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Allocation & lockup results

Below is the final institutional allocation of Kakao Pay. In the case of local institutions, the proportion of those pursuing long-term holding tendencies is visibly high.

More notably, foreign institutions (those with a transaction record, generally deemed a true overseas institution) secured half of the total institutional allocation. Application-wise, their weight is only 1.78%. So, yes, 50% seems pretty high. It may prove that the proportion of prominent institutions in this bookbuilding was high. Kakao Pay wanted to have them on the shareholder list for reputational purposes, which isn’t unfamiliar in a local IPO in Korea.

The lockup result is as follows. 59% of all institutional allocations are locked up. Nearly 70% of them are locked up for more than three months. As a result, we have 4.23% of the post-IPO SO put up for lockup, and only 2.94% of the post-IPO SO will hit the market immediately after the listing.

Today, Singapore Press Holdings (SPH SP) announced a competing privatisation offer from Cuscaden at S$2.10 cash per SPH share, which is a 40.0% premium to the share price of S$1.50 on 30 March 2021 (announcement of SPH’s strategic review), an 11.7% premium to the share price of S$1.88 on 30 July (last trading day prior to Keppel Corp (KEP SP)’s offer) and a 5.5% premium to the share price of S$1.99 on 28 October (last close prior to the trading halt). 

As discussed in SPH’s Privatisation by Keppel, on 2 August, SPH announced a privatisation offer from Keppel. The transaction involves Keppel offering S$0.668 cash per SPH share and 0.596 Keppel REIT units per SPH share along with SPH distributing-in-specie 0.782 SPH REIT units per SPH share. Based on the last close price of Keppel REIT (KREIT SP) and SPH REIT (SPHREIT SP), the total consideration is S$2.104 per SPH share, a whisker above Cuscaden’s all-cash offer.  

The two privatisation proposals are the culmination of the SPH’s strategic review to unlock shareholder value. The strategic review commenced with the announcement of the media business restructuring announced on 6 May. Shareholder approval for the media business restructuring was obtained on 10 September and is expected to be completed in December. 

While Cuscaden’s offer is broadly similar in value to Keppel’s offer, Cuscaden’s offer may be more appealing particularly to minorities. Cuscaden’s offer has greater certainty of value as it is all cash, eliminates the risk of changing REIT unit prices (Keppel REIT and SPH REIT) and does any require further shareholders’ approval on the part of Cuscaden (Keppel’s offer requires approval from Keppel shareholders). Cuscaden’s offer will also not be reduced by the S$34 million break fee payable to Keppel. 

SPH responded to Cuscaden’s offer by stating that it is “not a firm offer” and it has “not entered into any definitive or binding agreement” with Cuscaden. Keppel responded to Cuscaden’s offer by stating that “we are reviewing the matter and make an announcement at an appropriate time.”

Post market close on Friday, BYD (1211 HK) kicked off a US$1.8bn share placement. The company is looking to sell 50m shares at a price range of HK$273.5-279.5/share, a discount of 5.8-7.8% to the last close.

This comes 10 months after the company raised US$3.8bn in January, selling133m shares at HK$225/share – also a 7.8% discount to the last close.

At the last placement in January, the stock had dropped little more than 5% prior to the announcement and rallied into the passive buying. This time around, the stock is down a little less than 5% from its highs.

There will be buying from FTSE and MSCI trackers in the next few days coinciding with the settlement of the new shares. The increase in shares for the Hong Kong Hang Seng Index (HSI INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX) will take place at the rebalance in March.

Short interest is near the lows and there could be some shorts that will look to cover on any drop in the stock price over the next few days.

BYD (1211 HK) is looking to raise up to US$1.8bn in its H-share placement.

In this note, we will look at deal dynamics, recent Q3 results, and run the deal through our ECM framework.

We covered the January placement in:

• BYD (比亚迪汽车) Placement – A Well Anticipated Placement with Strong Momentum 

This morning the market got something of a surprise when an entity called Cuscaden Peak Pte. Limited showed up with an all-cash offer (Scheme of Arrangement) for Singapore Press Holdings (SPH SP) at S$2.10/share, which is just over the Total Combined Consideration (cash, SPH REIT (SPHREIT SP) units, Keppel REIT (KREIT SP) units) of S$2.086/unit as of yesterday’s close. 

Cuscaden Peak is a new entity, but it is not of unknown heritage. Ownership is 40% Singapore-listed Hotel Properties Ltd (led by tycoon Ong Beng Seng), 30% Capitaland parent company (Temasek-backed), and 30% Mapletree Investments – a S$66bn property owner and manager with four listed S-REITs and 6 private equity real estate funds (Mapletree is an independently-managed Temasek portfolio company). 

Right now this is a Proposed Acquisition. SPH itself has not entered into any agreement and the Proposed Acquisition would need SPH to finalise and accept terms of a Possible Scheme, Cuscaden and SPH entering definitive agreements, and other conditions.

This is a serious bidder. Ong Beng Seng saw lobang and brought in the others. Now one set of Temasek-backed companies just sabo’d another. This is kind of fun now. It bears watching. And as every good event person knows, if the stock goes higher on expectation of a higher bid because the bidders have room to bid higher, it is more likely to get a higher bid.

Based on the FTSE Taiwan RIC Capped Index[1], the SGX FTSE Taiwan Index Futures started to trade on the SGX on 20 July 2020 and is currently the only liquid CFTC approved offshore Taiwan futures contract. Volumes on the futures contract have continued to increase and average at nearly 70,000 contracts (US$4.1bn) a day while the open interest on the futures currently stands at US$6.3bn[2]. There are dedicated on-screen market makers providing liquidity and the average bid-ask spread of the near month futures contract averages 2 basis points[3] across Asian, European and U.S. trading hours[4]. This makes the SGX FTSE Taiwan Index Futures the go-to contract for international investors (including U.S. investors) for round the clock market access. Additionally, the SGX FTSE Taiwan Index Futures has received onshore regulatory approval and has been added as an eligible foreign contract for Taiwan trades, enabling Taiwan onshore brokers and investor participation.

The FTSE Taiwan RIC Capped Index has a 68% index crossover[5] and a high correlation with the Taiwan Stock Exchange Capitalisation Weighted Stock Index (TWSE Index)[6]. With liquid futures on both indices, there are opportunities to take advantage of short-term price deviations to engage in mean-reversion trades.

Before getting to the trading strategy, we compare the two indices to get a better understanding of how they stack up against each other.

Macquarie Group (MQG AU)  is looking to raise US$1.1bn in its institutional placement.

In this note, we will look at deal dynamics, performance of past deals, its recent results and run the deal through our ECM framework.

We covered its 2019 placement in:

• Macquarie Group Placement – Small in Relative Terms but Seems Opportunistic 

Allocation & lockup results

Below is the final institutional allocation of Kakao Pay. In the case of local institutions, the proportion of those pursuing long-term holding tendencies is visibly high.

More notably, foreign institutions (those with a transaction record, generally deemed a true overseas institution) secured half of the total institutional allocation. Application-wise, their weight is only 1.78%. So, yes, 50% seems pretty high. It may prove that the proportion of prominent institutions in this bookbuilding was high. Kakao Pay wanted to have them on the shareholder list for reputational purposes, which isn’t unfamiliar in a local IPO in Korea.

The lockup result is as follows. 59% of all institutional allocations are locked up. Nearly 70% of them are locked up for more than three months. As a result, we have 4.23% of the post-IPO SO put up for lockup, and only 2.94% of the post-IPO SO will hit the market immediately after the listing.

BYD (1211 HK) is looking to raise up to US$1.8bn in its H-share placement.

In this note, we will look at deal dynamics, recent Q3 results, and run the deal through our ECM framework.

We covered the January placement in:

• BYD (比亚迪汽车) Placement – A Well Anticipated Placement with Strong Momentum 

Two-plus years ago, SBI Holdings (8473 JP) built up a stake in Shinsei Bank (8303 JP) and tried to negotiate a partnership. Earlier this year when Shinsei decided to partner with a competing online broker for its own securities business, media reports suggest SBI head Kitao-san was beside himself, and from January to end-March, he ended up buying 8% of the voting rights, getting SBI to just under 20% of Shinsei voting rights by March-end. 

On 9 September, SBI launched a Tender Offer to attempt to take its ownership from 20.32% to 48.00% in a Partial Tender Offer at ¥2,000/share, which was a 30+% premium to the then-traded price, but a much smaller premium to the highest price paid by SBI in the previous 6 months. It is also “only” 0.45x book, and 48% would likely gain AGM control because attendance is rarely much above 90%. 

The stock jumped. Then fell back a bit. 

Shinsei took exception, but has been quite reasoned – in the end – about their opposition. They have proposed a Poison Pill as a form of “Shareholder Approval” of the takeover – a kind of referendum if you will – and in its Target Opinion opposing the deal last week, Shinsei’s Board said it could recommend the deal if a) SBI raised its price to a fair price (0.45x book and high single digit forward PER is deemed low by the Board), and b) removed the cap limiting the number of shares shareholders may sell. 

Both of those are utterly reasonable requests – or should be seen that way by shareholders – but SBI lambasted them, refusing to do either. 

This history is described in the extensive coverage on the Shinsei opportunity and the deal so far. 

Games People Play

There is a fair bit of gamesmanship involved in positioning for a partial tender offer. One is presented with an opportunity to buy (or sell) shares now, before the tender, then faced with a choice to tender or not tender shares at a price above market and above undisturbed, with the idea that one might not sell everything and instead one would own a residual, which might trade at a different price. 

One can look at that as a “breakeven” trade. If you bought shares today at the closing price of ¥1,915/share, you are implicitly making the bet that IF the Tender Offer goes through on the terms announced, the post-Tender market price will trade in the ¥1,670-1,715 range, give or take, compared to the pre-announcement undisturbed price of ¥1,453/share, if 90-95% of likely-eligible-to-tender shareholders tender. That’s 17% higher than pre-announcement while the TOPIX Banks Index is roughly unchanged. 

However, if fewer than 80% of likely-eligible-to-tender shareholders tender, then the breakeven is about where the pre-announcement level was. 

So investors have to think about a bunch of things… But in this case, investors also have to think about… 

• What happens if shareholders decide to approve the Poison Pill defence at the shareholder meeting, or…
• What changes will be wrought by SBI if they get to 48% which would warrant seeing a back end price different than the undisturbed price? 
• Or how the shareholder structure would change post-Tender. 

Below the fold we look at…

• Are there big flows pre-Tender?
• Is there Dilution Risk Buying Before the EGM?
• What are the drivers which could prompt a bump?
• Is there room to own a chunk of shares post-Tender?
• What are the drivers and flows post-Tender which matter?

And we look at the Serious Game Of Chicken which could be played.

China Shineway Pharmaceutical (2877 HK) has been listed since December 2004. The IPO was 231x oversubscribed and the company was listed at 4.36 HKD. Since then the company has consistently paid interim, final, and special dividends totaling 5.89 HKD/share. 

Currently, Shineway has 6 HKD/share in net cash on the balance sheet vs a 7.2 HKD stock price. Cash is therefore approximately 85% of the market cap.

Shineway is not a hot stock, on the contrary, it is a TCM player out of Hebei which is rather boring. There’s positive and negatives about the TCM sector which we will delve into below. What attracted us to Shineway, and why it deserves your attention, is the new dividend policy it announced in late July. We believe this has gone largely unnoticed by investors but provides a floor for the stock which was not there before.

Shineway announced that from its 2021 dividend base of 0.6 RMB, the dividend would grow EVERY year with at least 15%, or by the % growth in earnings (whatever is higher). It also announced it would pay the dividend in quarterly installments. Shineway has effectively become a “Pharma REIT-or-BOND-like investment instrument”. So while your downside is supported by 1) the 6 HKD/share cash pile and 2) the new dividend policy. The upside case is a change from rock-bottom sentiment towards TCM and any of their five key growth drivers delivering earnings upside (see corporate presentation attached).

Shineway reminds us a lot of a similar situation at Oriental Watch (398 HK) over the past few years. Assuming the dividend policy is followed and the dividend grows by the minimum %/year investors in Shineway get back their entire investment in 6.5 years.

In our base case, we forecast Shineway to have a dividend yield of 11.5% in 2022, 13.3% in 2023, 15.3% in 2024, and 17.7% in 2025.

In our bull case, we forecast Shineway to have a dividend yield of 12.5% in 2022, 15.7% in 2023, 19.7% in 2024, and 24.7% in 2025.

Nearly 11 years ago, Paytm (PAYTM IN) filed its Red Herring Prospectus (RHP) to list. The offer size was INR 1.2bn and valued the company at around INR 5bn. The offer was pulled at the last minute due to market volatility.

The company then moved onto bigger and better things, helped along the way (in a big way) by demonetization.

Paytm (PAYTM IN) is now looking to raise INR 183bn (US$2.44bn) at a valuation of INR 1,394bn (US$18.57bn). This will make Paytm (PAYTM IN)‘s IPO the biggest in India’s corporate history, beating Coal India Ltd (COAL IN)‘s INR 150bn offering in 2010.

Paytm (PAYTM IN)‘s IPO will open on 8 November and close on 10 November with an expected listing date of 18 November. The anchor investor allocation could take place on 5 November where the company could raise up to INR 82.35bn (US$1.1bn).

Given the allocation to anchor investors and the lock-up on those shares, the stock will need to rally 83% from the top end of the IPO range to get Fast Entry to the MSCI India index, and 43% to get Fast Entry to the FTSE All-World index. If Paytm (PAYTM IN) does not get Fast Entry, it could be included in the MSCI India index at the February QIR and in the FTSE All-World index at the June QIR.

The grey market premium implies around 50% upside from the top end of the IPO range, but that could move lower with the company valuation coming in lower than what the unlisted market was expecting (around US$22-25bn).

Last evening, Li Ning (2331 HK) announced a top-up placement to raise HK$10.5bn by selling 120m shares at HK$87.5/share. The placing price represented a discount of 8.09% to the closing price on 27 October.

The stock is trading around 7.2% lower today and is currently 1% higher than the placing price.

In the short term, there should be buying from the passive FTSE trackers. With a change of less than 5% in the index shares, we expect MSCI to implement the increase at the May SAIR, while the index changes for the Hong Kong Hang Seng Index (HSI INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX) will take place at the March rebalance.

The increased market cap could also help the stock get inclusion in the FTSE China 50 Index at the December rebalance.

Two-plus years ago, SBI Holdings (8473 JP) built up a stake in Shinsei Bank (8303 JP) and tried to negotiate a partnership. Earlier this year when Shinsei decided to partner with a competing online broker for its own securities business, media reports suggest SBI head Kitao-san was beside himself, and from January to end-March, he ended up buying 8% of the voting rights, getting SBI to just under 20% of Shinsei voting rights by March-end. 

On 9 September, SBI launched a Tender Offer to attempt to take its ownership from 20.32% to 48.00% in a Partial Tender Offer at ¥2,000/share, which was a 30+% premium to the then-traded price, but a much smaller premium to the highest price paid by SBI in the previous 6 months. It is also “only” 0.45x book, and 48% would likely gain AGM control because attendance is rarely much above 90%. 

The stock jumped. Then fell back a bit. 

Shinsei took exception, but has been quite reasoned – in the end – about their opposition. They have proposed a Poison Pill as a form of “Shareholder Approval” of the takeover – a kind of referendum if you will – and in its Target Opinion opposing the deal last week, Shinsei’s Board said it could recommend the deal if a) SBI raised its price to a fair price (0.45x book and high single digit forward PER is deemed low by the Board), and b) removed the cap limiting the number of shares shareholders may sell. 

Both of those are utterly reasonable requests – or should be seen that way by shareholders – but SBI lambasted them, refusing to do either. 

This history is described in the extensive coverage on the Shinsei opportunity and the deal so far. 

Games People Play

There is a fair bit of gamesmanship involved in positioning for a partial tender offer. One is presented with an opportunity to buy (or sell) shares now, before the tender, then faced with a choice to tender or not tender shares at a price above market and above undisturbed, with the idea that one might not sell everything and instead one would own a residual, which might trade at a different price. 

One can look at that as a “breakeven” trade. If you bought shares today at the closing price of ¥1,915/share, you are implicitly making the bet that IF the Tender Offer goes through on the terms announced, the post-Tender market price will trade in the ¥1,670-1,715 range, give or take, compared to the pre-announcement undisturbed price of ¥1,453/share, if 90-95% of likely-eligible-to-tender shareholders tender. That’s 17% higher than pre-announcement while the TOPIX Banks Index is roughly unchanged. 

However, if fewer than 80% of likely-eligible-to-tender shareholders tender, then the breakeven is about where the pre-announcement level was. 

So investors have to think about a bunch of things… But in this case, investors also have to think about… 

• What happens if shareholders decide to approve the Poison Pill defence at the shareholder meeting, or…
• What changes will be wrought by SBI if they get to 48% which would warrant seeing a back end price different than the undisturbed price? 
• Or how the shareholder structure would change post-Tender. 

Below the fold we look at…

• Are there big flows pre-Tender?
• Is there Dilution Risk Buying Before the EGM?
• What are the drivers which could prompt a bump?
• Is there room to own a chunk of shares post-Tender?
• What are the drivers and flows post-Tender which matter?

And we look at the Serious Game Of Chicken which could be played.

FSN E-Commerce Ventures (Nykaa) (1003622D IN) operates an online beauty and wellness destination offering beauty and wellness products including makeup, skin, hair, appliances, personal care, natural, herbal, mom and baby, wellness, gift and fragrance products.

While revenue has more than doubled over the last couple of years and the company turned a profit for the last financial year, the trailing PE is 840. Nykaa has a lot of work to do to grow into that valuation notwithstanding the CEO’s claim that “Enough left on the table for the investor while fixing Nykaa IPO pricing“.

Nykaa’s IPO will open on 28 October and will run till 1 November with an expected listing date of 11 November.

Nykaa is looking to raise INR 53.47bn (US$714m) at a price range of INR 1085-1125/share valuing the company at US$7.1bn at the top end.

The anchor investor portion of the issue opens today (27 October) and reports indicate that the company is looking to raise INR 23.4bn (US$312m) via this route.

Given the allocation to anchor investors and the lock-up on those shares, we do not expect the stock to get Fast Entry to the MSCI and FTSE indices. Nykaa could be included in the FTSE All-World Index at the June 2022 QIR while inclusion in the MSCI India index will take a lot longer given that the FIF will be below 15% till a lot of the pre-IPO shares unlock and are sold.

The grey market premium implies a 60% upside from the top end of the price range. While the stock could open there, there will be a lot of flippers selling to raise cash for the next hot IPO. With no passive flow supporting the stock and the anchor investor expiry one month post listing, further gains could be capped.

In Evergrande as a Study of Quantum Mechanics Theory in August I discussed how the state of Evergrande (3333 HK)‘s existence was somehow not dissimilar to the classic cat-in-a-box problem mooted by early quantum physics theorists.

With coupon payments not being made, then being made at the last minute to avoid default, this quantum kitty has more life (or is using up its nine lives) than one might have thought. It is worth exploring.

Evergrande Property Services Deal Broken – The Nuance

Last week it became clear that Evergrande (3333 HK) (“Evergrande”) would end up NOT selling a controlling stake in Evergrande Property Services (6666 HK) (“EPS”) to Hopson Development (754 HK) (“Hopson”), but that was less clear that it appeared. 

Evergrande said Hopson had not fulfilled its obligations (with word being – getting the Guangzhou govt stamp of approval). Hopson’s “clarification” on the failure to settle the trade was nuanced quite differently. Evergrande had, according to Hopson, sought to change the terms of the deal, by asking for all the cash upfront before netting out the monies owned between Evergrande and its guarantors and EPS as the deal was originally laid out. The problem was that once the cash was paid out, it was not clear that Evergrande would pay to EPS the monies owed. The nuance here is that the “Cash and Short-Term Securities” at EPS may be in short-term securities issued by its parent. If the payment made to the parent (HK$20.04bn) nets out against HK$17bn possibly borrowed, that means that Evergrande only gets HK$3bn for 50.01%. It actually reduces debt, BUT getting that HK$3bn is less useful than getting HK$20bn. 

There is a HK$1bn break fee to the ‘party which defaults’ on the closure of the Sale of Target Company Shares. At this point, Evergrande is saying Hopson is at fault. Hopson has said it will go through with the transaction (and insists on doing so) at the terms agreed. Given the circumstances, I would expect this is now a HK$1bn payment to Hopson which will be owed but which could probably be marked to market at 20cts on the dollar. 

The other nuance one may derive from that little bust-up is that the shares in Evergrande Property Service – which are a crucial part of the value of the potential “estate” of Evergrande for the bondholders – may be worth a fair bit less than their traded value because if the netting could not occur, that means Evergrande Property Services may not control its significant net cash position. Evergrande and Hopson agreed at a price then below market based on the idea that the cash existed and Evergrande was good for it. The terms about timing would have been clear enough to Evergrande. Take that cash away and it is worth US$2bn less (which is a lot when the US$20bn of USD Evergrande debt is trading at 20cts on the dollar). That net cash position may be invested in Evergrande exposure, and if so, it may not be coming back out until Evergrande is fully healthy. Which may take awhile. But Hopson has stated its case. 

Coupons Paid and Unpaid – The Nuance

The News we got last Friday and over the weekend was that the US$83.5mm of coupons which were in their grace period since the 23 September due date were paid to bondholders, apparently. While I had self-admittedly been up in the air about the likelihood they would pay, all reports suggest they have, and that means the company is in the clear until the 29th of October when more coupons run out their grace period. That would be ~US$47mm of coupons not paid on 29 September. There were other USD bond coupons unpaid recently – roughly US$148.13mm of coupons due on 11 October. Those would see their grace period expire on 10 November. 

There are another $82mm of coupons coming due on 6 November (where the grace period would be until 6 December) and another $255mm of coupons coming due on 28 December. 

But there is nuance here too. And timing. And that is better discussed in more detail below. 

The Discovery Phase of the Bezzle

I used that phrase a bit more than a year ago when talking about Evergrande, suggesting that Galbraith’s fabulously evocative word describing the cumulative increase in illusory/unrealised wealth and general excess marked by over-abundant trust and plentiful money on the way up – The Bezzle – was now in its discovery phase, where “Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous.”  I can cherry pick quotes, and if I do, I’d note that section continues a bit, then says, “Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to a universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed.”

I’d say we are definitely there now.

It’s a great book, and well worth reading, and this particular section describes very clearly the increase of unrealised wealth under the curve – which separately Mr. Galbraith looked at as seeding wealth effect spending, something for which our favourite Belt Brother is known.

What struck many observers for many years was how impervious to the enormous risks born by Evergrande’s capital providers and customers Founder Hui Ka Yan and his reputation seemed. That all seemed to end with a series of articles and posts on mainland media in July and August, culminating in this Caixin article at the end of August which talked quite explicitly about Hui Ka Yan’s poker buddies supporting him and his investments (the next day, one of his poker buddies – Joseph Lau and his wife, now head of Chinese Estates Holdings (127 HK), started selling shares), and another article perhaps 5 weeks ago which talked about Chairman Hui having blown up a US$43bn fortune.  

Hui Ka Yan – also known by Xu Jiayin – has been on the Forbes China Philanthropy List for years, giving RMB 3bn in 2020, and RMB 3bn in 2019, RMB 4.1bn in 2018, and RMB 4.2bn in 2017, and he had topped the list in 2016 and 2015 as well (this year was his first year in several not in the top spot (taken by Jack Ma this year)). 

A Reuters article last week suggested that Evergrande chairman Hui Ka Yan had agreed to put up money into a project which backed a private $260mm USD bond issued by Jumbo Fortune Enterprises, an offshore JV affiliated with Evergrande subsidiary Hengda Real Estate, but guaranteed by Evergrande itself, with the idea that doing so gave more comfort to bondholders that they could extend the maturity, and avoid triggering an Event of Default on Evergrande proper. 

The nuance is that if this was the case, Chairman Hui is putting up his own money to make sure that default is delayed. That changes things. 

The Newest News

On Monday 25 October there were headlines that the NDRC had called a meeting of real estate developers with the notable common factor among them that they had issued offshore bonds. Today they reportedly asked the companies to “optimise their foreign debt structures and proactively prepare for repayment of both principal and interest” according to Reuters. 

On 26 October, Modern Land defaulted on a USD bond, which was something of a surprise given the chairman and controlling shareholder Zhang Lei and company president Zhang Peng together offered to loan the company 800 million yuan “within the next 2-3 months” on 11 October and a surprise given the NDRC meeting.

And Bloomberg reported yesterday that the government had urged/ordered Chairman Hui Ka Yan to use his personal wealth to pay Evergrande’s debt. While this is perhaps not surprising, especially as he is calculated to have taken out US$8bn in dividends in the past decade, it is indicative that “common prosperity” means rich people make sure those from whom they take money to become rich get what they are owed. 

There is nuance here too. And timing. 

More discussion of timing and nuance below the fold. 

Li Ning aims to raise around US$1bn via a top-up placement in Hong Kong. The company has been doing well over the past year and most of the past deals in the name have done well too.

We have covered the previous placements in:

• Li Ning Placement – Viva China Selling – Small Deal Size and Overhang Is Manageable 

• Li Ning Placement – Expectations Adjusted, Overhang Removed

• Li Ning – Just the Start of TPG Exit

The Japan Post Holdings (6178 JP) Offering is likely to price today, the first day of its Pricing Period. 

Two weeks ago I wrote Japan Post Holdings – World’s Largest Cleanup Trade Announced – Story and Index Implications and noted that this was likely to be the last equity offering that Japan Post Holdings would ever do. 

It was cheap, and it was a nice clean setup.

That part hasn’t changed. Some other things have, and they merit attention. 

The last time I wrote about Kunlun Energy (135 HK) was in early June 2021 when I discussed the little extra trick one might use to maximise dividend payout. It worked. But I was bullish.

At that time, my conclusion was…

I am still VERY bullish on Kunlun Energy vs a basket of the three listed HK peers, and at this point, a dollar-neutral position is probably appropriate. 

The stock was a little wishy-washy the day the Special Dividend went ex- – for whatever reason I do not know – then rallied sharply but since 4 June, though the stock itself rallied 30% from that post ex-div rally to early September, the sharp rise in gas input costs caused the shares to fall back to their post-div rally point last week. However the stock has continued to outperform peers – outperforming a basket of three liquid HK-listed city gas peers by 37.9% since I last wrote (the dots). 

But despite that performance… 

I am still VERY bullish on Kunlun Energy vs a basket of the three listed HK peers, and at this point, EITHER a dollar-neutral position OR an outright long is appropriate. 

More below the fold. 

MSCI is scheduled to announce the results of the November 2021 Semi Annual Index Review (SAIR) on 12 November (Asia time) with the changes implemented after the close of trading on 30 November.

We have completed week 1 of the review period and are headed into the final week of the review period. MSCI has historically chosen a day from week 1 of the review period to compute the market cap of the stocks to determine index inclusions and exclusions. So it mainly comes down to which day MSCI chooses from week 1, though there is always a possibility that MSCI chooses a day from week 2.

For the Small Cap index, the flows are small but the impact is quite high in many cases. For Asia, we see 113 potential inclusions and 54 potential exclusions. There will be more changes, but we have restricted the list to stocks that have at least a medium probability of being added or deleted and are sufficiently inside/outside the cutoff thresholds.

Stocks with the largest estimated passive inflows are Tatung Co Ltd (2371 TT), Liontown Resources (LTR AU), Novonix Ltd (NVX AU), L.K. Technology Holdings (558 HK), Hong Seng Consolidated Bhd (HONGSENG MK), Visional Inc (4194 JP), Kintor Pharmaceutical (9939 HK), Advanced Energy Solution (6781 TT), Ngern Tid Lor (TIDLOR TB) and BNC Korea (256840 KS).

Stocks with the largest estimated passive outflows are Restaurant Brands NZ (RBD NZ), Synlait Milk (SML NZ), Pavilion Real Estate Investment Trust (PREIT MK), Grace Technology (6541 JP), Ritek Corporation (2349 TT), Selamat Sempurna (SMSM IJ), Kamakura Shinsho (6184 JP), Chubu Shiryo (2053 JP), Sourcenext Corp (4344 JP), Integrated Research (IRI AU) and KPM Tech Co Ltd (042040 KS).

Stocks that are expected to have the largest impact (in terms of ADV) from passive buying are Pepper Money (PPM AU), Sundaram Clayton (SDC IN), Areit (AyalaLand REIT) (AREIT PM), Malagasy Minerals (CMM AU), PEXA Group (PXA AU), Grindwell Norton (GWN IN), Intage Holdings (4326 JP), 29Metals (29M AU), Huanxi Media (1003 HK), China Youran Dairy Group Ltd (9858 HK) and Evergreen Steel Corp (2211 TT).

Stocks that are expected to have the largest impact (in terms of ADV) from passive selling are Selamat Sempurna (SMSM IJ), Pavilion Real Estate Investment Trust (PREIT MK), China Vast Industrial Urban Development (6166 HK), Restaurant Brands NZ (RBD NZ), China Fangda Group (200055 CH), Leong Hup International (LHIB MK), China Xinhua Education (2779 HK), Homeland Interactive Technology (3798 HK), Beijing North Star Co Ltd H (588 HK) and Oxley Holdings (OHL SP).

There are quite a few stocks that are inclusions/exclusions in other indices as well and there will be a higher impact on these stocks due to the amplified passive flows.

Japan-based systems integration company Simplex Holdings (4373 JP) was listed in the First Section of the Tokyo Stock Exchange (TSE) on 22nd September 2021 and as discussed in my previous insight, TOPIX Inclusion: Simplex Holdings (4373 JP), a stock that gets listed on the TSE First Section will subsequently get included in the TOPIX Index which will require TOPIX-tracking funds to purchase to stock during an Inclusion Event creating a net demand situation. Considering the inclusion parameters for Simplex and its momentum at that time, I was Bullish on the name until the Inclusion Event. 

Since then, the stock has had a sharp jump, a correction, and is now showing signs of a final rebound before the upcoming Inclusion Event at the end of this month. 

Below is a look at my expectations for the upcoming trading days. 

Beijing Airdoc Technology (2251 HK)  is looking to raise up to US$232m in its Hong Kong IPO

Beijing AirDoc Technology (BAT) is an AI-based medical device company with a focus on AI-empowered retina-based early detection, diagnosis and health risk assessment solutions.

Our previous coverage of the IPO:

• Beijing Airdoc (北京鹰瞳科技) Pre-IPO – A Niche Field with Merits but Can It Sell? 
• Beijing Airdoc (北京鹰瞳科技) Pre-IPO – Updates on 1Q21 Results and Competition 
• Beijing Airdoc (北京鹰瞳科技) Pre-IPO – New PHIP Updates 

MSCI is scheduled to announce the results of the November 2021 Semi Annual Index Review (SAIR) on 12 November (Asia time) with the changes implemented after the close of trading on 30 November.

We have completed week 1 of the review period and are headed into the final week of the review period. MSCI has historically chosen a day from week 1 of the review period to compute the market cap of the stocks to determine index inclusions and exclusions. So it mainly comes down to which day MSCI chooses from week 1, though there is always a possibility that MSCI chooses a day from week 2.

Stocks with the largest estimated passive inflows are Mitsui O.S.K. Lines (9104 JP), OZ Minerals Ltd (OZL AU), Parade Technologies (4966 TT), Ememory Technology (3529 TT), Godrej Properties (GPL IN), IDP Education (IEL AU), Open House (3288 JP), SRF Ltd (SRF IN), Tata Power (TPWR IN), Krafton Inc (259960 KS) and L&F Co Ltd (066970 KS).

Stocks with the largest estimated passive outflows are United Urban Investment (8960 JP), Nabtesco Corp (6268 JP), A2 Milk Co Ltd (ATM NZ), Stanley Electric (6923 JP), Casio Computer (6952 JP), Tohoku Electric Power Co (9506 JP), Nh Foods Ltd (2282 JP), AGL Energy Ltd (AGL AU), Powertech Technology (6239 TT), Thk Co Ltd (6481 JP), NSK Ltd (6471 JP) and Yamada Denki (9831 JP).

Stocks that are expected to have the largest impact (in terms of ADV) from passive buying are CRRC Corp Ltd H (1766 HK), OZ Minerals Ltd (OZL AU), Voltronic Power Technology (6409 TT), IDP Education (IEL AU), Inari Amertron (INRI MK), AC Energy Corp (ACEN PM), Open House (3288 JP), Zomato (ZOMATO IN), Benefit One Inc (2412 JP) and Kanzhun (BZ US).

Stocks that are expected to have the largest impact (in terms of ADV) from passive selling are MCB Bank Ltd (MCB PA), A2 Milk Co Ltd (ATM NZ), China Everbright (165 HK), Shenzhen Investment (604 HK), Lucky Cement (LUCK PA), Ipca Laboratories (IPCA IN), Chongqing Rural Commercial Bank (3618 HK), United Urban Investment (8960 JP), Powertech Technology (6239 TT), Habib Bank Ltd (HBL PA) and China Resources Pharmaceutical (3320 HK).

Other changes at the November SAIR will include an increase in Sea Ltd (SE US)‘s index inclusion factor from 0.25 to 0.5, plus potential listing switches from JD.com Inc (ADR) (JD US) to JD.com Inc. (9618 HK) and from NetEase Inc (NTES US) to NetEase (9999 HK).

The Japan Post Holdings (6178 JP) Offering is likely to price today, the first day of its Pricing Period. 

Two weeks ago I wrote Japan Post Holdings – World’s Largest Cleanup Trade Announced – Story and Index Implications and noted that this was likely to be the last equity offering that Japan Post Holdings would ever do. 

It was cheap, and it was a nice clean setup.

That part hasn’t changed. Some other things have, and they merit attention. 

The last time I wrote about Kunlun Energy (135 HK) was in early June 2021 when I discussed the little extra trick one might use to maximise dividend payout. It worked. But I was bullish.

At that time, my conclusion was…

I am still VERY bullish on Kunlun Energy vs a basket of the three listed HK peers, and at this point, a dollar-neutral position is probably appropriate. 

The stock was a little wishy-washy the day the Special Dividend went ex- – for whatever reason I do not know – then rallied sharply but since 4 June, though the stock itself rallied 30% from that post ex-div rally to early September, the sharp rise in gas input costs caused the shares to fall back to their post-div rally point last week. However the stock has continued to outperform peers – outperforming a basket of three liquid HK-listed city gas peers by 37.9% since I last wrote (the dots). 

But despite that performance… 

I am still VERY bullish on Kunlun Energy vs a basket of the three listed HK peers, and at this point, EITHER a dollar-neutral position OR an outright long is appropriate. 

More below the fold. 

MSCI is scheduled to announce the results of the November 2021 Semi Annual Index Review (SAIR) on 12 November (Asia time) with the changes implemented after the close of trading on 30 November.

We have completed week 1 of the review period and are headed into the final week of the review period. MSCI has historically chosen a day from week 1 of the review period to compute the market cap of the stocks to determine index inclusions and exclusions. So it mainly comes down to which day MSCI chooses from week 1, though there is always a possibility that MSCI chooses a day from week 2.

For the Small Cap index, the flows are small but the impact is quite high in many cases. For Asia, we see 113 potential inclusions and 54 potential exclusions. There will be more changes, but we have restricted the list to stocks that have at least a medium probability of being added or deleted and are sufficiently inside/outside the cutoff thresholds.

Stocks with the largest estimated passive inflows are Tatung Co Ltd (2371 TT), Liontown Resources (LTR AU), Novonix Ltd (NVX AU), L.K. Technology Holdings (558 HK), Hong Seng Consolidated Bhd (HONGSENG MK), Visional Inc (4194 JP), Kintor Pharmaceutical (9939 HK), Advanced Energy Solution (6781 TT), Ngern Tid Lor (TIDLOR TB) and BNC Korea (256840 KS).

Stocks with the largest estimated passive outflows are Restaurant Brands NZ (RBD NZ), Synlait Milk (SML NZ), Pavilion Real Estate Investment Trust (PREIT MK), Grace Technology (6541 JP), Ritek Corporation (2349 TT), Selamat Sempurna (SMSM IJ), Kamakura Shinsho (6184 JP), Chubu Shiryo (2053 JP), Sourcenext Corp (4344 JP), Integrated Research (IRI AU) and KPM Tech Co Ltd (042040 KS).

Stocks that are expected to have the largest impact (in terms of ADV) from passive buying are Pepper Money (PPM AU), Sundaram Clayton (SDC IN), Areit (AyalaLand REIT) (AREIT PM), Malagasy Minerals (CMM AU), PEXA Group (PXA AU), Grindwell Norton (GWN IN), Intage Holdings (4326 JP), 29Metals (29M AU), Huanxi Media (1003 HK), China Youran Dairy Group Ltd (9858 HK) and Evergreen Steel Corp (2211 TT).

Stocks that are expected to have the largest impact (in terms of ADV) from passive selling are Selamat Sempurna (SMSM IJ), Pavilion Real Estate Investment Trust (PREIT MK), China Vast Industrial Urban Development (6166 HK), Restaurant Brands NZ (RBD NZ), China Fangda Group (200055 CH), Leong Hup International (LHIB MK), China Xinhua Education (2779 HK), Homeland Interactive Technology (3798 HK), Beijing North Star Co Ltd H (588 HK) and Oxley Holdings (OHL SP).

There are quite a few stocks that are inclusions/exclusions in other indices as well and there will be a higher impact on these stocks due to the amplified passive flows.

There are no provisions regarding minority squeeze-out mechanisms under Thai law. However, if the board of directors approves a proposed de-listing,  an independent financial adviser provides its opinion to shareholders on the merits of the proposal, and the company gains approval (≥ 75% for, ≤10% against) from its shareholders to voluntarily delist, then a company can be delisted. The company is permitted to purchase shares tendered in accordance with SEC and Capital Market Supervisory Board rules. 

On page 57 (of Siam Future’s Tender Offer doc’s PDF), it states:

After the Tender Offer, the Offeror has an intention to delist the Business from being a listed company on the SET during the period of 12 months after the end of the Offer Period. Currently, the Offeror is under the possibility study of proceeding such transaction under relevant rules and regulations, including but not limited to, assessment of possibility of obtaining the approval from the shareholders meeting of the Business, of which has not reached a conclusion on delisting of the Business from being a listed company on the SET.

With 96.24% held, a Delisting Offer from CPN is likely imminent. Such an Offer at the prior Tender Offer price provides 20% upside to the current price. 

MSCI is scheduled to announce the results of the November 2021 Semi Annual Index Review (SAIR) on 12 November (Asia time) with the changes implemented after the close of trading on 30 November.

We have completed week 1 of the review period and are headed into the final week of the review period. MSCI has historically chosen a day from week 1 of the review period to compute the market cap of the stocks to determine index inclusions and exclusions. So it mainly comes down to which day MSCI chooses from week 1, though there is always a possibility that MSCI chooses a day from week 2.

Stocks with the largest estimated passive inflows are Mitsui O.S.K. Lines (9104 JP), OZ Minerals Ltd (OZL AU), Parade Technologies (4966 TT), Ememory Technology (3529 TT), Godrej Properties (GPL IN), IDP Education (IEL AU), Open House (3288 JP), SRF Ltd (SRF IN), Tata Power (TPWR IN), Krafton Inc (259960 KS) and L&F Co Ltd (066970 KS).

Stocks with the largest estimated passive outflows are United Urban Investment (8960 JP), Nabtesco Corp (6268 JP), A2 Milk Co Ltd (ATM NZ), Stanley Electric (6923 JP), Casio Computer (6952 JP), Tohoku Electric Power Co (9506 JP), Nh Foods Ltd (2282 JP), AGL Energy Ltd (AGL AU), Powertech Technology (6239 TT), Thk Co Ltd (6481 JP), NSK Ltd (6471 JP) and Yamada Denki (9831 JP).

Stocks that are expected to have the largest impact (in terms of ADV) from passive buying are CRRC Corp Ltd H (1766 HK), OZ Minerals Ltd (OZL AU), Voltronic Power Technology (6409 TT), IDP Education (IEL AU), Inari Amertron (INRI MK), AC Energy Corp (ACEN PM), Open House (3288 JP), Zomato (ZOMATO IN), Benefit One Inc (2412 JP) and Kanzhun (BZ US).

Stocks that are expected to have the largest impact (in terms of ADV) from passive selling are MCB Bank Ltd (MCB PA), A2 Milk Co Ltd (ATM NZ), China Everbright (165 HK), Shenzhen Investment (604 HK), Lucky Cement (LUCK PA), Ipca Laboratories (IPCA IN), Chongqing Rural Commercial Bank (3618 HK), United Urban Investment (8960 JP), Powertech Technology (6239 TT), Habib Bank Ltd (HBL PA) and China Resources Pharmaceutical (3320 HK).

Other changes at the November SAIR will include an increase in Sea Ltd (SE US)‘s index inclusion factor from 0.25 to 0.5, plus potential listing switches from JD.com Inc (ADR) (JD US) to JD.com Inc. (9618 HK) and from NetEase Inc (NTES US) to NetEase (9999 HK).

Clover Biopharmaceuticals (CBL HK) is a global clinical-stage biotechnology company dedicated to developing novel vaccines and biologic therapeutic candidates for infectious diseases as well as cancer and autoimmune diseases. The two core products are SCB-2019 (CpG 1018/Alum) and SCB-808. SCB-2019 (CpG 1018/Alum) is a protein-based COVID-19 vaccine candidate which may be commercially launched as early as year-end 2021. SCB-808 is a potentially differentiated Enbrel (etanercept) biosimilar. 

Clover is pre-marketing an HKEx IPO to raise proceeds of $300 million, according to press reports. Clover has a credible management team with a commendable track record in drug discovery and commercialization. Clover also has several blue-chip backers such as Hillhouse, Temasek, Lapam Capital, Delos Capital, Qianhai FoF, Oceanpine Capital, Betta Capital and OrbiMed. 

Order table

The final institutional subscription rate of Kakao Pay was 1,714.47 to 1. It is close to the historical high of SKIET (1,883 to 1).

There seem to be three explanations that local institutions rushed to this IPO like this.

• First, the IPO price of Kakao Pay may have provided valuation merit.
• Second, in terms of demand interference within the same corporate group and within the same sector, there might have been many local institutions that wanted to include Kakao Pay in their portfolios rather than Kakao Bank.
• Third, Kakao Pay is the last mega IPO of this year in a situation where LGES’s listing within this year has gone awry, so the competition between local IPO funds that have not yet achieved satisfactory results may have erupted this time.

This reasoning is evidenced by the fact that 100% of the orders are above 75% of the upper end. The “Unspecified” is generally considered “Above the upper end” in Korea’s local IPO bookbuildings.

Regardless of whether the holding tendencies are long-term or short-term, all institutions have been pricing fairly aggressively. It shows once again that there is fierce competition among institutions to secure the target allocation volume.

Additional data:

The order table for each institutional type is below.

The daily bookbuilding participation quantity is as follows.

Despite a slight slowdown in August and September,  due to supply constraints from Rolex and Patek as well lockdowns in China due to Covid, we expect that Oriental Watch (398 HK) will announce a profit alert ahead of its result in November.

We continue to like Oriental Watch (398 HK):

• We believe that despite the last two months of difficulties, dividends for H1 2022 will still be more than 25 cents representing an annualized yield of 12% on the current share price.
• We expect inventories to trend lower due to these supply constraints resulting in further cash conversion on the balance sheet and net cash levels remaining over one bn HKD (representing 50% of the current market capitalization).

Risks

• Imposition of a luxury tax by the Chinese government.
• Further severe supply curtailments by Rolex and Patek Philippe. 

Tokyo Kikai Seisakusho (6335 JP) is Japan’s largest maker of printing presses. It has a market cap of a whopping $130mm, and that is only after a significant rise in price in the past year or so. 

On 20 July this year, a fund called Asia Investment Fund (along with associate Asia Development Capital Co (9318 JP) which is an affiliate of Sun Hung Kai) announced they had bought 7.91% of TKS as of 13 July (which required them to file a Large Shareholder Report). Unknown to the public at the time of the 20 July report was that they had purchased 6.81% on 14 July and 6.11% on 15 July and additional 5.35% in the next three trading days which took them to 26.50% by the time they had announced they had purchased their first 5%. The day after they filed the report which said they owned 7.91% – on 21 July – they bought another 6.19% in the market, which meant the day after they filed the first time they owned 32.72% of the company. On 29 July, TKS announced that Asia Development Capital held 11.83% as of 29 July (which was a little weird because on the 26th of July the two entities reported holding 21.16%).

Then it got fun. There was a lot of effort by TKS and ADC effectively did not respond until TKS did something which ADC thought they could call out. TKS launched a Poison Pill, and ADC tried to file injunctions rejecting both the poison pill and urging the court to require TKS to count their votes held on margin (which is a question). The Court will decide after the EGM.

A list of all the interaction and announcements thereto is at https://www.tks-net.co.jp/aif/. The most recent announcement on Friday is that Shareholders approved the Poison Pill.

More below the fold. 

In the United States, as per FAA classifications, any airplane with a MTOW (Maximum Takeoff Weight) of 300,000 pounds (136,000kg) is classified as heavy”.

The pilot will designate his plane as “heavy” when talking to the Aircraft Control Tower  when taking off and landing to make clear that the tower should maintain separation between it and other aircraft. Tonight’s flight from Singapore to Frankfurt the pilot might say “Tower, this is Singapore 26 Heavy…”

The issue is that the larger the airplane, and the slower it is going, the more ‘wake turbulence” is created. That “wake turbulence” primarily comes from two sources. The first is the “jet wash” (which is the moving air coming out of jet engines – it is chaotic, and of short duration) made famous for many in the movie Top Gun.  The second is “wingtip vortices” where as the wing is generating lift, air flows over the wing in a regular pattern, and at the wingtips and other points, it swirls. This is highly regular, stable, and actually will last for minutes. This is the more dangerous, despite its stability. It is most easily seen in the rain or in super high humidity environments, or there are 

Tower is supposed to give time between planes so as the one coming after avoids the residual turbulence which may exist.

After the big plane does the big thing, you avoid the area. 

When covid-19 suddenly hit travel in early 2020, airlines around the world were reasonably quick to reduce capacity, and costs, and to raise equity to get through what was going to be a lean period. Singapore Air raised S$8.8bn in summer of 2020, and promised a possible raise of another S$6.2bn in summer of 2021. It ended up raising that in June as discussed in Singapore Air Rights MCBs – S$6.2bn of Capital Suck.

As discussed in Singapore Air – The Rights Distribution – Vol Is Your Friend last year, the Rights Shares and Rights Mandatory Convertible Bonds (MCBs) significantly diluted common shareholders so even if there was a V-shaped recovery in business prospects, there would not be a V-shaped recovery in earnings per share. And that was the best case. 

The worst case was worse. 

More below the fold. 

SBI Holdings (8473 JP) launched a surprise hostile–ish Tender Offer on Shinsei Bank (8303 JP) about 6 weeks ago, and that has now officially become HOSTILE.

Shares traded up originally, then down below ¥1,900/share, then near ¥1,900/share, and today, after a delay, which followed an extension, or vice versa, Shinsei Bank (8303 JP) finally came out with their Target Opinion of the SBI Holdings (8473 JP) Tender Offer to purchase an additional 27.68% of Shinsei Bank at ¥2,000/share which would get them to 48% ownership. 

The Contents of the The Opinion were leaked by the Nikkei overnight, and indeed, the Opinion is AGAINST. This bit is not at all surprising. The arguments presented are indeed almost exactly what one would expect. 

It is, however, a nuanced CONDITIONAL AGAINST. And that is where it is gets interesting.

Shinsei Bank is, of course, right on both counts. 

1. SBI, by getting to 48%, can effectively control the Board because to block a full SBI slate would require that more than 96% of shareholders show up to a shareholder meeting and that is unlikely (no meeting in five years has gotten measurably above 91%), and because they cannot act in contravention of the Rehabilitation/Revitalisation Plan, and the government owns 20%, the combination of the government and SBI would own a super-majority, and even if the government were to abstain from such a vote, SBI would have 60%  of the other shares, at a minimum. And if 10% of the non-government holders were to not show up for a vote and the govt were to abstain, SBI’s 48% would be more than two-thirds.
   • The objection is to the idea of a “Coercive Tender” which is called that because it has few enough limits and while possibly short-term beneficial to shareholders prior to the announcement, even shareholders who do not want to tender may feel obliged to do so because their “minority” interest may lose value after the Tender Offer because of the control gained by the Tender Offeror and resulting conflict of interest.
2. The price of ¥2,000/share is likely to be about 0.45x book value per share as of 30 Sep 2021. Combined with their average in-price of about ¥1480/share for their existing 20.32% means a combined average purchase price for control of approximately ¥1,780/share or about 0.40x book (though when they first purchased shares, BVPS was lower).

The “average weighted premium” argument is unusual. I personally have never seen a company defend itself with that, though those objecting to tender offers have used the argument before, and like the “coercion” argument, it relies on the weighted average benefit being low, which it is. This tender offer is being conducted at too low a price.

1. Either remove the upper limit for shares tendered, or conduct a Second TOB by 8 June 2022 which has no upper limit on shares tendered.
2. Raise the Tender Offer Price by negotiation with Shinsei.

If SBI complies with these Requirements for Support by 19 November 2021 – three business days prior to the EGM intended to gauge shareholder support for the Poison Pill – by agreeing and signing an MOU, Shinsei will withdraw the proposal for the Poison Pill and cancel the EGM. It will release data and materials which would allow SBI to conduct reasonable due diligence. 

Shinsei proposes that Shinsei and SBI HDS enter discussions immediately. 

Separately, Shinsei said that it is conducting discussions with potential partners regarding capital and business alliances, and will do so even after the Tender Offer if it is not successful (this is tough – there is no minimum). 

A First Impression: 

• I am normally quite skeptical of Target Opinions which are AGAINST because they tend to be totally self-serving and management entrenching.
• But this is remarkably different than what would normally come from a Japanese company. 
• This is really quite well done by Shinsei. There may be places to nitpick, and Shinsei should have proposed one more measure to make sure that SBI didn’t just decide to take the run and ignore Shinsei’s concerns.

Shinsei may still have room to do that thing, and if done right, that could prove devastating to SBI’s near-term plans. But the window to act on that is probably pretty small, unless there is another delay in the EGM, which would be possible. 

Or unless SBI rejects Shinsei’s proposals out of hand.  Which it just did. 

The situation is now more complicated than before, so I take a little more time to discuss it below.

We have discussed the prospects for Japan Post’s three main businesses – the post office itself, the bank and the insurance company – in three prior insights. Here we examine the trends in the implied holdco discount.

Earlier today, De Grey Mining (DEG AU) went into a trading halt and announced that the company was launching a fully underwritten A$125m placement to complete the Mallina Gold Project prefeasibility study, extend existing resources and conduct exploration drilling.

The company is selling a maximum of 113.636m shares at an offer price of A$1.10/share. This is a 9% discount to the last close. The trading halt will be lifted latest by 22 October, the new shares will settle on 27 October and will be allotted on 28 October.

The increased number of shares could result in De Grey Mining (DEG AU) being included in the S&P/ASX 200 (AS51 INDEX) at the December review. The stock has been close to the inclusion zone at the last few reviews but eventually missed out. This placement should put the stock in a stronger position for index inclusion.

Then there is the wave of M&A activity in Australia that will result in a few more index changes prior to the regular rebalance in December.

The Spark Infrastructure (SKI AU) acquisition is expected to be completed by end November, while the Oil Search Ltd (OSH AU) / Santos Ltd (STO AU) merger is expected to be complete by early December.

Sandfire Resources Limited (SFR AU) and Imugene Ltd (IMU AU) could be added to the S&P/ASX 200 (AS51 INDEX) ahead of the regular rebalance in December and there could be another 3-4 changes at the regular rebalance.

As expected, both SKT and SK Square will remain on the KOSPI 200 after the split.

[The KRX public disclosure concerning the SKT spin-off corporate actions]

[The KRX Corporate Actions & Events Methodology]

So, the daily flow of KOSPI 200 rebalancing trading due to this split is as follows.

• We should expect an outflow of ₩248.0B (1.87x ADTV) at the close on October 25, assuming that the KOSPI 200-tracking ETFs/index funds actively engaged in portfolio rebalancing trading in line with the index corporate action is conservatively estimated at ₩20T (out of the total ₩80T, including pension funds and variable insurance index funds).
• Based on the current share price, SKT’s passive inflow is expected to be ₩149.6B at the close on November 29, and SK Square will likely reach ₩99.7B.

There is nothing illegal about the sale of assets when a company is insolvent, or potentially insolvent. But any such sale must be at market value. Which is probably where negotiations between Hopson Development (754 HK) and Evergrande (3333 HK) came undone.

As discussed exhaustively both here at Smartkarma and in the media, Hopson is reportedly in talks to acquire a 51% stake in Evergrande Property Services (6666 HK) from Evergrande. 

It was unclear whether the headline value of HK$40bn was for the 51% stake, or the valuation of the company as a whole. If for the whole company, that would have implied a 27.7% discount to last close, which might have upset Evergrande shareholders and bondholders alike. If it were HK$40bn for a 51% stake, that would be a considerably different outcome. Media reports noting the suspension of talks pointed at a HK$20bn number for the 51% stake. 

Reportedly, the Guangdong provincial government, which is effectively wearing a pre-administrator hat concerning Evergrande’s restructuring, has not approved the sale. 

In hindsight, this might be a good thing for Hopson. If Evergrande were to enter receivership/liquidation, and the receiver/liquidator deemed the stake sale in Evergrande Property Services was at a reduced value, it may make an application to the courts to unwind the transaction.

The other side of the coin, is why would Hopson potentially expose themselves to an unwind, or questionable business practice by acquiring assets on the cheap from a technically bankrupt or near-bankru entity? If a sale was reversed, does Hopson become a creditor and if so, is it subordinated to other creditors?

The 23 October marks the 30-day grace period on Evergrande’s first missed payment before a default is officially declared. Evergrande also missed a second payment on September 29, and by media accounts, has been less than engaged with debtors on potential asset sales despite numerous requests.

And if Evergrande defaults, where does that leave Evergrande Property Services, whose business is almost exclusively reliant on the property services with its parent? And 65%-held Evergrande Auto (708 HK), which has yet to manufacture an electric vehicle? And even 34.5%-held Shengjing Bank Co Ltd H (2066 HK)?