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Most Read: Murata Manufacturing, Nippo Corp, Sembcorp Marine, Xinyi Solar Holdings, Jardine Cycle & Carriage and more

By | Daily Briefs, Most Read

In today’s briefing:

  • 2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, ‘Skupper’ OUT
  • ENEOS To Steamroll Nippo (1881 JP) Minorities
  • One More Day To Trade Sembcorp Marine Rights, Harvest the Spread, or Buy The MGO Option
  • HSCEI Index Rebalance Preview: Xinyi Solar Should Replace China Evergrande
  • StubWorld: JCNC Is A Set-Up Here

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

By Travis Lundy

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

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

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

Some Background

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

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

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

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

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

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

The Changes Announced

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

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

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

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

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

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

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


ENEOS To Steamroll Nippo (1881 JP) Minorities

By Travis Lundy

An article in Diamond Online late Monday after the close suggested that ENEOS Holdings (5020 JP), which is a 57%+ owner of road works and contractor Nippo Corp (1881 JP) would set up a Special Purpose Corporation, perhaps with the help of Goldman Sachs, and would bid for the rest of its subsidiary. It would then sell its current stake in the company back to the company. 

Late last night the two companies said that they were not the source of the article and that their boards would meet on 7 September to discuss. The stock traded limit up at ¥4215 today. I thought that would have been a great place to be long for a takeout. 

But after the close, ENEOS and Nippo announced a transaction where a slightly convoluted org chart of entities will do just that – try to buy out minorities of Nippo – but at ¥4,000/share. 

The Tender Offer is likely to start between mid-October and mid-November, but in the meantime, Nippo has come out to support the Tender Offer and we have all the supporting documentation. 

Other than today’s limit up price, ¥4,000/share is a lifetime high as far as I know. 

Given the capital construct, I could imagine some shareholders could get upset at this valuation. It looks underpriced to me. You can think of it the following way:

  • ENEOS currently owns 57% of Nippo. 
  • Some combination of ENEOS and Goldman Sachs are going to spend ¥200bn and small change to buy out minorities (the 43% ENEOS doesn’t own). It will be financed by non-recourse loans. ENEOS will have control. 
  • Then ENEOS will sell its currently-owned 57% back to the company.

To recap… if we imagine ENEOS was the sole buyer, this transaction allows ENEOS to gain 100% of the shares, take out a net $600mm in cash, and own the equity free and clear at 8x ex-cash and securities PER. 

Just phrasing it that way tells you it is probably being done too cheaply. 

The company has seen its share of scandals over the years which has left both it and all the road building companies (which have also shared these scandals) at low valuations. They were so low that the parents of Obayashi Road and Maeda Road saw fit to buy out the minorities of their subsidiaries (Obayashi in 2017, discussed in Obayashi Road: Another in a String of Underpriced Takeovers by a Japanese Parent and Maeda Road Construction Co (1883 JP) last year in a whole series of insights around the hostile takeover of the majority then the second squeezeout merger, so historical trading price is logically of less import when determining “fair value”.

I’d note that the usual construct that companies use to “prove” that their bid is adequate, or prove that their bidder’s bid is “not detrimental to minority interests” is to use a mixture of recent stock price, recent peers’ stock prices and multiples, and a DCF, which is often dodgily mashed together to create a number which the two parties have otherwise agreed upon behind the scenes. There is rarely any common sense involved. Non-operating rental real estate portfolios, cash, equity, and bond portfolios are sometimes valued to a discount rate of 10%, and sharp changes in forecasts and cash holdings are ignored. 

In addition, despite the METI Fair M&A Guidelines introduced in June 2019 which suggest in situations where there is a parent or founder family taking over a company that there should be a majority of minority condition, a full independent committee, a fairness opinion, and abundant care taken to treat minority investors appropriately given the inherent information asymmetry and conflict of interest, we rarely get those, and the extent to which a “control premium” is assessed is whether or not it ends up being a premium to recent traded price, which could be low precisely because investors have come to expect suspect governance from the company due to its status as a listed “child” company beholden to its parent.

However while the largest non-ENEOS holder appears to be sometimes-activist Silchester International, because they reported a 7+% position on 25 September 2020 and have not reported a subsequent position (which they would have had to do had they changed their position by more than 1% of shares outstanding), it is to note that their last report last year was to sell 1% of the company at prices between mid ¥2700s and high ¥2900s from July to September. 

There is some time between now and the start of the Tender Offer, which means there will be time for people to decide what they think. 

To help with the process, I offer some details and brief valuation notes below.


One More Day To Trade Sembcorp Marine Rights, Harvest the Spread, or Buy The MGO Option

By Travis Lundy

The Rights of Sembcorp Marine (SMM SP) started trading on 31 August, trading rich the first day, as expected, then falling. After closing at half a cent on the first day of trading, they are now trading at 0.001-0.002 despite Sembcorp Marine shares trading at 8.5-8.6 cts. 

If there were borrow on SMM left, it would be a great arb.

As it is, every long-only holder who is UP money in their portfolio should, if they can, sell the SMM shares and replace with SMM Rights. It will give them a 5% spread on their SMM shares. 

They have the rest of today and tomorrow to trade. 

There is also an “MGO Option.” And this bit is interesting.


HSCEI Index Rebalance Preview: Xinyi Solar Should Replace China Evergrande

By Brian Freitas

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

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

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

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

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

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


StubWorld: JCNC Is A Set-Up Here

By David Blennerhassett

This week in StubWorld …

Jardine Cycle & Carriage (JCNC SP), relative to Astra International (ASII IJ), is around record-lows outside the Covid-affect low last year. This is occurring amid recent corporate developments within the Jardine stable of companies.

Preceding my comments on JCNC are the weekly setup/unwind tables for Asia-Pacific Holdcos.

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


Before it’s here, it’s on Smartkarma

Most Read: Nintendo Co Ltd, Toyo Seikan Group Holdings L, Murata Manufacturing, China Gas Holdings, Pan Pacific International Holdings and more

By | Daily Briefs, Most Read

In today’s briefing:

  • Nikkei225 Index Rebalance Preview: Perennial Favourites Could Be In
  • Nikkei 225 Index Rebalance: Nintendo, Keyence, Murata IN; Nisshinbo, Toyo Seikan, SKY Perfect OUT
  • 2021 Nikkei 225 Rebalance: Nintendo, Murata, Keyence IN; Nisshinbo, Toyo Seikan, ‘Skupper’ OUT
  • HSI Index Rebalance Preview: Potential Inclusions in December
  • PPIH (7532 JP) ToSTNeT-3 Buyback – The Alliance Is Strong, so FamilyMart Is Selling Shares

Nikkei225 Index Rebalance Preview: Perennial Favourites Could Be In

By Brian Freitas

In May, the Nikkei released a market consultation on proposed changes to the Nikkei 225 (NKY INDEX) covering capping the weight of new constituents in the index at 1% by using a Price Adjustment Factor, limiting the number of index changes at a periodic review to 3, and changing the index universe from stocks listed on TSE’s 1st section to stocks that are listed on the Prime Market (post the reorganisation). Most of the proposed changes were subsequently approved.

This is the first Nikkei 225 (NKY INDEX) rebalance after the market consultation that tweaked things around. The tweaks could ensure the inclusion of stocks that were historically not included in the index due to their high stock price, though the impact will be much smaller since their weight in the index will not exceed 1%.

At the upcoming rebalance, we see a high probability of Nintendo Co Ltd (7974 JP) and ZOZO Inc (3092 JP) being included in the index while there is a lower probability of Oriental Land (4661 JP) and Orix Corp (8591 JP) being included.

Potential deletion candidates are Toho Zinc (5707 JP), Sky Perfect Jsat (9412 JP), Maruha Nichiro (1333 JP) and Pacific Metals (5541 JP).

There will be quite a large impact from passive trading on a few names.

The changes will be announced early September and will be implemented at the close of trading on 30 September.


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

By Brian Freitas

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

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

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

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

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

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


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

By Travis Lundy

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

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

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

Some Background

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

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

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

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

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

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

The Changes Announced

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

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

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

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

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

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

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


HSI Index Rebalance Preview: Potential Inclusions in December

By Brian Freitas

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

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

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

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

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

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


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

By Travis Lundy

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

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

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

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

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

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

As always, more below the fold. 


Before it’s here, it’s on Smartkarma

Most Read: Showa Denko K.K., West Japan Railway Co, SK Bioscience, Tyro Payments, China Gas Holdings and more

By | Daily Briefs, Most Read

In today’s briefing:

  • Showa Denko (4004 JP) Offering – Supply, Passive Demand, and Opportunity
  • JR West (9021 JP) Offering – Supply Vs Yutai+Passive Demand
  • ETF Arbitrage Using KRX BBIG New Deal Is on the Rise
  • Index Rebalance & ETF Flow Recap: FTSE China50/A50/TW50, UKX, ASX200, KOSPI2, EPRA Nareit, JR West
  • HSI Index Rebalance Preview: Potential Inclusions in December

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

By Travis Lundy

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

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

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

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

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

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

It is even bigger when you consider shareholder structure. 

Pricing is likely on 6 September. 

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


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

By Travis Lundy

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

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

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

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

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

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

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

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

More below the fold. 


ETF Arbitrage Using KRX BBIG New Deal Is on the Rise

By Sanghyun Park

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

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

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

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

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

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

By Brian Freitas

In this weeks recap, we look at:

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

Events This Week

Click on the link under Detail to go to the Insight

Date

Index

Detail

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

HSI Index Rebalance Preview: Potential Inclusions in December

By Brian Freitas

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

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

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

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

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

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


Before it’s here, it’s on Smartkarma

Most Read: West Japan Railway Co, China Logistics Property Holdings, SK Telecom, Showa Denko K.K. and more

By | Daily Briefs, Most Read

In today’s briefing:

  • JR West (9021 JP) New Issue: Index Implications
  • China Logistics (1589 HK): JD.com’s Offer Comes Up Short
  • Asia Shorts: Alibaba, CMB, Tencent, Anta, Shiseido, Odakyu, Keio, NC Soft, LGD, SK Tel, Evergreen
  • Amazon Global Store Finally Launches in Korea – In Partnership with 11st (SK Telecom)
  • Showa Denko (4004 JP) Offering – Supply, Passive Demand, and Opportunity

JR West (9021 JP) New Issue: Index Implications

By Brian Freitas

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

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

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

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

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

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

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


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

By David Blennerhassett

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

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

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

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

This all looks pretty clean.

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

The Offer price will not be increased. 

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

More below the fold.


Asia Shorts: Alibaba, CMB, Tencent, Anta, Shiseido, Odakyu, Keio, NC Soft, LGD, SK Tel, Evergreen

By Brian Freitas

The Asia Short Interest weekly looks at moves in market wide short interest and highlights movements in stock specific short interest across Hong Kong, Japan, Korea and Taiwan using the last available data published by the relevant authorities.

Hong Kong saw shorts rise on Alibaba Group (9988 HK), China Merchants Bank H (3968 HK), JD.com Inc. (9618 HK), Xiaomi Corp (1810 HK) and Kuaishou Technology (1024 HK) while there was short covering on Tencent (700 HK), Ping An Insurance (H) (2318 HK), Anta Sports Products (2020 HK), Shenzhou Intl Group Holdings (2313 HK) and HKEX (388 HK). Shorts increased in the Information Technology, Consumer Discretionary, Health Care and Real Estate sectors while decreasing in the Communication Services and Materials sectors.

In Japan, stocks increased on Shiseido Company (4911 JP), Fast Retailing (9983 JP), Yaskawa Electric (6506 JP), Canon Inc (7751 JP) and Mitsui Osk Lines (9104 JP) while there was short covering on Invesco Office J Reit (3298 JP), Odakyu Electric Railway (9007 JP), Lasertec Corp (6920 JP), JSR Corp (4185 JP), Keio Corp (9008 JP). Shorts increased in most sectors led by the Industrials, Consumer Discretionary, Information Technology, Consumer Staples and Materials stocks.


Amazon Global Store Finally Launches in Korea – In Partnership with 11st (SK Telecom)

By Douglas Kim

On 31 August, Amazon.com Inc (AMZN US) finally launched its ‘Amazon Global Store’ in South Korea in partnership with SK Telecom (017670 KS)‘s e-commerce platform 11th. Amazon and 11th have been working on the details of this new service for many months and it has finally become available for millions of consumers in Korea.

With the launch of Amazon Global Store Korea, this has been the end of a long decade plus journey of when Amazon would enter Korea. For now, Amazon has joined hands with SK Telecom although this partnership could change several years from now when Amazon could decide to operate alone Korea. In the next few months, we see millions of Korean consumers flocking to the Amazon Global Store Korean website (https://www.11st.co.kr/amazon/best). 11st (SK Telecom) will play a pivotal role in this roll-out as a key partner. 

Trading Ideas – In our view, we like a long-short trading idea of long SK Telecom (017670 KS) and short Coupang (CPNG US) at current levels. With the launch of Amazon Global Store in Korea, this will directly threat Coupang and likely to result in lower sales growth for the company for the rest of 2021. We also continue to have a positive view of SK Telecom (017670 KS).


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

By Travis Lundy

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

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

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

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

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

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

It is even bigger when you consider shareholder structure. 

Pricing is likely on 6 September. 

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


Before it’s here, it’s on Smartkarma

Most Read: Asian Sea, Milton Corp Ltd, West Japan Railway Co, Lifestyle Communities, Bharti Airtel and more

By | Daily Briefs, Most Read

In today’s briefing:

  • Smartkarma Corporate Webinar | Asian Sea: Pet Food and Frozen Sustainable Growth Drivers
  • Marvelous Milton Merger Mapping Mabbled: Ratio Done, Now For The Hard Part
  • JR West (9021 JP) New Issue: Index Implications
  • ASX100/200/300 Sep21 Index Rebalance: Some Surprises In Here + Same Way Flow
  • Bharti Airtel Partially Paid Rights Situation

Smartkarma Corporate Webinar | Asian Sea: Pet Food and Frozen Sustainable Growth Drivers

By Smartkarma Research

For our next Corporate Webinar, we are glad to welcome the CFO of Asian Sea (ASIAN TB), Akamon Prasoppolsujarit, and the CFO of Asian Alliance International, Varanratch Assanupong.

Asian Sea has been in the food manufacturing industry for over 40 years and distributes to customers around the world. Asian Sea continuously expanded and developed from a family-owned business to a listed company on the Stock Exchange of Thailand (SET) using the symbol “ASIAN”. ASIAN currently has four segments – Frozen Food, Pet Food, Tuna, and Aquaculture Feed.

In this upcoming webinar, Akamon and Varanratch will share a short company presentation, after which they will engage in a fireside chat with Smartkarma Insight Provider Angus Mackintosh. This will be followed by a live Q&A session.

The Corporate Webinar will be hosted on Tuesday, 24 August 2021, 17:00 SGT

Corporate Webinars by Smartkarma Corporate Solutions feature discussions with IROs and Executives, discussing their companies, the challenges they face, and the opportunities in their sectors and markets.


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

By Travis Lundy

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

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

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

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

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

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

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

There is, as always, more below the fold.


JR West (9021 JP) New Issue: Index Implications

By Brian Freitas

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

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

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

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

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

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

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


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

By Brian Freitas

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

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

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

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

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


Bharti Airtel Partially Paid Rights Situation

By Travis Lundy

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

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

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

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

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

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

I expect it may not take long.

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

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

As always, there is more below the fold. 


Before it’s here, it’s on Smartkarma

Most Read: Hotel Property Investments, OUE Commercial REIT, Tencent, West Japan Railway Co and more

By | Daily Briefs, Most Read

In today’s briefing:

  • FTSE EPRA NAREIT – Lots of Adds In Developed Asia
  • FTSE EPRA Nareit Rebalance Decided; Sub-Baskets Worth Trading Still
  • Tencent – An Analytical Framework For “Tomorrow’s” Gaming Minors
  • West Japan Railway Placement – A Large, Unexpected Dilution
  • JR West (9021 JP) New Issue: Index Implications

FTSE EPRA NAREIT – Lots of Adds In Developed Asia

By Brian Freitas

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

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

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

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

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

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


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

By Travis Lundy

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

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

The inclusion date is 17 September.

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

More analysis below the fold.


Tencent – An Analytical Framework For “Tomorrow’s” Gaming Minors

By Jason Yap, CFA

Tencent (700 HK)‘s share price retreated 3.2% overnight on news that China would restrict playing time for minors to 3 hours a week – that is, 8pm to 9pm time slots on Friday, Saturday and Sunday, with an extra hour on public holidays.  The share price erased these losses and recorded an intra-day gain of 3.3% by Tuesday’s market close, suggesting that regulatory concerns were assuaged by Tencent’s affirmation of low single-digit revenue contribution of minors. 

Insight Provider Mio Kato wrote a unique but sensible piece about how the market may have misunderstood the significance of the restrictions, with the implications for the long-term growth of the industry more severe and an appreciation of the relevant issues would come sooner.  A key thrust of the argument is that habit-formation of gaming at an early age would be disrupted to an extent that gaming habits and user time spent do not carry over into adulthood. 

Tencent’s gaming revenue is derived primarily from the sales of in-game virtual items and the provision of adjacent services.  In this article, we expand on the above argument by highlighting how the habit-formation disruption not only affects user time spent but also have a knock-on impact with respect to in-game virtual item spending, subscription, and IP consumption. 

Further, Tencent’s revenue recognition on the provision of online games heavily depends on management’s assumptions of the gamer’s usage profile, which was in turn determined based on past gaming habits. This was historically raised as a Key Audit Matter in Tencent’s Audit Opinions. Accordingly, we also discuss in this article how the underlying management assumptions might change as a result of the regulations and consequent impact on Tencent’s gaming revenues. 


West Japan Railway Placement – A Large, Unexpected Dilution

By Zhen Zhou, Toh

West Japan Railway Co (9021 JP)  (JR West) is looking to raise up to US$2.7bn (including over-allocation) in its upcoming Japan follow-on offering.

In this note, we take a brief look at fundamentals, recent results, and share our thoughts on deal dynamics. We will also run the deal through our ECM framework.


JR West (9021 JP) New Issue: Index Implications

By Brian Freitas

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

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

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

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

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

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

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


Before it’s here, it’s on Smartkarma

Most Read: Hotel Property Investments, Baidu, KakaoBank, Great Wall Motor and more

By | Daily Briefs, Most Read

In today’s briefing:

  • FTSE EPRA NAREIT – Lots of Adds In Developed Asia
  • FTSE China 50 Index Rebalance: High Turnover; Relatively Low Impact; Surging Shorts
  • KOSPI200 September Index Rebalance: Krafton, Kakao Bank Fast Entry Confirmed
  • Kakao Bank Placement – Its Expensive but the Discount Is Enticing
  • FTSE China A50 Index Rebalance: Strong Momentum; No Surprises

FTSE EPRA NAREIT – Lots of Adds In Developed Asia

By Brian Freitas

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

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

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

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

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

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


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

By Brian Freitas

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

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

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

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

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


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

By Brian Freitas

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

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

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

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

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

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



FTSE China A50 Index Rebalance: Strong Momentum; No Surprises

By Brian Freitas

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

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

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

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

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

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


Before it’s here, it’s on Smartkarma

Most Read: Tencent, Alibaba Group, China Youzan, Krafton Inc and more

By | Daily Briefs, Most Read

In today’s briefing:

  • China Gaming Restrictions Are FAR More Severe Than the Market Is Assuming
  • Tencent/Netease: Online Game Tightening Coming to an End
  • HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping
  • China Youzan (8083 HK): Once Bitten …
  • KRX BBIG Index Rebalance: Krafton, SK Bioscience, SK IE Tech Included (Among Others)

China Gaming Restrictions Are FAR More Severe Than the Market Is Assuming

By Mio Kato

Overnight many Chinese gaming-related names fell ~3% on news that China would be restricting playing time for minors to just three hours a week, specifically 20:00-21:00 on Friday, Saturday and Sunday. The market reaction grossly underestimates how drastic these restrictions will be for gaming companies and seems to simply be superficially looking at the low single-digit revenue contribution percentages of minors.


Tencent/Netease: Online Game Tightening Coming to an End

By Ke Yan, CFA, FRM

We have discussed previously that the Chinese central government could impose tightening measure on online game companies to restrict screen time for the youth. Last night the NPPA announced a notice further tightening the youth playing. In this note, we will take a look at the notice and assess the impact on Tencent and Netease. We are of the view that this policy will have little impact on the two companies. 


HSI, HSCEI, HSTECH: September Rebalance Flows Post Capping

By Brian Freitas

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

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

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

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

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

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

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

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


China Youzan (8083 HK): Once Bitten …

By David Blennerhassett

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

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

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

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

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

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

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

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

The New News

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

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

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

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

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

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

More below the fold.


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

By Brian Freitas

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

These are the changes to the indices:

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

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

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


Before it’s here, it’s on Smartkarma

Most Read: WH Group, Hitachi Transport System, Kerry Logistics Network, Bharti Airtel, SK Materials and more

By | Daily Briefs, Most Read

In today’s briefing:

  • WH Group Post-Tender Outlook – Index Selldown and Back-End Trading/Valuations
  • Hitachi Transport Uncoupled – TSE Prime, Price Popping, And Supply To Come
  • Kerry Logistics (636 HK): Technicalities As Partial Draws To An End
  • Bharti Airtel’s Large Partly Paid Rights Offering
  • SKC Is Down 5% Today: Why & What Impact on SK Holdings/SK Materials Arb Spread-Hunting

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

By Travis Lundy

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

Then we wait. 

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

And into the week after…

But we wait anyway. 

More below the fold. 

Insights on This WH Group Event To Date

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

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

By Travis Lundy

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

The Background

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The shares reacted well to that too. 

But all this creates a curious problem. 

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

But there is selling to come. 

More below the fold. 


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

By David Blennerhassett

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

Below is a timeline of events that subsequently unfolded:

Date

Data in the Date

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

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

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

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

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

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

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

More below the fold. 

Plus updated Ye Olde Arb Grids


Bharti Airtel’s Large Partly Paid Rights Offering

By Brian Freitas

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

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

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

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

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

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

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


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

By Sanghyun Park

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

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

(Courtesy SK Holdings)

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

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

So who will be the next target?

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

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

Before it’s here, it’s on Smartkarma

Most Read: WH Group, 3peak, KakaoBank, Hitachi Transport System, Krafton Inc and more

By | Daily Briefs, Most Read

In today’s briefing:

  • WH Group Post-Tender Outlook – Index Selldown and Back-End Trading/Valuations
  • STAR50 Index Rebalance: If You Obey All The Rules, You Miss All The Fun
  • Index Rebalance & ETF Flow Recap: FTSE GEIS/CH50/A50/TW50, UKX, KOSPI200, MLT/WHSP, Busy Week Ahead
  • Hitachi Transport Uncoupled – TSE Prime, Price Popping, And Supply To Come
  • MSCI Std Korea Nov SAIR Adds Checkup: SD Biosensor & Krafton

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

By Travis Lundy

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

Then we wait. 

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

And into the week after…

But we wait anyway. 

More below the fold. 

Insights on This WH Group Event To Date

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

STAR50 Index Rebalance: If You Obey All The Rules, You Miss All The Fun

By Brian Freitas

Post market close on 27 August, the Shanghai Stock Exchange and China Securities Index Company announced the changes to the SSE STAR 50 (STAR50 INDEX). The changes will be effective after the close of trading on 10 September.

There are 5 inclusions and 5 exclusions in the review. The inclusions are Pylon Technologies Co Ltd (688063 CH), 3peak (688536 CH), Bestechnic Shanghai (688608 CH), Zhejiang Supcon Technology (688777 CH) and Tianneng Battery Group (688819 CH), while the deletions are Guangzhou Fangbang Electronics-A (688020 CH), Piesat Information Technology (688066 CH), Shanghai Shen Lian Biomedical (688098 CH), Shenzhen Lifotronic Technology-A (688389 CH) and Farasis Energy Gan Zhou Co-A (688567 CH)

The changes imply that a 6 month minimum listing was used. This is surprising (but not totally unexpected) since there were 141 stocks that were listed for longer than 1 year and that number was at the upper end of the 100-150 range where the methodology would change to use a minimum 12 month listing history.

Even more surprising is the deletion of Farasis Energy Gan Zhou Co-A (688567 CH). The stock ranks much higher than other index constituents and we cannot see any reason for its deletion from the index.

The inclusions, exclusions and capping changes will result in a one-way turnover of 10.46% and result in a one-way trade of CNY4.05bn.


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

By Brian Freitas

In this weeks recap, we look at:

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

Events This Week

Click on the link under Detail to go to the Insight

Date

Index

Detail

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

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

By Travis Lundy

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

The Background

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The shares reacted well to that too. 

But all this creates a curious problem. 

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

But there is selling to come. 

More below the fold. 


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

By Sanghyun Park

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

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

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

Full market cap (delete)

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

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

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

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

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

Before it’s here, it’s on Smartkarma