of LG CNS for about ₩1tn. LG CNS is the system integration IT service unit of the LG Group. Douglas believes this sale will provide a positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends. (link to Douglas’ insight: Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won)

United Technologies (UTX US)  (Mkt Cap: $108bn; Liquidity: $100mn)

The market raction to the proposed ‘merger of equals’ between aerospace giant UTX and US defense  contractor Raytheon Company (RTN US) announced at the beginning of the week, has so far been underwhelming. 

• Robert Sassoon believes the major complicating factor in this situation is that UTX is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price.
• This has significant ramifications for an all-stock deal in which the substantially undervalued UTX stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which he assesses should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected.

(link to Robert’s insight: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms)

Italian Banks

The Italian banking system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A. Yet prospective Italian banking M&A activity has more recently been domestic, largely due to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically.

• Victor Galliano believes Italian bank stock valuations are driven by the challenging domestic macro-economic and political outlook; yet for the longer term, he likes UniCredit SpA (UCG IM) with its attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks.
• In M&A land, Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; and Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are confined to being acquisition targets for banks with high risk appetites

(link to Victor’s insight: Italian Banks M&A – The Complex Italian Job)

• Three weeks have now elapsed since the Offer for Harbin Electric Co Ltd H (1133 HK) was extended. That means shareholders who had previously tendered are now entitled to withdraw their acceptances, if they so choose, which takes about 10 days. I estimate ~9.2mn shares have additionally tendered since the extension, or 1.4%, giving a total acceptance level of 87.2%. But, 9.5mn shares or ~1.4% have now moved back into CCASS – which appear to be shares to be withdrawn. Shares closed Friday at $4.41, the lowest since the extension announcement. ~5.8% of issued shares have changed hands since the extension, more than enough for the deal to get up.

• Shortly after publishing my insight, Netcomm Wireless (NTC AU) released the supplementary disclosure. The directors reaffirm their recommendation to vote for the Scheme. The disclosure sought to clarify how the directors can recommend the Offer yet maintain a bright future. In short, the directors consider the Scheme crystalises value now. There doesn’t appear to be any news out of the ordinary here. But delaying the vote so as to make this disclosure is unusual. Shares closed firm at $1.08 compared to the $1.10/share Scheme Offer. The Scheme Meeting will be held on the 18th June.

• Indofood Agri Resources (IFAR SP) issued a notice which simply reiterates the final Offer Price and the closing date (25 June – 60th day from dispatch). No update to the % tendered was provided.

• DuluxGroup Ltd (DLX AU)‘s Scheme Meeting will be held on the 31 July.

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.   

For the past fifteen months, I’ve flagged 345 large moves (>10%) in my weekly Event SPACE insights. So I analysed those moves across 112 brokers. Some of the observations include:

• Overall, 50% of stocks demonstrating a large CCASS movement underperformed the HSI in the first week after the share transfer, which is neither here nor there, however, this number gradually increased over time, touching 70% one-year after the share transfer.
• Share transfers involving stocks with a market capitalisation of less than US$250mn AND between US$500mn to US$1bn, were the worst performers, in absolute terms and relative to the HSI.
• When combining the % CCASS change and market capitalisation, stocks with a market capitalisation in excess of US$1bn at the time of the shares transferred displayed a reduced tendency to underperform. 

(link to my insight: CCASS: Why Large Moves Matter Redux)

In this briefing:

1. Nexon Sale: Kakao Is Emerging as the Leading Horse
2. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma
3. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech
4. Extreme Valuations: Global Stock Ideas Using the BORUC Yield

1. Nexon Sale: Kakao Is Emerging as the Leading Horse

Yeah, Nexon event is very quiet. Even we didn’t have rumor report from local media lately since the main bid closing. So, we are hearing all kinds of worrying voices that the deal may be falling apart. Then, MK, one of Korea’s top tier economic daily, put out a follow-up report on this event late today. MK quoted someone familiar with the matter, possibly a banker working on this deal or a Nexon insider, but MK doesn’t specify the identity further. This “someone” told MK that the deal is still very much alive. Just, it now seems that KKR and Bain are no longer in the race. According to MK (well actually this “someone”), it is now a three-horse race between Kakao, Netmarble and MBK. Is this a surprise? Of course, it is not. What’s really bothering me is why this “someone inside” has always been leaking inside info and mood to local media, mainly MK and HK. Is Nexon doing it on purpose to buttress the share price so that they can keep having the upper hand in the deal talking? Well, it may be, or I don’t know for sure. Alright, let’s put this intention thing aside for now, and let’s first take a look at what this “someone” told MK.

BTW, this is the link of this latest MK report. (Title is quite provocative…)

2. 🇰🇷 🇯🇵 That Was The Week That Was North Asia – 10-16th June 2019 @Smartkarma

TW3 NORTH ASIA 10-16TH JUNE

Smartkarma’s North Asian Insight providers were overwhelmingly bullish this week. In the Event-Driven space, Sanghyun Park provided an update on the Nexon Sale, and Michael Causton gave an excellent overview of the M&A permutations for Japan’s listed Drugstore companies. Douglas Kim reviews SKC’s purchase of KCFT and suggests that the SK Group appears intent on making more big M&A deals where it wants to have a leading presence – in this case in vertically integrating the lithium-ion batteries/components/materials.  Also in Korea, KCGI’s move on Hanjin Kal is running into funding problems, while a 3% stake has recently by purchased by Goldman Sachs, with the rumoured end-buyer being Delta Airlines.  

Only one IPO was commented on – Oshadhi Kumarasiri casts a dubious eye over the upcoming Shin-nihon-seiyaku Co Ltd (4931 JP) deal and suggests that management maybe selling out ahead of the peaking of the company main, and so-far only brand, Perfect One.

Bullish Equity Bottom-Up comments were published on Nissan (7201 JP), Renesas Electronics (6723 JP), Rakuten (4755 JP), Hitachi (6501 JP), Modec(6269 JP), Nintendo (7974 JP), and Life (8194 JP). Only ZOZO (3092 JP) saw (another) bearish call.

Bullish Thematic & Strategy Insights were released on Japanese Telcos from Kirk Boodry – highlighting another regulatory-driven boost for Rakuten, while Sanghyun Park delved into the murky world of high-speed trading (HST) in Korea where Citadel and Merrill Lynch have made some controversial moves. In Japan, HST has recently been regulated with all operators required to establish an onshore entity or appoint a local agent and meet stringent reporting requirements governing their trading activities. Perhaps Korea should follow this example? Lastly, this author updated his Relative Price Score data, although these Insights are not summarised below.  

Nexon Sale: Current Status Checkup

Drug-Fuelled Marriages and Macho Shachos in Japan

Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion

Hanjin Kal Special Situation: KCGI’s Takeover Is Tougher than Previously Appeared

Shinnihonseiyaku IPO: Perfect One, Not So Perfect Afterall

Nissan: Chances of the Alliance Surviving Have Dimmed Greatly

Renesas: Factory Automation and Aircon Inventory Adjustments to Take Time

Rakuten Pay Winning the Japanese Cashless War?

Hitachi Ltd. (6501 JP): Share Price Up on Restructuring News

MODEC: On Track to Win Roughly Half of Its Bids

Switch Production to Move From China; Nintendo Plunges After Dull E3 Presentation

Life Corp Ties with Amazon Japan

Zozo: The Underlying Operating Metrics Worry Us

Japan Telcos – Lower Cap for Early Cancellation: Positive for Rakuten

Algorithm Trading on KOSDAQ: Citadel Fund Case Checkup

🇯🇵 Japan • June Relative Price Scores: Market, Sectors & Peer Groups – More of The Same

🇯🇵 Japan • Relative Price Scores – Overbought & Oversold Companies – June 2019

3. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech

Last Week in Event SPACE …

• The Huatai Securities Co Ltd (A) (601688 CH) GDR is the one single trade that everyone is looking at.
• Death and taxes – but there is no urgency for the Cho family to sell their shares in Hanjin Kal Corp (180640 KS).
• AGL Energy Ltd (AGL AU) goes off-script and joins an ever-growing list of suitors for Vocus Communications (VOC AU).
• Drug-fuelled marriages and macho shachos amidst Cocokara Fine (3098 JP)‘s two or three-way merger.
• A potential divestment of stores may be required to allay ACCC’s merchandising concerns triggered by the Ruralco Holdings (RHL AU) / Nutrien Ltd (NTR CN) deal.
• KKR makes a (large) fast buck selling its 100% stake in KCF Technologies to Skc Co Ltd (011790 KS) for US$1bn. 

• 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)

Huatai Securities Co Ltd (A) (601688 CH) (Mkt Cap: $20.7bn; Liquidity: $234mn)

The Huatai Sec GDR (Global Depositary Receipt) pricing came out the 11th of June at US$20.00 to US$24.50 per GDR, conveniently after a day with a 5% gain in both the H-share and the A-share issues, announcing the deal at a then 12.5-28+% discount, which was wider than most seemed to have expected.  Now with the deal well-subscribed at the low end, there are warnings investors need to be bid higher than the bottom end to get any paper. 

• There is widespread scepticism as to why the deal needs to be done in the first place, and that gives many people some pause. Because of the discount and the liquidity on the A-shares, and the fact that the low end priced at a four to five year low, the margin of safety people perceive is quite high. 
• There is a lot of talk about how the shares haven’t seen the bottom end price even in the trough post June 2015 A-share crash so that provides a kind of “virtual floor” at around RMB 14/share. The 2015 low price of around RMB 14/share in late Q3 early Q4 2015, was almost exactly one year after they were trading at RMB 8/share in 2014 before the margin-trading bubble-induced runup. 
• Travis Lundy is bullish the GDRs Huatai Securities Co Ltd (HTSC LI) and not necessarily the A shares. He thinks the trade will end up making money for people, whether perfectly hedged or not. As of now, he would expect some softness in the As on the unwind. He also expected those with patience to go past 140 days could see the As rebound a bit after everyone assumes the GDR converters are out of their trade.

(link to Travis’ insight: Huatai GDRs – Prices Lower, Then Sooner, Then Later, Then Higher)

Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.9bn; Liquidity: $95mn)

KCGI has accumulated 15.95% in Hanjin at a cost of ₩270bn, the last 1% at a 5.3% premium to last close. KCGI appears to be angling for management takeover. The question is whether the Cho family – holding 28.93% of the common shares and 3.02% of the prefs – are willing/forced sellers. And there are also rumours Mirae is asking KCGI for full repayment on ₩40bn worth of stock collateral loans.

• Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of  ₩230~240bn.
• But that need not be paid at once, and can be paid over 5 years, with that clock starting in October. Taking into account Cho’s severance pay (net of inheritance tax) and stock collateral loans (up to 50% of their stock value), there doesn’t appear to be any urgency on the Cho family’s behalf to unload shares in Hanjin Kal to foot the tax bill.
• At the time of Sanghyun’s note, Hanjin Kal was trading at a 28% premium to NAV. The trade approach was pretty straightforward – short it. That was the right call. I see the premium now at 6%.

links to Sanghyun’s insights: 
Hanjin Kal Special Situation: KCGI’s Takeover Attempt Is Tougher than Previously Appeared
Hanjin Kal Special Situation: Market Wide Shorting Looming

Vocus Communications (VOC AU)  (Mkt Cap: $1.9bn; Liquidity: $10mn)

Vocus has announced it has received an A$3.02bn (US$2.1bn) non-binding, indicative proposal from Aussie energy outfit AGL Energy Ltd (AGL AU) by way of a Scheme, at A$4.85/share in cash, a 26.63% premium to last close. This proposal arrives one week after Swedish PE outfit EQT and Vocus terminated takeover talks – and just two weeks since that lofty $5.25/share indicative offer was first announced.

• For EQT’s “hairy” pre-event proposal, I said that there was value; and there (potentially) were/are multiple players out there who could look at this situation, given Vocus’ fibre network offers efficient scale characteristics.
• AGL views Vocus as providing a stronger product set/mix to its customers in the long-term. The opposing view is that AGL is getting desperate in the face of increased scrutiny of its electricity prices forcing a shift away from its core competence. AGL was down 7.2% on the news, although this was probably compounded by a reduced profit guidance announcement after an extended unit outage.
• IF a deal does get done – this may complete around mid-November. That remains a big “IF”. Currently trading at A$4.36, which shows a return/risk of 11% up to the indicative offer vs. 12% down, roughly similar to where shares traded in response to EQT’s proposal.

(link to my insight: AGL Takes A Turn At Vocus)

Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)

Japan’s drugstore industry began a new era of consolidation after a decade of already unprecedented growth at the top. Cocokara Fine, the seventh-ranked drugstore retailer in Japan announced it was not only in talks with fourth-ranked Matsumotokiyoshi (Matsukiyo), as it had already confirmed a month before, but had now also begun negotiations with Sugi Holdings (7649 JP), the sixth largest firm. This was also discussed in Travis’ Insight Cocokara Fine は Cocokara いいね.

• Unlike supermarkets and home centres, drugstore consolidation is not just about melding regional power into a national chain but is also about the additional pressure to acquire share in drugstore merchandise categories where the acquirer is weak. 
• Michael Causton believes a merger between Sugi and Cocokara Fine is a natural fit because of the synergistic regional coverage but also their differing merchandise strengths. But, Matsukiyo also needs to acquire or merge, and fast. While it has stores in 45 of 47 prefectures, its presence outside the Tokyo region is minimal and it has dropped from first place to fourth in just three years, with even more headwinds going forward.
• If there is a two or three-way merger, Aeon and Tsuruha are unlikely to stand still since even just a Sugi/Cocokara deal would create a new sector leader by sales. Aeon and Tsuruha already work together on sourcing and private brands through the Aeon-led Hapicom buying group. If the pressure builds and Aeon tries to force a merger on Tsuruha as it did with CFS in 2007-8, Tsuruha and Matsukiyo may find common cause and arrange partial merger.

(link to Michael’s insight: Drug-Fuelled Marriages and Macho Shachos* in Japan)

Ruralco Holdings (RHL AU) (Mkt Cap: $302mn; Liquidity: $1mn)

Although the release of the ACCC’s Statement of Issues (SOI) is less than ideal development in the Nutrien Ltd (NTR CN) / Ruralco merger – an informal clearance from the ACCC would have been preferable – it was not an unforeseen development, nor is it viewed as a deal breaker. The ACCC’s concerns are not definitive or strongly worded, therefore the possibility of a formal clearance remains. But on balance, my read is that there is sufficient weight surrounding merchandising issues such that a divestment of stores is likely required for this deal to get up.

• The ACCC highlighted 7 areas (one each in WA and NSW, two in Queensland and three in the Northern Territories) where the remaining competition – subsequent to a successful merger – is limited. The ACCC also flagged some regional centres only source wholesale supplied from either Ruralco or Nutrien. This may lead to the amalgamated company discriminating on prices and supplies to stores within its own network compared to independent stores in the same catchment.

• To this, Nutrien could lodge a proposed undertaking with the ACCC to divest certain stores in the 7 highlighted (by the ACCC) catchments to address competition concerns. Such a submission would likely be premised on the ACCC accepting the court-enforceable divestment proposal, and a rescheduled Scheme Meeting could probably be reconvened in around a month after the undertaking proposal. Should this transpire, I would expect no change to the Scheme Offer Price.
• Currently trading at a gross/annualised spread of 5.5%/21% – with the annualised % roughly in line with the figure prior to the SOI announcement, suggesting a positive remedy to the issues raised by the ACCC is expected. The risk/reward looks attractive here.

(link to my insight: ACCC Raises Concerns With Ruralco/Nutrien)

Skc Co Ltd (011790 KS) (Mkt Cap: $1.1bn; Liquidity: $4mn)

SKC has agreed to acquire a 100% stake in KCFT (KCF Technologies) for ₩1tn (US$1bn) from KKR. SKC plans to use about ₩400bn-₩500bn of its own equity capital to fund the transaction with the remaining ₩700bn-₩800bn sourced from debt financing. KKR will make a tidy profit from the deal – in February 2018, it acquired a 100% stake of LS Mtron’s copper foil and thin film business for ₩300bn and renamed it KCFT. 

• KCFT has the number one market share globally (15% share) for making copper foil and thin film products used in lithium ion battery based EVs. 
• SK Group is currently the third largest player in the EV batteries and related components/materials in Korea, after LG Chem Ltd (051910 KS) and Samsung Sdi (006400 KS). The acquisition of KCFT should accelerate SK Group’s efforts to vertically integrate the value chain of the lithium ion batteries/components/materials.
• KCFT’s finances are mainly kept under wraps, however, based on the acquisition price, this suggests 4x P/S and 40x P/E, using estimated sales and net profits in 2018.

(link to  Douglas Kim‘s insight: Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion)

Briefly …

Reportedly LG Corp (003550 KS) plans to sell a 35% or more stake of LG CNS for about ₩1tn. LG CNS is the system integration IT service unit of the LG Group. Douglas believes this sale will provide a positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends. (link to Douglas’ insight: Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won)

United Technologies (UTX US)  (Mkt Cap: $108bn; Liquidity: $100mn)

The market raction to the proposed ‘merger of equals’ between aerospace giant UTX and US defense  contractor Raytheon Company (RTN US) announced at the beginning of the week, has so far been underwhelming. 

• Robert Sassoon believes the major complicating factor in this situation is that UTX is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price.
• This has significant ramifications for an all-stock deal in which the substantially undervalued UTX stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which he assesses should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected.

(link to Robert’s insight: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms)

Italian Banks

The Italian banking system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A. Yet prospective Italian banking M&A activity has more recently been domestic, largely due to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically.

• Victor Galliano believes Italian bank stock valuations are driven by the challenging domestic macro-economic and political outlook; yet for the longer term, he likes UniCredit SpA (UCG IM) with its attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks.
• In M&A land, Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; and Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are confined to being acquisition targets for banks with high risk appetites

(link to Victor’s insight: Italian Banks M&A – The Complex Italian Job)

• Three weeks have now elapsed since the Offer for Harbin Electric Co Ltd H (1133 HK) was extended. That means shareholders who had previously tendered are now entitled to withdraw their acceptances, if they so choose, which takes about 10 days. I estimate ~9.2mn shares have additionally tendered since the extension, or 1.4%, giving a total acceptance level of 87.2%. But, 9.5mn shares or ~1.4% have now moved back into CCASS – which appear to be shares to be withdrawn. Shares closed Friday at $4.41, the lowest since the extension announcement. ~5.8% of issued shares have changed hands since the extension, more than enough for the deal to get up.

• Shortly after publishing my insight, Netcomm Wireless (NTC AU) released the supplementary disclosure. The directors reaffirm their recommendation to vote for the Scheme. The disclosure sought to clarify how the directors can recommend the Offer yet maintain a bright future. In short, the directors consider the Scheme crystalises value now. There doesn’t appear to be any news out of the ordinary here. But delaying the vote so as to make this disclosure is unusual. Shares closed firm at $1.08 compared to the $1.10/share Scheme Offer. The Scheme Meeting will be held on the 18th June.

• Indofood Agri Resources (IFAR SP) issued a notice which simply reiterates the final Offer Price and the closing date (25 June – 60th day from dispatch). No update to the % tendered was provided.

• DuluxGroup Ltd (DLX AU)‘s Scheme Meeting will be held on the 31 July.

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.   

For the past fifteen months, I’ve flagged 345 large moves (>10%) in my weekly Event SPACE insights. So I analysed those moves across 112 brokers. Some of the observations include:

• Overall, 50% of stocks demonstrating a large CCASS movement underperformed the HSI in the first week after the share transfer, which is neither here nor there, however, this number gradually increased over time, touching 70% one-year after the share transfer.
• Share transfers involving stocks with a market capitalisation of less than US$250mn AND between US$500mn to US$1bn, were the worst performers, in absolute terms and relative to the HSI.
• When combining the % CCASS change and market capitalisation, stocks with a market capitalisation in excess of US$1bn at the time of the shares transferred displayed a reduced tendency to underperform. 

(link to my insight: CCASS: Why Large Moves Matter Redux)

4. Extreme Valuations: Global Stock Ideas Using the BORUC Yield

The Bucephalus Idea Generator (BIG) picks stocks by combining our work on Creative Accounting and our work on capex and valuation cycles to see which companies are forecast to generate extreme returns and/or are on extreme valuations. The model then creates performance outcomes to search for absolute and relative investment ideas.

We run the model every month to see what has changed and which companies are worthy of further investigation.

Click here to download a sample company overview from the Bucephalus Idea Generator.

In this briefing:

1. WDC Impact from Toshiba Power Outage
2. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)
3. Key Impact of 2.9% Minimum Wage Hike in Korea for 2020 – Who Are Major Beneficiaries?
4. Samsung Situation: Stella Chemifa Dilemma & Recent Price Movement
5. KCC Corp Equity Spinoff: Summary & Mispricing Checkup

1. WDC Impact from Toshiba Power Outage

Toshiba’s Mid-June power outage raised some alarm about potential product shortfalls for Western Digital (WDC).  This Insight evaluates the likely outcome of the event and finds that its timing in the industry cycle will dull its impact, if there is any impact at all.

2. The Political Crisis Between Japan & South Korea (Lessons from the Joseon White Porcelains & Cobalt)

It has been more than 20 years that I’ve been covering the Korean markets and never has the political climate between Japan and South Korea been this terrible to the extent that the Japanese government has imposed the first round of significant economic sanctions on South Korea. 

In our view, there will likely be no major positive news next week that could dramatically result in the reconciliation between Japan and South Korea. Rather, we believe this heated political battle between Japan and South Korea appears to be just starting and that the Japanese government could impose the SECOND ROUND of economic sanctions on South Korea some time in August/September. 

While all these economic sanctions and restrictions of key chemical/semiconductor materials are occurring, the story of the “Joseon white porcelains” came to my mind. All in all, the current restrictions of key chemical materials from Japan such as fluorine-containing polyimide, resists, and etching gas are reminiscent of the trade restrictions on imported items such as cobalt during the Joseon dynasty hundreds of years ago.  They are also a keen reminder that in order for Korea to have a vibrant, flourishing economy, excellent political relationships with its close, powerful neighbors including China and Japan is a must. 

3. Key Impact of 2.9% Minimum Wage Hike in Korea for 2020 – Who Are Major Beneficiaries?

This morning, the South Korean government announced the minimum wages effective January 1st, 2020 which will be 8,590 won (US$7.30) (up 2.9% YoY). This will be the smallest hike in minimum wages in Korea since 2010 when they rose 2.8% YoY. The minimum wages in Korea were raised so much in the past two years (up 16.4% YoY in 2018 and up 10.9% YoY in 2019). This was the highest increase in minimum wages among the OECD countries in the past two years.

There were some fears that the minimum wages in Korea would be raised in the high single digits next year. The fact that the minimum wages growth has been capped at 2.9% will be viewed positively by the market. The incumbent administration has finally realized that the excessive minimum wage growth has negatively impacted the domestic economy and has reduced the minimum wage growth. 

The following are the major companies among the top 100 market cap stocks in Korea that should be positively impacted by the 2.9% minimum wage hikes in 2020:

• E Mart Inc (139480 KS)
• BGF Retail (282330 KS) 
• Cj Logistics (000120 KS)
• Gs Retail (007070 KS) 
• Shinsegae (004170 KS) 

4. Samsung Situation: Stella Chemifa Dilemma & Recent Price Movement

Samsung LJY is still in Japan. What is he still doing there? Apparently, he is trying to secure etching gas as much as possible. Now, it’s all about etching gas. In this post, I will do some checkups on LJY’s current Japan trip and the recent price movement on Samsung.

5. KCC Corp Equity Spinoff: Summary & Mispricing Checkup

This post has a summary of KCC Corp’s equity spinoff into two companies. This was announced today on July 11 after the market closed. In this post, I also look at mispricing possibilities resulting from this demerger.