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Singapore

Brief Singapore: SATS: Traffic -99.5% in April and May; How Much Worse Can It Get? and more

By | Daily Briefs, Singapore

In this briefing:

  1. SATS: Traffic -99.5% in April and May; How Much Worse Can It Get?
  2. The Week that Was in [email protected] – Thai Strategy, New Economy Telco, and Olam
  3. Trump Wants South Korea to Join EPN – Will Moon Agree?
  4. Bank Credit Weekly: Return of Risk-On Sentiment

1. SATS: Traffic -99.5% in April and May; How Much Worse Can It Get?

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SATS Ltd (SATS SP) is a Singapore travel monopoly that has rarely been cheap given its great dividend track record. SATS controls 80% of flight service operations around Changi Airport, one of the top-20 airports in the world. Its most important client Singapore Airlines (SIA SP) has been saved by Temasek and retail shareholders.

According to IATA data Changi flight operations were down -99.5% in April. We expect the same in May. June will see some improvement with travel lines re-opening between China/SG and Singapore Airlines (SIA SP) starting more routes globally next week.

While we continue to wait for FY20 earnings (FY ends 31/3/20) all bad news might be priced in already. With Singapore elections approaching in July and pressure from other global capitals which are re-opening, Singapore can’t afford to have its air-links closed for much longer. Things are set to get incrementally better from here, not worse.

Timing a bottom is always difficult but risk/reward on a long-term basis could be attractive even after a 25% rally from the recent 2.6 SGD low in the past ten days. Read below for more details.

2. The Week that Was in [email protected] – Thai Strategy, New Economy Telco, and Olam

This past week’s offering of Insights across [email protected] is filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up and credit insights.

Please find a brief summary below, with a fuller write up in the detailed section. We also include in the detailed section the past week’s relevant discussions in [email protected]

Macro Insights

In Mid-Year Thai Strategy Review 2020: Focus on Recovery Plays, our Thai guru Athaporn Arayasantiparb, CFA lays out his thoughts and recommendations for 2H2020 in Thailand. 

Equity Bottom-Up  Insights

In Telekomunikasi Indonesia (TLKM IJ) – Nurturing the New Economy, CrossASEAN Insight Provider Angus Mackintosh revisits Indonesia’s largest telco and finds it making significant strides into the digital economy. 

In Valuetronics (VALUE SP): Cash Is an Important Asset + Expansion in Vietnam Continues, CrossASEAN Insight Provider Nicolas Van Broekhoven revisits this electronics player and although valuations look cheap, it faces headwinds from its predominantly Chinese production together with a large market focus on the USA. 

In Comfort Delgro (CD): Back-To-Office (BTO), CrossASEAN Insight Provider Henry Soediarko circles back to this Singapore taxi operator in light of a lifting of the circuit breaker in the near future.

In BDO Unibank – Is A Capital Raise Next?,Thomas J. Monaco zeros in on Philippine bank BDO Unibank Inc (BDO PM) after the announcement of a special loan loss provision. 

In Singapore Air – The Rights Distribution – Vol Is Your Friend,Travis Lundy revisits Singapore Airlines (SIA SP) post its rights issue. 

In Singapore Air – Aftermath of the Rights,Travis Lundy takes a step back and reviews the potential post-rights positioning for Singapore Airlines (SIA SP).

In VGI: Most Solid Player in Media Sector, our friends at Country Group revisit VGI PCL (VGI TB) having attended the analyst meeting on 2nd June, where they came back with a neutral tone. 

In GULF: Fastest Growing Utility Player in Thailand,Country Group initiate coverage of Gulf Energy Development Public Company (GULF TB) with a BUY rating, based on a 2021E target price of Bt44.6, derived from a sum-of-the-parts (SOTP) methodology.

In Singapore Press Reach for SGD1.18, technical analysis specialist Thomas Schroeder works his magic on Singapore Press Holdings (SPH SP) and takes a bearish view on the removal from the Index the company created.

Sector and Thematic Insights

In Singapore REITs – New Rental Relief Framework for SMEs,Sumeet Singh revisits the Singapore REITs sector post the announcement of rental relief for SMEs by the Government. 

In STI Index Review – And Ironic It Is!,Brian Freitas comments the review of the FTSE Straits Times Index (STI) (STI INDEX) which took place last week. 

In KLCI Index Review – Liquidity Play,Brian Freitas comments on the recent changes to the Kuala Lumpur Composite Index (KLCI) (FBMKLCI INDEX).

In Singapore STI Laggard Play, technical analysis specialist Thomas Schroeder comments on Singapore’s ST Index and sees it as an attractive laggard. 

Credit Insights

In Olam International: Cocoa Against COVID, Credit specialist Warut Promboon initiates coverage on Singapore-based commodity player Olam International (OLAM SP), as management shifts to more value-added businesses and processes. 

In OUE Ltd. – Bonds Not Joining the Party, Credit Specialist Lakshmi Iyer, CFA takes a look at this Singapore property company’s 2023 bonds. 

3. Trump Wants South Korea to Join EPN – Will Moon Agree?

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  • Economic Prosperity Network (EPN) is a recent terminology that will likely gain more prominence in the coming months and years, especially as it relates to the strategic importance of how South Korea aligns itself between the two global superpowers – the United States and China. 
  • EPN refers to an initiative started by the United States to diversify global supply chains away from China. The EPN is a clear contrast to China’s “Belt & Road Initiative,” which has tried to bring China, other parts of Asia, Europe, and the Middle East closer together to eventually better serve China’s long term strategic interests.
  • Unlike his predecessors including President Park Geun-Hye and Lee Myung-Bak who had very pro-U.S. foreign policies, President Moon has been “sitting on the fence” with regards to trying to not upset either China or the United States. In fact, one could make a strong case that in the past three years, President Moon has been a lot more pro-China than his two previous predecessors. Given this precedent, it is highly unlikely for President Moon to order the South Korean government to join the EPN, in our view. The more likely scenario is for President Moon to try to postpone any kind of formal decision to join the EPN.

4. Bank Credit Weekly: Return of Risk-On Sentiment

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For every Asia-headquartered bank bond that widened during the week, eight tightened. Risk-on sentiment rose in Asia’s high yield market with option adjusted spreads tightening by almost as much as the US market over the last week. The end-of-the week surprise in US non-farm payroll numbers with a rise in employment during May, as opposed to another large decline, may drive Asia HY risk sentiment as this week opens.

Senior unsecured bank debt continued to outperform in this week’s return to risk-on environment, although each class of bank securities tightened week-on-week. Inherently volatile bonds of India-headquartered finance companies retained their high beta nature by outperforming this week, following last week’s underperformance. Meanwhile, newly improved risk sentiment in Thailand and Vietnam continued to be rewarded in bank bonds that had underperformed so far this year. At the same time, capital inflows into emerging market economies rose as investors’ EM risk perceptions declined.

Hong Kong inter-bank rates retraced recent rises. We expect a negative Q2 result impact on banks with less attractive deposit franchises although banks with valuable deposit franchises should benefit from this recent volatility. Concurrently, US$ Libor continued to flatten, although a rise in three-month Treasury rates suggests that net interest margin compression should be arrested. For three weeks in a row, three-month US LIBOR rates fell by only 2bps week-on-week. Nonetheless, LIBOR rates are down 113bps since the end of Q1. Combined with lower credit growth, this could lead to lower quarterly-sequential net interest revenue for many banks.

Moody’s downgrade of India and the subsequent downgrade of India-headquartered banks had low-to-no impact on investor risk sentiment regarding these assets, as this move was price-in weeks ago. In fact, the limited downgrade amount may have contributed to the risk-on sentiment for India-headquartered bank assets.

Market Outlook: Improved sentiment as coronavirus contagion risks reduce are likely to continue to reprice credit risk tighter, although geo-political risks may prove disadvantageous. Senior unsecured may continue to be best positioned for continued defensive tightening. At the same time, our general preference would be non-Hong Kong centric risk assets, such as India-headquartered bank bonds.

 Inside: In this weekly, we review recent changes in bank bond spread moves over the last week, as well as LIBOR and HIBOR moves, to identify possible investment opportunities and potential pitfalls.

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Brief Singapore: Banks – Credit Risk, Cratering and more

By | Daily Briefs, Singapore

In this briefing:

  1. Banks – Credit Risk, Cratering
  2. The Week that Was in [email protected] – Singapore’s Election, Thai Hospitals, and Rubber Gloves
  3. Major Accordia Golf Trust Shareholder Has Issues With Price & Process
  4. Bank Credit Weekly: Risk Restart
  5. Hong Kong: Uncertain Times But…

1. Banks – Credit Risk, Cratering

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Data from our bank analytics vendor shows credit risk down substantially from the peak in April to the last week in June. Credit Analytics shows the probability of default (PD) of 64,000 public companies across the world are down more than 50% in some sectors including airlines and oil and gas sectors. For some of the least troubled sectors, PD rates are also down considerably. The implications are positive for banks’ credit costs during 2Q20 and during 2H20. And we note that this is in contrast to what some banks were forecasting some months back, of ‘similar’ credit costs during 2Q20 as in 1Q20.  

2. The Week that Was in [email protected] – Singapore’s Election, Thai Hospitals, and Rubber Gloves

This past week’s offering of Insights across [email protected] is filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up and credit insights.

Please find a brief summary below, with a fuller write up in the detailed section. We also include in the detailed section the past week’s relevant discussions in [email protected]

Macro Insights

In A Real Electoral Contest in Singapore, Albeit Limited by Lack of Physical Campaigning, CrossASEAN Chief economist Prasenjit K. Basu zeros in on the prospects for the upcoming Singapore election, where he sees the PAP coming out on top but with major challenges ahead.  

In The Race to the Bottom: Growth Pessimism Increasing but Still Too Optimistic,Dr Jim Walker addresses what he sees as an overt optimistic view of the world and its eventual recovery from multilateral agencies. 

Equity Botton-Up Insights

In Bangkok Dusit Medical (BDMS TB) – Well-Placed to Treat the Recovery, CrossASEAN Insight Provider Angus Mackintosh revisits this leading Thai hospital stock as a pandemic recovery play. 

In Matahari Department Store (LPPF IJ) – Opportunity Knocks?, CrossASEAN Insight Provider Angus Mackintosh revisits Indonesia’s largest department store operator post a call with the company. 

In Sri Trang Gloves IPO Trading – Riding on COVID-19 Second Wave,Sumeet Singh revisits the IPO of Sri Trang Gloves (STGT TB) in Thailand. 

In SGX – Bolt-On Transaction,Thomas J. Monaco zeros in on the most recent acquisition by SGX (SGX SP) and sees only marginal impact. 

In Accordia Golf Trust Buyout… A Gimme But…Travis Lundy takes a look at this lingering buyout situation.  

In Major Accordia Golf Trust Shareholder Has Issues With Price & Process,Travis Lundy revisits this buyout situation after some telling comments from its major shareholder. 

In TEAMG: Government Stimulus Should Support Sales Growth,Dr Andrew Stotz, CFA initiates coverage on TEAM Consulting Engineering & (TEAMG TB) with a BUY recommendation based on a target price of Bt2.42, implying an upside of 20% from the current share price. 

In TASCO: Healthy Demand from Domestic Projects, out friends at Country Group revisits Tipco Asphalt (TASCO TB) after attending the company’s analyst briefing, where the company expressed a positive tone.  

Sector and Thematic Insights

In Osotspa, Indorama: Strong Operations Amidst Pandemic, our Thai guru writes up two recent company visits to consumer products giant Osotspa Public Company Limited (OSP TB), manufacturer of top-selling energy drink M-150 and liquid Vitamin C C-Vitt and petrochemicals giant Indorama Synthetics (INDR IJ), both of which he sees as resilient pandemic recovery plays. 

Credit Insights

In LAOS PDR: Twin Deficit DilemmaWarut Promboon initiates coverage of Laos Sovereign Credit (LAOS GOVT) (Laos) as a high-yield sovereign credit.

In Agung Podomoro Land – Tear Sheet,Trung Nguyen takes a birds-eye view of this Indonesian property developer from a credit perspective. 

3. Major Accordia Golf Trust Shareholder Has Issues With Price & Process

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On Friday 3 July after the close, Hibiki Path Advisors – the second largest shareholder in Accordia Golf Trust (AGT SP) and one who has been noisy on behalf of all shareholders – issued a Press Release which started noting the 29 June announcement of a Board-supported deal by saying…

We would like to publicly announce that we are disappointed with this price which is unarguably low based on our understanding. We are hoping that all independent unitholders agree that this price does not provide “reasonable” premium to fully take over a publicly traded entity generating a significantly attractive cashflow. We will be voting against the proposed divestment in the case the price is not revised higher. As the leading minority unitholder, we are also open for constructive negotiation with the bidder.    [I added the bold]

This comes after a public letter to the board from 15 June shared to fellow unit-holders more recently, and at least one earlier letter to the board. 

There are numerous issues mentioned, some of which have been noted by the Board in the deal announcement. 

It is worth a discussion. 

4. Bank Credit Weekly: Risk Restart

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Emerging market capital inflows restarted with the beginning of the third quarter.  Nonetheless, risk sentiment remained decoupled globally as positive momentum in the US contrasted with slightly negative sentiment in Asia. This is exactly the opposite of prior week results as holiday calendars drive investor attention. In the US, positive vaccine developments offset concerns over an increase in Coronavirus infections, as early trials of experimental shots showed promise. We expect Asia to follow as the week opens.  

In Hong Kong, one-month HIBOR declined 4 basis points (bps) to retest multi-year lows. It is difficult to envision Hong Kong’s interest rates staying at these low levels without substantial central bank intervention. End of week rates were set prior to the first enforcement of Hong Kong’s new security law. Bloomberg reports that a protesting resident was arresting for inciting secession by chanting a slogan. While investors prefer stability to instability, censorship and free markets do not go together.

Consistent with Asia’s slightly lower risk tone, three bank bonds tightened for every two that widened during the week. As such, spread widening was more prominent than during prior weeks. Amongst Asia-headquartered banks bonds, cross-over senior unsecured bonds outperformed for the second week in a row. Investors switched from lower duration bonds, which outperformed in the second quarter, into high duration bonds which lagged during the past quarter.

The Treasury-Eurodollar spread closed the week unchanged at 17bps versus a 2019 average of 24bps. The lower bound of Treasury note interest rates should drive LIBOR upwards as economic recovery pushes Treasury yields higher in a bull market effect. Net interest margins should rise from here.

In other notable bank-related developments, Credit Suisse was recently mandated to lead a high yield Additional Tier 1 (AT1) bond issue by Philippine-headquartered Rizal Commercial Banking (RCB PM). In addition, Emirates NBD (EBIUH) managed to squeeze an AT1 US$-bond into the market, despite the shortened US work week. The new bond was issued at the six-year US Treasury yield + 365.5bps for a yield of 6 1/8%. Concurrently, EBIUH’s 6 3/8% coupon bond is callable in Sept. At current interest rates, this resets to a 4.643% coupon if not called, fully 1.48 percentage points lower that the newly issued bond. Emirati banks may take the title of “Most Bondholder Friendly Issuers” in 2020.

Market Outlook: The Fed’s Secondary Market Corporate Credit Facility, combined with unconventional monetary policy stimulus globally, should continue to push investors into high yield and emerging market bonds over the next few months. At the same time, we expect a livelier H2 in terms of international borrowing from emerging market companies, including banks in Asia. Tactically, cross-over senior unsecured may be best for defensive positioning; however, given the improved interest rate environment, higher beta senior unsecured as well as longer duration high yield and cross-over subordinated debt are better positioned for further risk taking.

Inside: In this weekly, we review recent changes in bank bond spread moves over the last week, as well as LIBOR and HIBOR moves, to identify possible investment opportunities and potential pitfalls.

5. Hong Kong: Uncertain Times But…

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Hong Kong’s economy is in deep downturn and her future uncertain. The passage of the new national security bill has made sure that the island is not going back to the pre-protests Hong Kong. However Beijing will be hard pushed to replace Hong Kong. Aside from its dependence on the island’s financial markets, services industry, independent legal system and the central role it plays in China’s GBA and BRI initiatives, it is not in Beijing’s interest to do so. For now China will want to continue to leverage off Hong Kong’s international reputation. The introduction this week of the Hong Kong-Greater Bay Area wealth management connect is a case in point. There are no immediate alternatives. Five years out from now is a different story.

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Brief Singapore: Trump Wants South Korea to Join EPN – Will Moon Agree? and more

By | Daily Briefs, Singapore

In this briefing:

  1. Trump Wants South Korea to Join EPN – Will Moon Agree?
  2. Bank Credit Weekly: Return of Risk-On Sentiment
  3. Last Week in Event SPACE: Infigen, Huadian Fuxin, Melco, Evergrande, Hitachi, Sing Air, DP World

1. Trump Wants South Korea to Join EPN – Will Moon Agree?

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  • Economic Prosperity Network (EPN) is a recent terminology that will likely gain more prominence in the coming months and years, especially as it relates to the strategic importance of how South Korea aligns itself between the two global superpowers – the United States and China. 
  • EPN refers to an initiative started by the United States to diversify global supply chains away from China. The EPN is a clear contrast to China’s “Belt & Road Initiative,” which has tried to bring China, other parts of Asia, Europe, and the Middle East closer together to eventually better serve China’s long term strategic interests.
  • Unlike his predecessors including President Park Geun-Hye and Lee Myung-Bak who had very pro-U.S. foreign policies, President Moon has been “sitting on the fence” with regards to trying to not upset either China or the United States. In fact, one could make a strong case that in the past three years, President Moon has been a lot more pro-China than his two previous predecessors. Given this precedent, it is highly unlikely for President Moon to order the South Korean government to join the EPN, in our view. The more likely scenario is for President Moon to try to postpone any kind of formal decision to join the EPN.

2. Bank Credit Weekly: Return of Risk-On Sentiment

Week%2023%20 %20hibor%20vs%20libor

For every Asia-headquartered bank bond that widened during the week, eight tightened. Risk-on sentiment rose in Asia’s high yield market with option adjusted spreads tightening by almost as much as the US market over the last week. The end-of-the week surprise in US non-farm payroll numbers with a rise in employment during May, as opposed to another large decline, may drive Asia HY risk sentiment as this week opens.

Senior unsecured bank debt continued to outperform in this week’s return to risk-on environment, although each class of bank securities tightened week-on-week. Inherently volatile bonds of India-headquartered finance companies retained their high beta nature by outperforming this week, following last week’s underperformance. Meanwhile, newly improved risk sentiment in Thailand and Vietnam continued to be rewarded in bank bonds that had underperformed so far this year. At the same time, capital inflows into emerging market economies rose as investors’ EM risk perceptions declined.

Hong Kong inter-bank rates retraced recent rises. We expect a negative Q2 result impact on banks with less attractive deposit franchises although banks with valuable deposit franchises should benefit from this recent volatility. Concurrently, US$ Libor continued to flatten, although a rise in three-month Treasury rates suggests that net interest margin compression should be arrested. For three weeks in a row, three-month US LIBOR rates fell by only 2bps week-on-week. Nonetheless, LIBOR rates are down 113bps since the end of Q1. Combined with lower credit growth, this could lead to lower quarterly-sequential net interest revenue for many banks.

Moody’s downgrade of India and the subsequent downgrade of India-headquartered banks had low-to-no impact on investor risk sentiment regarding these assets, as this move was price-in weeks ago. In fact, the limited downgrade amount may have contributed to the risk-on sentiment for India-headquartered bank assets.

Market Outlook: Improved sentiment as coronavirus contagion risks reduce are likely to continue to reprice credit risk tighter, although geo-political risks may prove disadvantageous. Senior unsecured may continue to be best positioned for continued defensive tightening. At the same time, our general preference would be non-Hong Kong centric risk assets, such as India-headquartered bank bonds.

 Inside: In this weekly, we review recent changes in bank bond spread moves over the last week, as well as LIBOR and HIBOR moves, to identify possible investment opportunities and potential pitfalls.

3. Last Week in Event SPACE: Infigen, Huadian Fuxin, Melco, Evergrande, Hitachi, Sing Air, DP World

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Last Week in Event SPACE …

  • Plus, other events, CCASS movements and Mood Spins.

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


M&A – ASIA

Infigen Energy (IFN AU) (Mkt Cap: $0.5bn; Liquidity: $2mn)

UAC Energy (75% owned by AC Energy, which is a wholly-owned subsidiary of Ayala Corporation (AC PM), and 25% owned by UPC Renewableshas launched a Takeover Bid on an unsolicited basis for Infigen at A$0.80/stapled security. The stake claimed and filed is 12.82% which is 9.9% outright and a Total Return Swap of 2.92%. Interestingly, The Children’s Investment Fund (TCI) announced earlier the same day of the Offer that it had raised its stake to 33.09% from 32.62%. TCI was, according to the AFR yesterday, widely tipped to be a seller at the right price. 

  • This is a starting salvo. How power/energy markets, rates, volatility, politics evolve may determine whether there is market appetite to push it near-term. Travis expects this goes to FIRB first, and takes six months. I expect that any negotiation which happens between UAC and Infigen management will be slow-walked because there is no need to get agreement at A$0.90 before FIRB comes out. 
  • This asset is sub-scale, and sub-scale assets trade cheaper than large scale assets. This could be an attractive target for someone like Shell to bolt on to their Erm Power Ltd (EPW AU) acquisition of late 2019. They want “green cred” and adding this would give it some.  Brookfield sold in February at a price 10% lower. That suggests that after two years, they could not get traction with management, or did not feel a bid was likely to be successful. Travis expects they were low-balling their bid.
  • This stock may be “dead money” near-term, but on the whole Travis would rather be long than not.

Huadian Fuxin Energy Corp (816 HK) (Mkt Cap: $2.6bn; Liquidity: $3mn)

Following the suspension of its shares on the 28 May, HEFC announced its major shareholder, Huadian with 62.76% – via wholly-owned listed vehicle Fujian Huadian Furui (the Offeror) – has tabled a privatisation Offer by way of a Merger by Absorption. The Offer price of $2.50/share, is a 65.56% premium to last close and 85.34% premium to the average closing for the 90 days prior to the Offer announcement. The Offer Price is Final. A final dividend of RMB0.054/share (~HK$0.0587/share) will also be added to the consideration price. Unlike recent merger by absorptions, there is no tendering condition. I have no idea why.

  • If simply pegging to windpower and clean energy peers, HFEC’s Offer price is fair. The pushback is that the entire peer basket is off 12% YTD.  Dissension rights are discussed in HFEC’s AoA. However, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC Laws. 
  • Note – there are pre-conditions with respect to approvals from NDRC, Ministry of Commerce and SAFE. The ultimate Offeror is Huadian, an SOE controlled by SASAC. Apart from possible timing delays, these approvals should all be forthcoming. 

Hitachi Ltd (6501 JP) (Mkt Cap: $33bn; Liquidity: $130mn)

After the close on Friday, Hitachi released its full-year earnings (with a news releasepresentation, and supplemental materials). It also released an update on Progress of the Mid-Term Management Plan, with a webcast and a presentation deck. The contents surprised even Travis. He did not expect to be so underwhelmed.

  • There was no comment about Hitachi Transport System (9086 JP) or Hitachi Capital (8586 JP) and there are ongoing investor questions about the former. 
  • It is at least a year, and probably more like three, given that the COVID-19 situation will effectively contaminate this year, and to some extent the following year, before a really solid sale process can start for the two remaining listed subs. 
  • If indeed the two consolidated listed subs end up for sale, Travis would expect a beauty contest for buyers like occurred for Hitachi Chemical, Hitachi Koki, and others. And those sale processes got great results for both Hitachi and minorities. For that, even if a sale is a few years down the road, any deep dip on the two stocks due to market selloff or flow patterns would be an opportunity to buy the dip. I have my doubts that they will both be world-beating enterprises by the time they are let free from the Hitachi name, but Travis expects they will be worthwhile enough that buyers will compete, especially for HCM.

Zenith Energy Ltd/AU (ZEN AU) (Mkt Cap: $0.1bn; Liquidity: $1mn)

Back on the 6 March, remote power generator Zenith Energy announced an Offer, by way of a Scheme, from Elemental Infrastructure BidCo, a Pacific Equity Partners (PEP) entity, at $1.01/share in cash, a 45.3% premium to last close.  The Offer had been unanimously recommended by Zenith’s board of directors, and valued Zenith’s equity at ~A$150mn (US$98mn) and an enterprise value of ~$250mn.

  • On the 6 April, an initial substantial shareholder announcement (15.45%) was made by Apex Opportunities, an entity controlled by Infrastructure Specialist Asset Management, a trustee of Diversified Infrastructure Trust/Infrastructure Capital Group (ICG) and OPSEU Pension Plant Trust Fund (OPTrust). This stake was bumped to 17.61% on the 22 April.
  • On the 6 May, PEP noted Apex’s holding, and that it would be challenging to implement the Scheme if Apex were to vote against the resolutions. So PEP reached out to Apex such that Apex’s consortium members could take an equity position in the Elemental/PEP group holding structure. If an agreement could be reached, a revised proposal would be tabled.
  • And so it was on the 29 May, Zenith announced Apex had joined PEP/Elemental’s proposed Scheme. There are no other material changes to the Scheme implementation deed announced on the 6 March. This was previously viewed as a clean takeover situation. You have an agreed deal, a solid premium to last close, together with major shareholders support – albeit with a rollover for key shareholders. I expect this deal to get up. But it is not a particularly liquid arb situation.

Onevue Holdings (OVH AU) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

On 1st June 2020, Australian financial markets software company Iress Ltd (IRE AU) signed an scheme implementation agreement to acquire 100% of OneVue valuing the company at a market cap of A$107mn.  The Acquirer announced they will also be simultaneously raising AS$170mn of equity but the OneVue Deal will not be conditional on financing.  The Deal currently requires approvals from Target Shareholders and regulatory authorities.  The Offer Price is A$0.40/share and the consideration will be in the form of cash.

  • In 2019, OneVue sold its trustee business Diversa to financial technology and infrastructure company Sargon for a consideration of $43mn. Out of this, A$31mn was to be settled by Nov 2019 but Sargon failed to make this payment. In January 2019, Sargon went into receivership forcing OneVue to write down a significant portion of the money owed to them by Sargon. 
  • This Deal comes at a premium of 66.7% to the pre-announcement closing price of A$0.24. It is also 281.0% higher than the all-time low of A$0.11 reached in March 2020.  There is some uncertainty regarding the potential recovery of Sargon receivables and the restriction on dividends/buybacks makes it unattractive to hold the stock.  However, the Deal requires approval from at least 75% of votes cast. Janaghan Jeyakumar feels the outcome of the shareholder vote may depend somewhat on the progress in recovering the Sargon receivables between now and the Scheme Meeting in early-September. 
  • This is not a large deal. ADV is about US$300k which is actually on the high side given how private the shareholder register appears to be. The spread is wide and the deal timeline is short but there is some uncertainty to this deal because of the low price. Janaghan expects this to trade with a lot of noise until there is more clarity on the Sargon Receivables. Until then, we recommend avoiding this situation considering the large gap risk (~35% fall to pre-announcement close). 
(link to Janaghan’s insight: OneVue-Iress: Australian Deal Trading Wide)

Metlifecare Ltd (MET NZ) (Mkt Cap: $0.6bn; Liquidity: $4mn)

The  High Court of New Zealand passed down its decision, clarifying the dispute regarding the validity of the notice to terminate the Scheme Implementation Agreement entered with Asia Pacific Village Group Limited (APVG/EQT) should be resolved before MET shareholders vote on the Scheme plan.  The High Court decision provides no insight or context as to whether the termination of the SIA was valid/correct, or not, in the eyes of law. This decision by the judge is purely a judgment on whether the Scheme meeting should be held before the outcome of the litigation.

  • In the interim, MET will hold a shareholder meeting mid-July to seek a formal endorsement from shareholders on whether to continue, or not, with its legal action challenging APVG’s termination of the SIA. MET anticipates dispatching the Notice of Meeting next week. This meeting is MET’s own doing, not a requirement from the Court. The endorsement may require a special resolution – i.e. a 75% approval – for the litigation to continue. No doubt shareholders will overwhelmingly support the litigation – and why wouldn’t they, given the substantial premium over the price at which the company’s shares are currently trading at.
  • Separately, and as previously noted, MET had filed a Statement of Claim in the High Court on the 15 May, seeking orders to compel APVG/EQT to fulfill their contractual obligations under the SIA, The High Court has set an expedited court timetable for the dispute, with the trial scheduled to commence on 23 November 2020. A decision may be available in late January 2021.  I argued (so far, unsuccessfully to date) it would be challenging for EQT to get out of the MAC carve-out. I expect the judge’s final decision to side with MET and therefore, move to put the Scheme to a shareholder vote.
  • Seeking endorsement from shareholders on whether to proceed with litigation may have a small net negative impact. Given this is a long-dated deal, some active investors may trim positions. It is possible APVG/EQT may face reputational damage dragging out this process, and potentially seek a compromise.  I remain positive this deal will get up.

Kingswood Enterprise Co., Ltd. (600255 CH) (Mkt Cap: $0.3bn; Liquidity: $6mn)

Wuhu Chuheng Investment, the second-largest shareholder in Kingswood with 2.30% of shares out, is seeking to raise its stake to 15.00% via a partial Tender Offer, in an RMB269.6mn (~US$38mn) transaction. The Tender Offer is RMB1.20/share, a ~13% premium to the undisturbed close. The minimum pro-ration is 13.05%.  Sans a punchy premium, the low pro-ration appears unattractive.  However, recent partial Offers in China have shown remarkably high pro-rations. That’s worth a second look.  And Kingswood is relatively liquid.

STUBS

I see Melco’s discount to NAV at ~28%, bang in line with its 12-month average. But it’s Lawrence Ho’s insider buying that is worthy of a discussion. According to the HKEx, Lawrence has added 2.06% in Melco or 31.5mn shares year-to-date, taking his direct take in Melco to 57.95% and elevating his look-thru stake in MLCO to 33%. Technically, >30% gives a shareholder “control” in the company – largely premised on the fact 30% is the takeover trigger threshold, and is sufficient to block an unsolicited takeover offer. Therefore, Lawrence could collapse the Melco Holdco structure and maintain control. 

  • As discussed in StubWorld: Melco Steps Back From Crown; Ayala Hands Over Control Of Manila Water, Melco stub ops are largely inconsequential/immaterial, encompassing various “perpetual” trademarks and goodwill (after Melco gained control of MLCO), the Jumbo restaurant in Aberdeen (est. at $370mn for its 86.678% stake – perhaps a lot less since the restaurant is currently closed),  and slot machines and a social gaming developer Entertainment Gaming Asia (implied value of HK$265mn).
  • Collapsing the Holdco structure? Not dissimilar to my Hang Lung (10 HK) commentary last week (StubWorld: Hang Lung Group (10 HK) Is A Buy), this could be achieved via a takeover of Melco (giving Lawrence majority control), in-specie-ing MLCO (giving Lawrence 33% direct into MLCO) or a reverse takeover of Melco by MLCO, perhaps by a scrip/cash offer, wherein Lawrence would opt for the scrip only. This may give Lawrence a higher direct % into MLCO, depending on the scrip ration and who takes up the scrip/cash option. Lawrence would need to abstain from voting in a takeover of Melco – and more likely abstain in a reverse takeover.
  • I would take advantage of any weakness in Melco to build a position. Lawrence was okay with buying at a more expensive implied stub than where it is now. It is worth noting the acquisition of shares Melco by Lawrence this year was primarily done at an implied stub higher the current level.

EVENTS

Evergrande Real Estate Group (3333 HK)  (Mkt Cap: $30bn; Liquidity: $38mn)

Evergrande commenced buying back stock for the first time in two years on 4 May 2020. At the time, because of various options which had been exercised before their expiry (since the end of the buyback in 2018), they had the ability to buy a certain number of shares. The shareholder permission granting of a general mandate to the Directors to “repurchase Shares not exceeding 10% of the existing issued share capital of the Company at the date of passing this resolution.”

  • But that wasn’t the actual flexibility. The actual limit was closer to 208mm shares because of the Exchange rule limiting them to a float of 22.04% or more. As of the previous Friday’s close, that room to repurchase shares was halved at 103mm shares. The first half took 17 trading days out of the 18 since they started buying back shares. The pace slowed a bit after the initial flurry of larger orders, but even if they average 5 million shares/day, they will reach their limit by end-June.  
  • Travis expects shorting near the tail end of the buyback is worthwhile as I expect property stimulus may remain a zone where China policymakers don’t yet want to go because of the ease in which it expands debt, household leverage, and high interest rate equity check borrowing, which causes financial hardship unless property prices go up forever.
  • This insight is labelled BEARISH because I expect sometime in the next two weeks will be the time to sell one’s long and/or short the shares. I believe there is still a little room for the company to push before those who would short will be happy to add marginal risk. 

(link to Travis’ insight: Evergrande (3333 HK) Buyback Half Done)


Singapore Airlines (SIA SP)  (Mkt Cap: $3.7bn; Liquidity: $35mn)

SIA has now announced the distribution of the rights and the rights not taken up. A surprising number of rights were NOT taken up. The announcement does not say the division of the distribution between those who will be allocated the excess rights in order to cover oddlots and those which will be distributed to Excess Rights Applications. The likelihood of another 14% gain on SIA shares is now sharply diminished. This is because there is no V-shaped recovery in the shares to come. Arithmetically, with 150% more shares, EPS will fall 60% on a pro-forma basis. That is not a recipe for seeing the shares at their old price. People looking at charts need to not look at stock price but look at EV “price”. Another 10% higher on the shares would get Forward EV to the same level as calendar Q4 2019.

  • Near-term? there may be selling pressure. If you have shares or borrow and are inclined to sell to buy back, Travis expect there is an opportunity to do so on 3-5 June. Long-term? there should be no V-shaped rebound. The shares are substantially de-levered from before. That means a lot less EPS and theoretically, a lot lower capital structure volatility on a gross basis (shares should be less volatile than before. Medium-term? Travis would not be surprised to see the shares run a bit too far because float is small, there are still shorts, borrow will become easier next week again, and coming out of lockdown will mean people will feel better about doing things.
  • Comparatively? Cathay Pacific Airways (293 HK) and others which have not raised capital are still operating under the old share price paradigm. Theoretically, their shares should be more volatile than SIA’s. That introduces theoretical beta vs realised beta problems for those who manage risk. Cathay still needs capital. SIA doesn’t, and can get another S$6+bn from Temasek over the next year in the form of MCBs. And Cathay still needs capital and will likely still get diluted from here. 
  • And about the MCBs? Something of a disaster of an offering. Out of S$3.496bn, only S$145mm will be tradable. It is possible that these have a very lonely life on the exchange. It also means that aggressive market-makers will be able to trade these at the bond equivalent spread of 10 cents on exchange.

(link to Travis’ insight: Singapore Air – The Rights Distribution – Vol Is Your Friend)


China Pacific Insurance (2601 HK) (Mkt Cap: $3.7bn; Liquidity: $35mn)

CPI released an announcement that it had received permission from the China Securities Regulatory Commission (CSRC) to issue up to but not more than 125,734,000 GDRs which corresponds to a newly issued number of A-Shares of China Pacific Insurance (Group) Co., (601601 CH) (CPIC) of not more than 628,670,000. That comes to an underlying value of US$2.5bn or so, though one might expect a decent discount at issue. The company also announced a cornerstone agreement with Swiss Re agreeing to buy a number of shares which would not exceed 1.5% of the resulting post-offering outstanding number of shares. Required remaining approvals are the FCA and the London Stock Exchange. 

  • The Trade? Bid for and get LSE-listed GDRs of CPIC, then sell the A-share equivalent (GDR ratio-adjusted) of what you can buy on Shanghai.  If you did not get enough, buy more on the market on the LSE once they start trading, then sell a commensurate quantity in Shanghai. If your A-share portfolio is 3% CPIC, and you can buy at a 15% discount, you will earn 45bp outperformance on your entire portfolio just from this trade. There is no other FX to hedge. It is a USD-denominated A-share. It will deliver an amount in RMB equal to the CPIC share price. 
  • At the end of 120 days when the GDRs become fungible, check with your broker how they will be converted (the brokers will probably either sell A-shares VWAP or something similar, but check the method they will “price” your GDRs at), and then do the opposite. If the broker sells the A-shares VWAP on Day X, then you should buy A-shares on Day X, VWAP. The reason you do this is that the conversion the broker will do is not a ‘real’ conversion. You don’t get A-shares. You get the money from them selling A-shares on your behalf. To keep the exposure, you need to buy A-shares while they are selling them. 
  • The other trade? If you are a hedge fund and want to buy a large block of stock cheap, and you like the insurance sector as a whole, buy a block and you are long a slow-rolling block trade where the discount will shrink over the next four months, but you may not make anything just from your long position in the GDR. But you have a bigger buffer against loss. It is effectively a “cornerstone” buy of a block of A-shares where you are locked up for just over four months. But it’s a big enough discount to care.

(link to Travis’ insight: CPIC (601601 SH / 2601 HK) – GDR Issuance Incoming!)


SK Biopharmaceuticals (BIO SK) could reopen the Korean IPO market with its listing that is expected later this month. With 19.58m shares being offered in the IPO at a price range of KRW 36,000 – KRW 49,000 per share, there is a possibility that the stock could get fast entry into the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) and other global indices bringing in passive flows and supporting the stock price. In SK Biopharmaceuticals – Fast Index Entry Possibilities, Brian Freitas takes a look at a few details of the IPO and assesses the likelihood of the stock getting fast entry into indices that have significant assets benchmarked to them.

M&A – EUROPE

Masmovil Ibercom (MAS SM) (Mkt Cap: $3.4bn; Liquidity: $17mn)

A trio of PE funds – KKR, Cinven, and Providence – have launched a takeover bid to acquire a majority stake in Spanish telecom operator MásMóvil Ibercom, S.A. If the Deal goes through, all three PE firms will hold an equal stake in the company. The Offer Price is EUR22.50/share (20.2% premium to the undisturbed) valuing the company at a market cap of ~EUR3.0bn and an enterprise value of EUR 5.011bn. Providence is currently the second-largest shareholder with (9.16%) and including them, shareholders collectively holding 29.56% have agreed to sell. 

  • MásMóvil has been a unique success story in an over-saturated and fiercely competitive European Telecom Industry. The company has disrupted larger competitors by providing low-cost bundles of mobile phone and internet services and also has inorganically strengthened its market position by acquiring brands such as Yoigo, Pepephone, Lyca and Lebara in the last few years. However, the company will need more financial resources to remain competitive against the other local players such as Telefónica, Orange, Vodafone, and Euskaltel. This Deal will probably give them that financial backing. 
  • The Deal has a minimum acceptance condition of 50% and MásMóvil’s shares are currently trading above terms at EUR23.18.  Janaghan feels there is some fundamental backing for an improvement to the current offer – either in the form of a bump from the current bidders or an overbid from other competitive bidders who could potentially be one of MásMóvil’s rivals. MásMóvil has a wholesale agreement with Orange to resell services using Orange’s Spanish network and this can probably attract strategic buyers who could be interested in unlocking synergies. Janaghan recommends buying in the low EUR 23s.
  • Separately Jesus Rodriguez Aguilar has a target price of EUR 26.

M&A – NORTH AMERICA

Cineplex Inc (CGX CN) (Mkt Cap: $0.7bn; Liquidity: $8mn)

On June 1st, Cineplex provided an update on the status of Investment Canada review in connection to the Cineplex-Cineworld Deal – officially, the Deal is still alive. With less than a month to the Outside Date (30th June), the Deal remains conditional mainly on the ICA Approval, fulfilment of certain covenants in the arrangement agreement (SEDAR link), and Cineplex maintaining its debt level under C$725mn (the “Debt Condition”). 
  • Janaghan feels the ICA approval might depend on Cineworld coming to terms with the competition authority on certain matters. The reason for extension of the ICA approval deadline from June 1st to June 15th is not explicitly stated on Cineplex’s announcement. We feel that this could be related to concern of potential closure of screens and the consequent loss of employment that could result from this transaction.
  • With shareholders of both companies having voted in favour of the Deal, the Cineworld’s board of directors is bound by their good faith obligations in the Arrangement Agreement which means IF ICA Approval is granted AND all other conditions including the Debt Condition is met, we feel that it will be highly unlikely for Cineworld to be able to walk away without having to face a lawsuit and discovery. 
  • If ICA Approval is granted on time, there could possibly be some short-lived excitement around the share price. This presents some trading opportunities for punters in the run up to the ICA Approval deadline – June 15th. If you expect short-lived excitement, but eventual deal break, you could make a quick bet on buying to the upside, or you could borrow shares and wait for the stock to pop then short-sell it, but if you do the latter, you should be very sure this deal does not get renegotiated. For fundamental bets on the recovery of Cineplex, wait for the Deal to break and if it does break, buy if the shares fall well below the estimated range for the theoretical break price. 
(link to Janaghan’s insight: Cineplex-Cineworld: The Final Countdown

M&A – MIDDLE EAST

DP World (DPW DU)  (Mkt Cap: $13bn; Liquidity: $11mn)
DP World announced that it had received a Court Date for the hearing to sanction the Scheme. That court date is 16 June.  There are no market holidays between here and there. This remains the easiest short-term risk arb deal in the world right now. Travis doesn’t understand why more people haven’t been doing this trade. There is still juice. If you buy Sunday at the closing offer, and pay 15bp commission, the return is 127bp for less than a month in USD. Easy money is not always easy to find. Get involved.

(link to Travis’ insight: DP World – Ticking Down To The Last Trade)

INDEX RE-BALS

The Stock Exchange of Thailand (SET) will announce the results of the semi-annual review of the SET50 index in June and the changes will be effective from 1 July 2020. Passive funds and index arb desks will need to trade at (or by) the close on 30 June 2020. In SET50 Rebalance Preview: The Final Cut, Brian expects TTW Pcl (TTW TB) and Banpu Power PCL (BPP TB) will be included in the SET50 index replacing Banpu Public (BANPU TB) and WHA Corp Pcl (WHA TB).


STOXX Ltd., the operator of Qontigo’s index business has announced the changes to the STOXX Europe 600 index for the upcoming review. The rebalance will be effective as of the opening of European markets on 22 June and passive funds will need to trade at the close on 19 June. There are 21 inclusions and exclusions in this review. As discussed by Brian in STOXX Europe 600 Index Review: Adds Outperforming Deletes, based on passive assets tracking the STOXX Europe 600 index and the associated size and sector indices, there is significant volume to trade on quite a few stocks. The adds have significantly outperformed the deletes over the last year, with the bulk of the outperformance coming over the last few months


FTSE Russell has just announced the results of the June index review for the FTSE China A50 Index (XIN9I INDEX). The next rebalance will be effective 22 June and passive funds will need to trade at the close on 19 June. As discussed by Brian in FTSE China A50 Index Review – Couple of Changes, there are 2 additions and 2 deletions in the June review. The additions are Beijing-Shanghai High Speed Railway (601816 CH) and WuXi AppTec Co Ltd (603259 CH) and the deletions are 360 Security Technology Inc. (601360 CH) and Boe Technology Group (000725 CH).


For FTSE China 50 index, as discussed by Brian in FTSE China 50 Index Review – Alibaba, Hansoh Pharma, Alibaba Health Included, there are 3 additions and 3 deletions in the June review. The additions are Alibaba Group (9988 HK)Alibaba Health Information Technology (241 HK) and Hansoh Pharmaceutical (3692 HK), while the deletions are Shenzhou Intl Group Holdings (2313 HK)New China Life Insurance (1336 HK) and China Communications Construction (1800 HK).


For the FTSE Straits Times Index (STI) (STI INDEX), as discussed by Brian in STI Index Review – And Ironic It Is!, there is 1 addition Mapletree Industrial Trust (MINT SP) and 1 deletion Singapore Press Holdings (SPH SP) in this review. Brian estimates more than 1.5 days of ADV to buy on MINT and around 0.9 days of ‘normal’ ADV to sell on SPH.


For the  Kuala Lumpur Composite Index (Klci) (FBMKLCI INDEX), as discussed by Brian in KLCI Index Review – Liquidity Play, there are 2 additions, Telekom Malaysia (T MK) and KLCCP Stapled (KLCCSS MK), and 2 deletions Malaysia Airports Hldgs (MAHB MK) and Ammb Holdings (AMM MK) in this review. There are significant days to trade on KLCCP and AMMB and the stocks could move from now to implementation day.


STOXX announced the results of the Deutscher Aktienindex (DAX) index review. The constituent changes will be effective from 22 June and the rebalancing trades will need to be done at the close on 19 June. As discussed by Brian in DAX Index Review – BIG Impact on Deutsche Wohnen, as expectedDeutsche Wohnen Ag (DWNI GR) has been included in the index and Deutsche Lufthansa Ag (LHA GR) has been excluded. This marks the end of a 32 year stay in the index Deutsche Lufthansa – the stock was part of the initial DAX index composition from 30 December 1987.

OTHER M&A & EVENT UPDATES

CCASS

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

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

Name

%chg

Into

Out of

51.05%
Excel
Pacific Found
UTS (6113 HK)
14.62%
Citi
RHB
62.65%
HSBC
Outside CCASS
Wine’s Link (8509 HK)
42.00%
HSBC
BNP
AL Group (8360 HK)
24.20%
Chaoshang
Outside CCASS
32.01%
HSBC
Outside CCASS
Kingland (1751 HK)
18.75%
Gransing
Outside CCASS
Grater Bay Ara (1189 HK)
18.71%
Satinu
Get Nice
18.77%
HSBC
Outside CCASS
13.19%
EFG
Easy One
11.70%
JPM
Outside CCASS
34.39%
CLSA
Outside CCASS
22.76%
UBS
Prime
11.70%
Elstone
Outside CCASS
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Contel (1912 HK)
15.63%
HSBC
Outside CCASS
57.82%
CMB
Outside CCASS
Source: HKEx

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Brief Singapore: Trump Wants South Korea to Join EPN – Will Moon Agree? and more

By | Daily Briefs, Singapore

In this briefing:

  1. Trump Wants South Korea to Join EPN – Will Moon Agree?
  2. Bank Credit Weekly: Return of Risk-On Sentiment
  3. Last Week in Event SPACE: Infigen, Huadian Fuxin, Melco, Evergrande, Hitachi, Sing Air, DP World
  4. Shape of Recovery: Square Root & Hockey Stick

1. Trump Wants South Korea to Join EPN – Will Moon Agree?

G7

  • Economic Prosperity Network (EPN) is a recent terminology that will likely gain more prominence in the coming months and years, especially as it relates to the strategic importance of how South Korea aligns itself between the two global superpowers – the United States and China. 
  • EPN refers to an initiative started by the United States to diversify global supply chains away from China. The EPN is a clear contrast to China’s “Belt & Road Initiative,” which has tried to bring China, other parts of Asia, Europe, and the Middle East closer together to eventually better serve China’s long term strategic interests.
  • Unlike his predecessors including President Park Geun-Hye and Lee Myung-Bak who had very pro-U.S. foreign policies, President Moon has been “sitting on the fence” with regards to trying to not upset either China or the United States. In fact, one could make a strong case that in the past three years, President Moon has been a lot more pro-China than his two previous predecessors. Given this precedent, it is highly unlikely for President Moon to order the South Korean government to join the EPN, in our view. The more likely scenario is for President Moon to try to postpone any kind of formal decision to join the EPN.

2. Bank Credit Weekly: Return of Risk-On Sentiment

Week%2023%20 %20hibor%20vs%20libor

For every Asia-headquartered bank bond that widened during the week, eight tightened. Risk-on sentiment rose in Asia’s high yield market with option adjusted spreads tightening by almost as much as the US market over the last week. The end-of-the week surprise in US non-farm payroll numbers with a rise in employment during May, as opposed to another large decline, may drive Asia HY risk sentiment as this week opens.

Senior unsecured bank debt continued to outperform in this week’s return to risk-on environment, although each class of bank securities tightened week-on-week. Inherently volatile bonds of India-headquartered finance companies retained their high beta nature by outperforming this week, following last week’s underperformance. Meanwhile, newly improved risk sentiment in Thailand and Vietnam continued to be rewarded in bank bonds that had underperformed so far this year. At the same time, capital inflows into emerging market economies rose as investors’ EM risk perceptions declined.

Hong Kong inter-bank rates retraced recent rises. We expect a negative Q2 result impact on banks with less attractive deposit franchises although banks with valuable deposit franchises should benefit from this recent volatility. Concurrently, US$ Libor continued to flatten, although a rise in three-month Treasury rates suggests that net interest margin compression should be arrested. For three weeks in a row, three-month US LIBOR rates fell by only 2bps week-on-week. Nonetheless, LIBOR rates are down 113bps since the end of Q1. Combined with lower credit growth, this could lead to lower quarterly-sequential net interest revenue for many banks.

Moody’s downgrade of India and the subsequent downgrade of India-headquartered banks had low-to-no impact on investor risk sentiment regarding these assets, as this move was price-in weeks ago. In fact, the limited downgrade amount may have contributed to the risk-on sentiment for India-headquartered bank assets.

Market Outlook: Improved sentiment as coronavirus contagion risks reduce are likely to continue to reprice credit risk tighter, although geo-political risks may prove disadvantageous. Senior unsecured may continue to be best positioned for continued defensive tightening. At the same time, our general preference would be non-Hong Kong centric risk assets, such as India-headquartered bank bonds.

 Inside: In this weekly, we review recent changes in bank bond spread moves over the last week, as well as LIBOR and HIBOR moves, to identify possible investment opportunities and potential pitfalls.

3. Last Week in Event SPACE: Infigen, Huadian Fuxin, Melco, Evergrande, Hitachi, Sing Air, DP World

Image?1591332840

Last Week in Event SPACE …

  • Plus, other events, CCASS movements and Mood Spins.

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


M&A – ASIA

Infigen Energy (IFN AU) (Mkt Cap: $0.5bn; Liquidity: $2mn)

UAC Energy (75% owned by AC Energy, which is a wholly-owned subsidiary of Ayala Corporation (AC PM), and 25% owned by UPC Renewableshas launched a Takeover Bid on an unsolicited basis for Infigen at A$0.80/stapled security. The stake claimed and filed is 12.82% which is 9.9% outright and a Total Return Swap of 2.92%. Interestingly, The Children’s Investment Fund (TCI) announced earlier the same day of the Offer that it had raised its stake to 33.09% from 32.62%. TCI was, according to the AFR yesterday, widely tipped to be a seller at the right price. 

  • This is a starting salvo. How power/energy markets, rates, volatility, politics evolve may determine whether there is market appetite to push it near-term. Travis expects this goes to FIRB first, and takes six months. I expect that any negotiation which happens between UAC and Infigen management will be slow-walked because there is no need to get agreement at A$0.90 before FIRB comes out. 
  • This asset is sub-scale, and sub-scale assets trade cheaper than large scale assets. This could be an attractive target for someone like Shell to bolt on to their Erm Power Ltd (EPW AU) acquisition of late 2019. They want “green cred” and adding this would give it some.  Brookfield sold in February at a price 10% lower. That suggests that after two years, they could not get traction with management, or did not feel a bid was likely to be successful. Travis expects they were low-balling their bid.
  • This stock may be “dead money” near-term, but on the whole Travis would rather be long than not.

Huadian Fuxin Energy Corp (816 HK) (Mkt Cap: $2.6bn; Liquidity: $3mn)

Following the suspension of its shares on the 28 May, HEFC announced its major shareholder, Huadian with 62.76% – via wholly-owned listed vehicle Fujian Huadian Furui (the Offeror) – has tabled a privatisation Offer by way of a Merger by Absorption. The Offer price of $2.50/share, is a 65.56% premium to last close and 85.34% premium to the average closing for the 90 days prior to the Offer announcement. The Offer Price is Final. A final dividend of RMB0.054/share (~HK$0.0587/share) will also be added to the consideration price. Unlike recent merger by absorptions, there is no tendering condition. I have no idea why.

  • If simply pegging to windpower and clean energy peers, HFEC’s Offer price is fair. The pushback is that the entire peer basket is off 12% YTD.  Dissension rights are discussed in HFEC’s AoA. However, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC Laws. 
  • Note – there are pre-conditions with respect to approvals from NDRC, Ministry of Commerce and SAFE. The ultimate Offeror is Huadian, an SOE controlled by SASAC. Apart from possible timing delays, these approvals should all be forthcoming. 

Hitachi Ltd (6501 JP) (Mkt Cap: $33bn; Liquidity: $130mn)

After the close on Friday, Hitachi released its full-year earnings (with a news releasepresentation, and supplemental materials). It also released an update on Progress of the Mid-Term Management Plan, with a webcast and a presentation deck. The contents surprised even Travis. He did not expect to be so underwhelmed.

  • There was no comment about Hitachi Transport System (9086 JP) or Hitachi Capital (8586 JP) and there are ongoing investor questions about the former. 
  • It is at least a year, and probably more like three, given that the COVID-19 situation will effectively contaminate this year, and to some extent the following year, before a really solid sale process can start for the two remaining listed subs. 
  • If indeed the two consolidated listed subs end up for sale, Travis would expect a beauty contest for buyers like occurred for Hitachi Chemical, Hitachi Koki, and others. And those sale processes got great results for both Hitachi and minorities. For that, even if a sale is a few years down the road, any deep dip on the two stocks due to market selloff or flow patterns would be an opportunity to buy the dip. I have my doubts that they will both be world-beating enterprises by the time they are let free from the Hitachi name, but Travis expects they will be worthwhile enough that buyers will compete, especially for HCM.

Zenith Energy Ltd/AU (ZEN AU) (Mkt Cap: $0.1bn; Liquidity: $1mn)

Back on the 6 March, remote power generator Zenith Energy announced an Offer, by way of a Scheme, from Elemental Infrastructure BidCo, a Pacific Equity Partners (PEP) entity, at $1.01/share in cash, a 45.3% premium to last close.  The Offer had been unanimously recommended by Zenith’s board of directors, and valued Zenith’s equity at ~A$150mn (US$98mn) and an enterprise value of ~$250mn.

  • On the 6 April, an initial substantial shareholder announcement (15.45%) was made by Apex Opportunities, an entity controlled by Infrastructure Specialist Asset Management, a trustee of Diversified Infrastructure Trust/Infrastructure Capital Group (ICG) and OPSEU Pension Plant Trust Fund (OPTrust). This stake was bumped to 17.61% on the 22 April.
  • On the 6 May, PEP noted Apex’s holding, and that it would be challenging to implement the Scheme if Apex were to vote against the resolutions. So PEP reached out to Apex such that Apex’s consortium members could take an equity position in the Elemental/PEP group holding structure. If an agreement could be reached, a revised proposal would be tabled.
  • And so it was on the 29 May, Zenith announced Apex had joined PEP/Elemental’s proposed Scheme. There are no other material changes to the Scheme implementation deed announced on the 6 March. This was previously viewed as a clean takeover situation. You have an agreed deal, a solid premium to last close, together with major shareholders support – albeit with a rollover for key shareholders. I expect this deal to get up. But it is not a particularly liquid arb situation.

Onevue Holdings (OVH AU) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

On 1st June 2020, Australian financial markets software company Iress Ltd (IRE AU) signed an scheme implementation agreement to acquire 100% of OneVue valuing the company at a market cap of A$107mn.  The Acquirer announced they will also be simultaneously raising AS$170mn of equity but the OneVue Deal will not be conditional on financing.  The Deal currently requires approvals from Target Shareholders and regulatory authorities.  The Offer Price is A$0.40/share and the consideration will be in the form of cash.

  • In 2019, OneVue sold its trustee business Diversa to financial technology and infrastructure company Sargon for a consideration of $43mn. Out of this, A$31mn was to be settled by Nov 2019 but Sargon failed to make this payment. In January 2019, Sargon went into receivership forcing OneVue to write down a significant portion of the money owed to them by Sargon. 
  • This Deal comes at a premium of 66.7% to the pre-announcement closing price of A$0.24. It is also 281.0% higher than the all-time low of A$0.11 reached in March 2020.  There is some uncertainty regarding the potential recovery of Sargon receivables and the restriction on dividends/buybacks makes it unattractive to hold the stock.  However, the Deal requires approval from at least 75% of votes cast. Janaghan Jeyakumar feels the outcome of the shareholder vote may depend somewhat on the progress in recovering the Sargon receivables between now and the Scheme Meeting in early-September. 
  • This is not a large deal. ADV is about US$300k which is actually on the high side given how private the shareholder register appears to be. The spread is wide and the deal timeline is short but there is some uncertainty to this deal because of the low price. Janaghan expects this to trade with a lot of noise until there is more clarity on the Sargon Receivables. Until then, we recommend avoiding this situation considering the large gap risk (~35% fall to pre-announcement close). 
(link to Janaghan’s insight: OneVue-Iress: Australian Deal Trading Wide)

Metlifecare Ltd (MET NZ) (Mkt Cap: $0.6bn; Liquidity: $4mn)

The  High Court of New Zealand passed down its decision, clarifying the dispute regarding the validity of the notice to terminate the Scheme Implementation Agreement entered with Asia Pacific Village Group Limited (APVG/EQT) should be resolved before MET shareholders vote on the Scheme plan.  The High Court decision provides no insight or context as to whether the termination of the SIA was valid/correct, or not, in the eyes of law. This decision by the judge is purely a judgment on whether the Scheme meeting should be held before the outcome of the litigation.

  • In the interim, MET will hold a shareholder meeting mid-July to seek a formal endorsement from shareholders on whether to continue, or not, with its legal action challenging APVG’s termination of the SIA. MET anticipates dispatching the Notice of Meeting next week. This meeting is MET’s own doing, not a requirement from the Court. The endorsement may require a special resolution – i.e. a 75% approval – for the litigation to continue. No doubt shareholders will overwhelmingly support the litigation – and why wouldn’t they, given the substantial premium over the price at which the company’s shares are currently trading at.
  • Separately, and as previously noted, MET had filed a Statement of Claim in the High Court on the 15 May, seeking orders to compel APVG/EQT to fulfill their contractual obligations under the SIA, The High Court has set an expedited court timetable for the dispute, with the trial scheduled to commence on 23 November 2020. A decision may be available in late January 2021.  I argued (so far, unsuccessfully to date) it would be challenging for EQT to get out of the MAC carve-out. I expect the judge’s final decision to side with MET and therefore, move to put the Scheme to a shareholder vote.
  • Seeking endorsement from shareholders on whether to proceed with litigation may have a small net negative impact. Given this is a long-dated deal, some active investors may trim positions. It is possible APVG/EQT may face reputational damage dragging out this process, and potentially seek a compromise.  I remain positive this deal will get up.

Kingswood Enterprise Co., Ltd. (600255 CH) (Mkt Cap: $0.3bn; Liquidity: $6mn)

Wuhu Chuheng Investment, the second-largest shareholder in Kingswood with 2.30% of shares out, is seeking to raise its stake to 15.00% via a partial Tender Offer, in an RMB269.6mn (~US$38mn) transaction. The Tender Offer is RMB1.20/share, a ~13% premium to the undisturbed close. The minimum pro-ration is 13.05%.  Sans a punchy premium, the low pro-ration appears unattractive.  However, recent partial Offers in China have shown remarkably high pro-rations. That’s worth a second look.  And Kingswood is relatively liquid.

STUBS

I see Melco’s discount to NAV at ~28%, bang in line with its 12-month average. But it’s Lawrence Ho’s insider buying that is worthy of a discussion. According to the HKEx, Lawrence has added 2.06% in Melco or 31.5mn shares year-to-date, taking his direct take in Melco to 57.95% and elevating his look-thru stake in MLCO to 33%. Technically, >30% gives a shareholder “control” in the company – largely premised on the fact 30% is the takeover trigger threshold, and is sufficient to block an unsolicited takeover offer. Therefore, Lawrence could collapse the Melco Holdco structure and maintain control. 

  • As discussed in StubWorld: Melco Steps Back From Crown; Ayala Hands Over Control Of Manila Water, Melco stub ops are largely inconsequential/immaterial, encompassing various “perpetual” trademarks and goodwill (after Melco gained control of MLCO), the Jumbo restaurant in Aberdeen (est. at $370mn for its 86.678% stake – perhaps a lot less since the restaurant is currently closed),  and slot machines and a social gaming developer Entertainment Gaming Asia (implied value of HK$265mn).
  • Collapsing the Holdco structure? Not dissimilar to my Hang Lung (10 HK) commentary last week (StubWorld: Hang Lung Group (10 HK) Is A Buy), this could be achieved via a takeover of Melco (giving Lawrence majority control), in-specie-ing MLCO (giving Lawrence 33% direct into MLCO) or a reverse takeover of Melco by MLCO, perhaps by a scrip/cash offer, wherein Lawrence would opt for the scrip only. This may give Lawrence a higher direct % into MLCO, depending on the scrip ration and who takes up the scrip/cash option. Lawrence would need to abstain from voting in a takeover of Melco – and more likely abstain in a reverse takeover.
  • I would take advantage of any weakness in Melco to build a position. Lawrence was okay with buying at a more expensive implied stub than where it is now. It is worth noting the acquisition of shares Melco by Lawrence this year was primarily done at an implied stub higher the current level.

EVENTS

Evergrande Real Estate Group (3333 HK)  (Mkt Cap: $30bn; Liquidity: $38mn)

Evergrande commenced buying back stock for the first time in two years on 4 May 2020. At the time, because of various options which had been exercised before their expiry (since the end of the buyback in 2018), they had the ability to buy a certain number of shares. The shareholder permission granting of a general mandate to the Directors to “repurchase Shares not exceeding 10% of the existing issued share capital of the Company at the date of passing this resolution.”

  • But that wasn’t the actual flexibility. The actual limit was closer to 208mm shares because of the Exchange rule limiting them to a float of 22.04% or more. As of the previous Friday’s close, that room to repurchase shares was halved at 103mm shares. The first half took 17 trading days out of the 18 since they started buying back shares. The pace slowed a bit after the initial flurry of larger orders, but even if they average 5 million shares/day, they will reach their limit by end-June.  
  • Travis expects shorting near the tail end of the buyback is worthwhile as I expect property stimulus may remain a zone where China policymakers don’t yet want to go because of the ease in which it expands debt, household leverage, and high interest rate equity check borrowing, which causes financial hardship unless property prices go up forever.
  • This insight is labelled BEARISH because I expect sometime in the next two weeks will be the time to sell one’s long and/or short the shares. I believe there is still a little room for the company to push before those who would short will be happy to add marginal risk. 

(link to Travis’ insight: Evergrande (3333 HK) Buyback Half Done)


Singapore Airlines (SIA SP)  (Mkt Cap: $3.7bn; Liquidity: $35mn)

SIA has now announced the distribution of the rights and the rights not taken up. A surprising number of rights were NOT taken up. The announcement does not say the division of the distribution between those who will be allocated the excess rights in order to cover oddlots and those which will be distributed to Excess Rights Applications. The likelihood of another 14% gain on SIA shares is now sharply diminished. This is because there is no V-shaped recovery in the shares to come. Arithmetically, with 150% more shares, EPS will fall 60% on a pro-forma basis. That is not a recipe for seeing the shares at their old price. People looking at charts need to not look at stock price but look at EV “price”. Another 10% higher on the shares would get Forward EV to the same level as calendar Q4 2019.

  • Near-term? there may be selling pressure. If you have shares or borrow and are inclined to sell to buy back, Travis expect there is an opportunity to do so on 3-5 June. Long-term? there should be no V-shaped rebound. The shares are substantially de-levered from before. That means a lot less EPS and theoretically, a lot lower capital structure volatility on a gross basis (shares should be less volatile than before. Medium-term? Travis would not be surprised to see the shares run a bit too far because float is small, there are still shorts, borrow will become easier next week again, and coming out of lockdown will mean people will feel better about doing things.
  • Comparatively? Cathay Pacific Airways (293 HK) and others which have not raised capital are still operating under the old share price paradigm. Theoretically, their shares should be more volatile than SIA’s. That introduces theoretical beta vs realised beta problems for those who manage risk. Cathay still needs capital. SIA doesn’t, and can get another S$6+bn from Temasek over the next year in the form of MCBs. And Cathay still needs capital and will likely still get diluted from here. 
  • And about the MCBs? Something of a disaster of an offering. Out of S$3.496bn, only S$145mm will be tradable. It is possible that these have a very lonely life on the exchange. It also means that aggressive market-makers will be able to trade these at the bond equivalent spread of 10 cents on exchange.

(link to Travis’ insight: Singapore Air – The Rights Distribution – Vol Is Your Friend)


China Pacific Insurance (2601 HK) (Mkt Cap: $3.7bn; Liquidity: $35mn)

CPI released an announcement that it had received permission from the China Securities Regulatory Commission (CSRC) to issue up to but not more than 125,734,000 GDRs which corresponds to a newly issued number of A-Shares of China Pacific Insurance (Group) Co., (601601 CH) (CPIC) of not more than 628,670,000. That comes to an underlying value of US$2.5bn or so, though one might expect a decent discount at issue. The company also announced a cornerstone agreement with Swiss Re agreeing to buy a number of shares which would not exceed 1.5% of the resulting post-offering outstanding number of shares. Required remaining approvals are the FCA and the London Stock Exchange. 

  • The Trade? Bid for and get LSE-listed GDRs of CPIC, then sell the A-share equivalent (GDR ratio-adjusted) of what you can buy on Shanghai.  If you did not get enough, buy more on the market on the LSE once they start trading, then sell a commensurate quantity in Shanghai. If your A-share portfolio is 3% CPIC, and you can buy at a 15% discount, you will earn 45bp outperformance on your entire portfolio just from this trade. There is no other FX to hedge. It is a USD-denominated A-share. It will deliver an amount in RMB equal to the CPIC share price. 
  • At the end of 120 days when the GDRs become fungible, check with your broker how they will be converted (the brokers will probably either sell A-shares VWAP or something similar, but check the method they will “price” your GDRs at), and then do the opposite. If the broker sells the A-shares VWAP on Day X, then you should buy A-shares on Day X, VWAP. The reason you do this is that the conversion the broker will do is not a ‘real’ conversion. You don’t get A-shares. You get the money from them selling A-shares on your behalf. To keep the exposure, you need to buy A-shares while they are selling them. 
  • The other trade? If you are a hedge fund and want to buy a large block of stock cheap, and you like the insurance sector as a whole, buy a block and you are long a slow-rolling block trade where the discount will shrink over the next four months, but you may not make anything just from your long position in the GDR. But you have a bigger buffer against loss. It is effectively a “cornerstone” buy of a block of A-shares where you are locked up for just over four months. But it’s a big enough discount to care.

(link to Travis’ insight: CPIC (601601 SH / 2601 HK) – GDR Issuance Incoming!)


SK Biopharmaceuticals (BIO SK) could reopen the Korean IPO market with its listing that is expected later this month. With 19.58m shares being offered in the IPO at a price range of KRW 36,000 – KRW 49,000 per share, there is a possibility that the stock could get fast entry into the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) and other global indices bringing in passive flows and supporting the stock price. In SK Biopharmaceuticals – Fast Index Entry Possibilities, Brian Freitas takes a look at a few details of the IPO and assesses the likelihood of the stock getting fast entry into indices that have significant assets benchmarked to them.

M&A – EUROPE

Masmovil Ibercom (MAS SM) (Mkt Cap: $3.4bn; Liquidity: $17mn)

A trio of PE funds – KKR, Cinven, and Providence – have launched a takeover bid to acquire a majority stake in Spanish telecom operator MásMóvil Ibercom, S.A. If the Deal goes through, all three PE firms will hold an equal stake in the company. The Offer Price is EUR22.50/share (20.2% premium to the undisturbed) valuing the company at a market cap of ~EUR3.0bn and an enterprise value of EUR 5.011bn. Providence is currently the second-largest shareholder with (9.16%) and including them, shareholders collectively holding 29.56% have agreed to sell. 

  • MásMóvil has been a unique success story in an over-saturated and fiercely competitive European Telecom Industry. The company has disrupted larger competitors by providing low-cost bundles of mobile phone and internet services and also has inorganically strengthened its market position by acquiring brands such as Yoigo, Pepephone, Lyca and Lebara in the last few years. However, the company will need more financial resources to remain competitive against the other local players such as Telefónica, Orange, Vodafone, and Euskaltel. This Deal will probably give them that financial backing. 
  • The Deal has a minimum acceptance condition of 50% and MásMóvil’s shares are currently trading above terms at EUR23.18.  Janaghan feels there is some fundamental backing for an improvement to the current offer – either in the form of a bump from the current bidders or an overbid from other competitive bidders who could potentially be one of MásMóvil’s rivals. MásMóvil has a wholesale agreement with Orange to resell services using Orange’s Spanish network and this can probably attract strategic buyers who could be interested in unlocking synergies. Janaghan recommends buying in the low EUR 23s.
  • Separately Jesus Rodriguez Aguilar has a target price of EUR 26.

M&A – NORTH AMERICA

Cineplex Inc (CGX CN) (Mkt Cap: $0.7bn; Liquidity: $8mn)

On June 1st, Cineplex provided an update on the status of Investment Canada review in connection to the Cineplex-Cineworld Deal – officially, the Deal is still alive. With less than a month to the Outside Date (30th June), the Deal remains conditional mainly on the ICA Approval, fulfilment of certain covenants in the arrangement agreement (SEDAR link), and Cineplex maintaining its debt level under C$725mn (the “Debt Condition”). 
  • Janaghan feels the ICA approval might depend on Cineworld coming to terms with the competition authority on certain matters. The reason for extension of the ICA approval deadline from June 1st to June 15th is not explicitly stated on Cineplex’s announcement. We feel that this could be related to concern of potential closure of screens and the consequent loss of employment that could result from this transaction.
  • With shareholders of both companies having voted in favour of the Deal, the Cineworld’s board of directors is bound by their good faith obligations in the Arrangement Agreement which means IF ICA Approval is granted AND all other conditions including the Debt Condition is met, we feel that it will be highly unlikely for Cineworld to be able to walk away without having to face a lawsuit and discovery. 
  • If ICA Approval is granted on time, there could possibly be some short-lived excitement around the share price. This presents some trading opportunities for punters in the run up to the ICA Approval deadline – June 15th. If you expect short-lived excitement, but eventual deal break, you could make a quick bet on buying to the upside, or you could borrow shares and wait for the stock to pop then short-sell it, but if you do the latter, you should be very sure this deal does not get renegotiated. For fundamental bets on the recovery of Cineplex, wait for the Deal to break and if it does break, buy if the shares fall well below the estimated range for the theoretical break price. 
(link to Janaghan’s insight: Cineplex-Cineworld: The Final Countdown

M&A – MIDDLE EAST

DP World (DPW DU)  (Mkt Cap: $13bn; Liquidity: $11mn)
DP World announced that it had received a Court Date for the hearing to sanction the Scheme. That court date is 16 June.  There are no market holidays between here and there. This remains the easiest short-term risk arb deal in the world right now. Travis doesn’t understand why more people haven’t been doing this trade. There is still juice. If you buy Sunday at the closing offer, and pay 15bp commission, the return is 127bp for less than a month in USD. Easy money is not always easy to find. Get involved.

(link to Travis’ insight: DP World – Ticking Down To The Last Trade)

INDEX RE-BALS

The Stock Exchange of Thailand (SET) will announce the results of the semi-annual review of the SET50 index in June and the changes will be effective from 1 July 2020. Passive funds and index arb desks will need to trade at (or by) the close on 30 June 2020. In SET50 Rebalance Preview: The Final Cut, Brian expects TTW Pcl (TTW TB) and Banpu Power PCL (BPP TB) will be included in the SET50 index replacing Banpu Public (BANPU TB) and WHA Corp Pcl (WHA TB).


STOXX Ltd., the operator of Qontigo’s index business has announced the changes to the STOXX Europe 600 index for the upcoming review. The rebalance will be effective as of the opening of European markets on 22 June and passive funds will need to trade at the close on 19 June. There are 21 inclusions and exclusions in this review. As discussed by Brian in STOXX Europe 600 Index Review: Adds Outperforming Deletes, based on passive assets tracking the STOXX Europe 600 index and the associated size and sector indices, there is significant volume to trade on quite a few stocks. The adds have significantly outperformed the deletes over the last year, with the bulk of the outperformance coming over the last few months


FTSE Russell has just announced the results of the June index review for the FTSE China A50 Index (XIN9I INDEX). The next rebalance will be effective 22 June and passive funds will need to trade at the close on 19 June. As discussed by Brian in FTSE China A50 Index Review – Couple of Changes, there are 2 additions and 2 deletions in the June review. The additions are Beijing-Shanghai High Speed Railway (601816 CH) and WuXi AppTec Co Ltd (603259 CH) and the deletions are 360 Security Technology Inc. (601360 CH) and Boe Technology Group (000725 CH).


For FTSE China 50 index, as discussed by Brian in FTSE China 50 Index Review – Alibaba, Hansoh Pharma, Alibaba Health Included, there are 3 additions and 3 deletions in the June review. The additions are Alibaba Group (9988 HK)Alibaba Health Information Technology (241 HK) and Hansoh Pharmaceutical (3692 HK), while the deletions are Shenzhou Intl Group Holdings (2313 HK)New China Life Insurance (1336 HK) and China Communications Construction (1800 HK).


For the FTSE Straits Times Index (STI) (STI INDEX), as discussed by Brian in STI Index Review – And Ironic It Is!, there is 1 addition Mapletree Industrial Trust (MINT SP) and 1 deletion Singapore Press Holdings (SPH SP) in this review. Brian estimates more than 1.5 days of ADV to buy on MINT and around 0.9 days of ‘normal’ ADV to sell on SPH.


For the  Kuala Lumpur Composite Index (Klci) (FBMKLCI INDEX), as discussed by Brian in KLCI Index Review – Liquidity Play, there are 2 additions, Telekom Malaysia (T MK) and KLCCP Stapled (KLCCSS MK), and 2 deletions Malaysia Airports Hldgs (MAHB MK) and Ammb Holdings (AMM MK) in this review. There are significant days to trade on KLCCP and AMMB and the stocks could move from now to implementation day.


STOXX announced the results of the Deutscher Aktienindex (DAX) index review. The constituent changes will be effective from 22 June and the rebalancing trades will need to be done at the close on 19 June. As discussed by Brian in DAX Index Review – BIG Impact on Deutsche Wohnen, as expectedDeutsche Wohnen Ag (DWNI GR) has been included in the index and Deutsche Lufthansa Ag (LHA GR) has been excluded. This marks the end of a 32 year stay in the index Deutsche Lufthansa – the stock was part of the initial DAX index composition from 30 December 1987.

OTHER M&A & EVENT UPDATES

CCASS

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

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

Name

%chg

Into

Out of

51.05%
Excel
Pacific Found
UTS (6113 HK)
14.62%
Citi
RHB
62.65%
HSBC
Outside CCASS
Wine’s Link (8509 HK)
42.00%
HSBC
BNP
AL Group (8360 HK)
24.20%
Chaoshang
Outside CCASS
32.01%
HSBC
Outside CCASS
Kingland (1751 HK)
18.75%
Gransing
Outside CCASS
Grater Bay Ara (1189 HK)
18.71%
Satinu
Get Nice
18.77%
HSBC
Outside CCASS
13.19%
EFG
Easy One
11.70%
JPM
Outside CCASS
34.39%
CLSA
Outside CCASS
22.76%
UBS
Prime
11.70%
Elstone
Outside CCASS
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Contel (1912 HK)
15.63%
HSBC
Outside CCASS
57.82%
CMB
Outside CCASS
Source: HKEx

4. Shape of Recovery: Square Root & Hockey Stick

Chart%203

While GDP data for Q1 are now “old” and seemingly of limited use, it makes little sense to forecast global growth in Q2 and beyond without at least knowing the starting point.

We estimate, based on data for 19 major economies, that global GDP growth slowed to -2.6% yoy in Q1 from +3.0% yoy in Q4 2019 and to -4.3% qoq from +0.6% qoq in Q4. Of these 19 major economies only Chile recorded positive quarter-on-quarter growth in Q1.

The outlook for Q2 and beyond is clouded by the unpredictable interplay between the:

1) Complex mathematics and science behind the spread of the covid-19 pandemic;

2) Often unprecedented measures which governments have taken to contain the pandemic, including national lockdowns varied in their length, scope and efficacy; and

3) Multiplication of policy measures designed to mitigate the slump in global growth.

Nevertheless, the consensus forecast for Q2, which we share, is that global GDP will likely contract even more sharply than in Q1. We forecast, based partly on the fall in the global PMI Composite Output index in April-May, that global GDP will contract 9% qoq in Q2, with most major economies in recession. This would imply that global GDP in Q2 will be similar to that of Q4 2015 and that four years’ worth of growth was wiped out in H1 2020.

We forecast global GDP growth in Q3 and Q4 at respectively +3.0% qoq and +3.5% qoq, and to resemble that of a square-root. Our core scenario is that most national lockdowns will continue to be eased and that widespread central bank policy rate cuts in the past year will have a lagged, positive impact on borrowing, expenditure and investment.

In level terms this implies that GDP’s path will be asymmetric, with its recovery in H2 2020 far more modest than its collapse in H1 2020, and will resemble that of a hockey stick. We estimate that GDP in Q4 would be at a similar level as three years prior.

We have some sympathy with the view that global GDP (level) may follow a W-shaped path (in the event of a “second wave” of covid-19 cases) but attribute low odds of a U and in particular L-shaped recovery (i.e. a depression rather than a recession).

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Brief Singapore: Major Accordia Golf Trust Shareholder Has Issues With Price & Process and more

By | Daily Briefs, Singapore

In this briefing:

  1. Major Accordia Golf Trust Shareholder Has Issues With Price & Process
  2. Bank Credit Weekly: Risk Restart
  3. Hong Kong: Uncertain Times But…
  4. COVID-19: A Second Wave & A Second Lockdown?
  5. Bank Credit Compass: Asia’s Q2 Winners and Losers; What Looks Mispriced into H2

1. Major Accordia Golf Trust Shareholder Has Issues With Price & Process

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On Friday 3 July after the close, Hibiki Path Advisors – the second largest shareholder in Accordia Golf Trust (AGT SP) and one who has been noisy on behalf of all shareholders – issued a Press Release which started noting the 29 June announcement of a Board-supported deal by saying…

We would like to publicly announce that we are disappointed with this price which is unarguably low based on our understanding. We are hoping that all independent unitholders agree that this price does not provide “reasonable” premium to fully take over a publicly traded entity generating a significantly attractive cashflow. We will be voting against the proposed divestment in the case the price is not revised higher. As the leading minority unitholder, we are also open for constructive negotiation with the bidder.    [I added the bold]

This comes after a public letter to the board from 15 June shared to fellow unit-holders more recently, and at least one earlier letter to the board. 

There are numerous issues mentioned, some of which have been noted by the Board in the deal announcement. 

It is worth a discussion. 

2. Bank Credit Weekly: Risk Restart

Week%2027%20 %20em%20hy%20senior%20unsecured%20by%20country

Emerging market capital inflows restarted with the beginning of the third quarter.  Nonetheless, risk sentiment remained decoupled globally as positive momentum in the US contrasted with slightly negative sentiment in Asia. This is exactly the opposite of prior week results as holiday calendars drive investor attention. In the US, positive vaccine developments offset concerns over an increase in Coronavirus infections, as early trials of experimental shots showed promise. We expect Asia to follow as the week opens.  

In Hong Kong, one-month HIBOR declined 4 basis points (bps) to retest multi-year lows. It is difficult to envision Hong Kong’s interest rates staying at these low levels without substantial central bank intervention. End of week rates were set prior to the first enforcement of Hong Kong’s new security law. Bloomberg reports that a protesting resident was arresting for inciting secession by chanting a slogan. While investors prefer stability to instability, censorship and free markets do not go together.

Consistent with Asia’s slightly lower risk tone, three bank bonds tightened for every two that widened during the week. As such, spread widening was more prominent than during prior weeks. Amongst Asia-headquartered banks bonds, cross-over senior unsecured bonds outperformed for the second week in a row. Investors switched from lower duration bonds, which outperformed in the second quarter, into high duration bonds which lagged during the past quarter.

The Treasury-Eurodollar spread closed the week unchanged at 17bps versus a 2019 average of 24bps. The lower bound of Treasury note interest rates should drive LIBOR upwards as economic recovery pushes Treasury yields higher in a bull market effect. Net interest margins should rise from here.

In other notable bank-related developments, Credit Suisse was recently mandated to lead a high yield Additional Tier 1 (AT1) bond issue by Philippine-headquartered Rizal Commercial Banking (RCB PM). In addition, Emirates NBD (EBIUH) managed to squeeze an AT1 US$-bond into the market, despite the shortened US work week. The new bond was issued at the six-year US Treasury yield + 365.5bps for a yield of 6 1/8%. Concurrently, EBIUH’s 6 3/8% coupon bond is callable in Sept. At current interest rates, this resets to a 4.643% coupon if not called, fully 1.48 percentage points lower that the newly issued bond. Emirati banks may take the title of “Most Bondholder Friendly Issuers” in 2020.

Market Outlook: The Fed’s Secondary Market Corporate Credit Facility, combined with unconventional monetary policy stimulus globally, should continue to push investors into high yield and emerging market bonds over the next few months. At the same time, we expect a livelier H2 in terms of international borrowing from emerging market companies, including banks in Asia. Tactically, cross-over senior unsecured may be best for defensive positioning; however, given the improved interest rate environment, higher beta senior unsecured as well as longer duration high yield and cross-over subordinated debt are better positioned for further risk taking.

Inside: In this weekly, we review recent changes in bank bond spread moves over the last week, as well as LIBOR and HIBOR moves, to identify possible investment opportunities and potential pitfalls.

3. Hong Kong: Uncertain Times But…

Capture3

Hong Kong’s economy is in deep downturn and her future uncertain. The passage of the new national security bill has made sure that the island is not going back to the pre-protests Hong Kong. However Beijing will be hard pushed to replace Hong Kong. Aside from its dependence on the island’s financial markets, services industry, independent legal system and the central role it plays in China’s GBA and BRI initiatives, it is not in Beijing’s interest to do so. For now China will want to continue to leverage off Hong Kong’s international reputation. The introduction this week of the Hong Kong-Greater Bay Area wealth management connect is a case in point. There are no immediate alternatives. Five years out from now is a different story.

4. COVID-19: A Second Wave & A Second Lockdown?

Rising 2

In this insight, we discuss the upcoming “Second Wave” of COVID-19 pandemic in 2H 2020. This insight should help the reader to visually assess some of the key countries that are improving or having greater difficulties in controlling COVID-19. 

In particular, we focus on the top 25 countries in terms of the total new cases of COVID-19. As of 1 July 2020, there were 10.6 million cases of COVID-19 in the world, of which the top 25 countries accounted for 85.8% of total cases. As of 1 July 2020, there were 0.5 million deaths related to COVID-19 in the world, of which the top 25 countries represented 89.1% of the total number of deaths. 

With so many deaths and economic hardships, the COVID-19 will become an even bigger political issue leading up to the U.S. election in November. Although it is difficult to tell the exact tipping point number, if the total number of new daily cases exceed 50k in the U.S., for example, there could be a more co-ordinated efforts by many members of the U.S. government to re-institute some kind of second lockdown measures, especially in the key western and southern states that are facing a big jump in new cases. In addition, if there is a second lockdown in many states, this will likely have big negative impact on these states’ economies and could cause further negative pressure on the stock markets. 

5. Bank Credit Compass: Asia’s Q2 Winners and Losers; What Looks Mispriced into H2

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Alpha generation remains available within individual Asian bank bonds. We expect security selection to have a greater impact during the second half of 2020.

In this the third and final portion of our trilogy on our expectations for Asia bank credit, we identify individual securities which appear mispriced based on Q2 performance. Please see: Crowding-In and Asia Bank Credit: The Context for H2 Expectations as well as Bank Credit Strategy: Asia HY Remains Oversold, our first and second pieces of this trilogy, respectively, for more insight regarding these expectations.  

Asia’s US$-denominated Additional Tier 1 (AT1), Tier 2 and Senior Unsecured bonds saw more spread tightening than widening during Q2 overall. In fact, only 30 securities, out of the 105 bank-issued bonds that we track widened since the end of March. Investors that were long bank credit at the peak of the Coronavirus pandemic panic and remained invested were rewarded.

Amongst AT1 bonds, Q2 winners and losers were short- and long-call dated, respectively. With call risk repricing to more normal levels, the market is likely to focus more on credit fundamentals. We have underweight recommendations on State Bank Of India (SBIIN) and United Overseas Bank’ (UOBSP) AT1 securities for this reason. SBI’s AT1 remains overbought.  

Within Tier 2 securities, Q2 winners and losers were China- and Hong Kong-centric, respectively. With geopolitical dynamics deteriorating and a US election fast approaching, we are not convinced that Hong Kong’s Tier 2 underperformance will reverse materially during H2 2020. Concurrently, we see more upside potential in Bank Tabungan Negara’s (BBTNIJ) Tier 2 than amongst other Q2 outperformers.

In senior unsecured, Q2 winners and losers were almost exclusively India-centric. The volatility of India-headquartered senior unsecured bonds may remain over the second half of 2020. Securities with shorter maturity dates could prove particularly volatile as jump to default risk is priced in and out of these securities. Nonetheless, we see some of ICICI Bank (ICICI) and Axis Bank’s (AXSBIN) securities as oversold.

In conclusion, we believe that continued crowding-into US$- denominated credit is the likely outcome of the Fed’s Secondary Market Corporate Credit Facility as investors grab for yield outside the US market. Concurrently with the ECB effectively paying banks to lend while also continuing to buy corporate credit, investors will be pushed further away from investment grade, low duration, and developed country credit.

High yield, long duration emerging market debt should benefit, and the technical knock-on effects are already being priced into credit, globally. Despite the relief rally felt since the announcement of these unconventional policy measures, a wall of money still awaits to be re-invested in the market. As such, unconventional monetary policy stimulus globally, should continue to push investors into risk asset over the next few months.

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Brief Singapore: Bank Credit Weekly: Return of Risk-On Sentiment and more

By | Daily Briefs, Singapore

In this briefing:

  1. Bank Credit Weekly: Return of Risk-On Sentiment
  2. Last Week in Event SPACE: Infigen, Huadian Fuxin, Melco, Evergrande, Hitachi, Sing Air, DP World
  3. Shape of Recovery: Square Root & Hockey Stick

1. Bank Credit Weekly: Return of Risk-On Sentiment

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For every Asia-headquartered bank bond that widened during the week, eight tightened. Risk-on sentiment rose in Asia’s high yield market with option adjusted spreads tightening by almost as much as the US market over the last week. The end-of-the week surprise in US non-farm payroll numbers with a rise in employment during May, as opposed to another large decline, may drive Asia HY risk sentiment as this week opens.

Senior unsecured bank debt continued to outperform in this week’s return to risk-on environment, although each class of bank securities tightened week-on-week. Inherently volatile bonds of India-headquartered finance companies retained their high beta nature by outperforming this week, following last week’s underperformance. Meanwhile, newly improved risk sentiment in Thailand and Vietnam continued to be rewarded in bank bonds that had underperformed so far this year. At the same time, capital inflows into emerging market economies rose as investors’ EM risk perceptions declined.

Hong Kong inter-bank rates retraced recent rises. We expect a negative Q2 result impact on banks with less attractive deposit franchises although banks with valuable deposit franchises should benefit from this recent volatility. Concurrently, US$ Libor continued to flatten, although a rise in three-month Treasury rates suggests that net interest margin compression should be arrested. For three weeks in a row, three-month US LIBOR rates fell by only 2bps week-on-week. Nonetheless, LIBOR rates are down 113bps since the end of Q1. Combined with lower credit growth, this could lead to lower quarterly-sequential net interest revenue for many banks.

Moody’s downgrade of India and the subsequent downgrade of India-headquartered banks had low-to-no impact on investor risk sentiment regarding these assets, as this move was price-in weeks ago. In fact, the limited downgrade amount may have contributed to the risk-on sentiment for India-headquartered bank assets.

Market Outlook: Improved sentiment as coronavirus contagion risks reduce are likely to continue to reprice credit risk tighter, although geo-political risks may prove disadvantageous. Senior unsecured may continue to be best positioned for continued defensive tightening. At the same time, our general preference would be non-Hong Kong centric risk assets, such as India-headquartered bank bonds.

 Inside: In this weekly, we review recent changes in bank bond spread moves over the last week, as well as LIBOR and HIBOR moves, to identify possible investment opportunities and potential pitfalls.

2. Last Week in Event SPACE: Infigen, Huadian Fuxin, Melco, Evergrande, Hitachi, Sing Air, DP World

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Last Week in Event SPACE …

  • Plus, other events, CCASS movements and Mood Spins.

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


M&A – ASIA

Infigen Energy (IFN AU) (Mkt Cap: $0.5bn; Liquidity: $2mn)

UAC Energy (75% owned by AC Energy, which is a wholly-owned subsidiary of Ayala Corporation (AC PM), and 25% owned by UPC Renewableshas launched a Takeover Bid on an unsolicited basis for Infigen at A$0.80/stapled security. The stake claimed and filed is 12.82% which is 9.9% outright and a Total Return Swap of 2.92%. Interestingly, The Children’s Investment Fund (TCI) announced earlier the same day of the Offer that it had raised its stake to 33.09% from 32.62%. TCI was, according to the AFR yesterday, widely tipped to be a seller at the right price. 

  • This is a starting salvo. How power/energy markets, rates, volatility, politics evolve may determine whether there is market appetite to push it near-term. Travis expects this goes to FIRB first, and takes six months. I expect that any negotiation which happens between UAC and Infigen management will be slow-walked because there is no need to get agreement at A$0.90 before FIRB comes out. 
  • This asset is sub-scale, and sub-scale assets trade cheaper than large scale assets. This could be an attractive target for someone like Shell to bolt on to their Erm Power Ltd (EPW AU) acquisition of late 2019. They want “green cred” and adding this would give it some.  Brookfield sold in February at a price 10% lower. That suggests that after two years, they could not get traction with management, or did not feel a bid was likely to be successful. Travis expects they were low-balling their bid.
  • This stock may be “dead money” near-term, but on the whole Travis would rather be long than not.

Huadian Fuxin Energy Corp (816 HK) (Mkt Cap: $2.6bn; Liquidity: $3mn)

Following the suspension of its shares on the 28 May, HEFC announced its major shareholder, Huadian with 62.76% – via wholly-owned listed vehicle Fujian Huadian Furui (the Offeror) – has tabled a privatisation Offer by way of a Merger by Absorption. The Offer price of $2.50/share, is a 65.56% premium to last close and 85.34% premium to the average closing for the 90 days prior to the Offer announcement. The Offer Price is Final. A final dividend of RMB0.054/share (~HK$0.0587/share) will also be added to the consideration price. Unlike recent merger by absorptions, there is no tendering condition. I have no idea why.

  • If simply pegging to windpower and clean energy peers, HFEC’s Offer price is fair. The pushback is that the entire peer basket is off 12% YTD.  Dissension rights are discussed in HFEC’s AoA. However, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC Laws. 
  • Note – there are pre-conditions with respect to approvals from NDRC, Ministry of Commerce and SAFE. The ultimate Offeror is Huadian, an SOE controlled by SASAC. Apart from possible timing delays, these approvals should all be forthcoming. 

Hitachi Ltd (6501 JP) (Mkt Cap: $33bn; Liquidity: $130mn)

After the close on Friday, Hitachi released its full-year earnings (with a news releasepresentation, and supplemental materials). It also released an update on Progress of the Mid-Term Management Plan, with a webcast and a presentation deck. The contents surprised even Travis. He did not expect to be so underwhelmed.

  • There was no comment about Hitachi Transport System (9086 JP) or Hitachi Capital (8586 JP) and there are ongoing investor questions about the former. 
  • It is at least a year, and probably more like three, given that the COVID-19 situation will effectively contaminate this year, and to some extent the following year, before a really solid sale process can start for the two remaining listed subs. 
  • If indeed the two consolidated listed subs end up for sale, Travis would expect a beauty contest for buyers like occurred for Hitachi Chemical, Hitachi Koki, and others. And those sale processes got great results for both Hitachi and minorities. For that, even if a sale is a few years down the road, any deep dip on the two stocks due to market selloff or flow patterns would be an opportunity to buy the dip. I have my doubts that they will both be world-beating enterprises by the time they are let free from the Hitachi name, but Travis expects they will be worthwhile enough that buyers will compete, especially for HCM.

Zenith Energy Ltd/AU (ZEN AU) (Mkt Cap: $0.1bn; Liquidity: $1mn)

Back on the 6 March, remote power generator Zenith Energy announced an Offer, by way of a Scheme, from Elemental Infrastructure BidCo, a Pacific Equity Partners (PEP) entity, at $1.01/share in cash, a 45.3% premium to last close.  The Offer had been unanimously recommended by Zenith’s board of directors, and valued Zenith’s equity at ~A$150mn (US$98mn) and an enterprise value of ~$250mn.

  • On the 6 April, an initial substantial shareholder announcement (15.45%) was made by Apex Opportunities, an entity controlled by Infrastructure Specialist Asset Management, a trustee of Diversified Infrastructure Trust/Infrastructure Capital Group (ICG) and OPSEU Pension Plant Trust Fund (OPTrust). This stake was bumped to 17.61% on the 22 April.
  • On the 6 May, PEP noted Apex’s holding, and that it would be challenging to implement the Scheme if Apex were to vote against the resolutions. So PEP reached out to Apex such that Apex’s consortium members could take an equity position in the Elemental/PEP group holding structure. If an agreement could be reached, a revised proposal would be tabled.
  • And so it was on the 29 May, Zenith announced Apex had joined PEP/Elemental’s proposed Scheme. There are no other material changes to the Scheme implementation deed announced on the 6 March. This was previously viewed as a clean takeover situation. You have an agreed deal, a solid premium to last close, together with major shareholders support – albeit with a rollover for key shareholders. I expect this deal to get up. But it is not a particularly liquid arb situation.

Onevue Holdings (OVH AU) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

On 1st June 2020, Australian financial markets software company Iress Ltd (IRE AU) signed an scheme implementation agreement to acquire 100% of OneVue valuing the company at a market cap of A$107mn.  The Acquirer announced they will also be simultaneously raising AS$170mn of equity but the OneVue Deal will not be conditional on financing.  The Deal currently requires approvals from Target Shareholders and regulatory authorities.  The Offer Price is A$0.40/share and the consideration will be in the form of cash.

  • In 2019, OneVue sold its trustee business Diversa to financial technology and infrastructure company Sargon for a consideration of $43mn. Out of this, A$31mn was to be settled by Nov 2019 but Sargon failed to make this payment. In January 2019, Sargon went into receivership forcing OneVue to write down a significant portion of the money owed to them by Sargon. 
  • This Deal comes at a premium of 66.7% to the pre-announcement closing price of A$0.24. It is also 281.0% higher than the all-time low of A$0.11 reached in March 2020.  There is some uncertainty regarding the potential recovery of Sargon receivables and the restriction on dividends/buybacks makes it unattractive to hold the stock.  However, the Deal requires approval from at least 75% of votes cast. Janaghan Jeyakumar feels the outcome of the shareholder vote may depend somewhat on the progress in recovering the Sargon receivables between now and the Scheme Meeting in early-September. 
  • This is not a large deal. ADV is about US$300k which is actually on the high side given how private the shareholder register appears to be. The spread is wide and the deal timeline is short but there is some uncertainty to this deal because of the low price. Janaghan expects this to trade with a lot of noise until there is more clarity on the Sargon Receivables. Until then, we recommend avoiding this situation considering the large gap risk (~35% fall to pre-announcement close). 
(link to Janaghan’s insight: OneVue-Iress: Australian Deal Trading Wide)

Metlifecare Ltd (MET NZ) (Mkt Cap: $0.6bn; Liquidity: $4mn)

The  High Court of New Zealand passed down its decision, clarifying the dispute regarding the validity of the notice to terminate the Scheme Implementation Agreement entered with Asia Pacific Village Group Limited (APVG/EQT) should be resolved before MET shareholders vote on the Scheme plan.  The High Court decision provides no insight or context as to whether the termination of the SIA was valid/correct, or not, in the eyes of law. This decision by the judge is purely a judgment on whether the Scheme meeting should be held before the outcome of the litigation.

  • In the interim, MET will hold a shareholder meeting mid-July to seek a formal endorsement from shareholders on whether to continue, or not, with its legal action challenging APVG’s termination of the SIA. MET anticipates dispatching the Notice of Meeting next week. This meeting is MET’s own doing, not a requirement from the Court. The endorsement may require a special resolution – i.e. a 75% approval – for the litigation to continue. No doubt shareholders will overwhelmingly support the litigation – and why wouldn’t they, given the substantial premium over the price at which the company’s shares are currently trading at.
  • Separately, and as previously noted, MET had filed a Statement of Claim in the High Court on the 15 May, seeking orders to compel APVG/EQT to fulfill their contractual obligations under the SIA, The High Court has set an expedited court timetable for the dispute, with the trial scheduled to commence on 23 November 2020. A decision may be available in late January 2021.  I argued (so far, unsuccessfully to date) it would be challenging for EQT to get out of the MAC carve-out. I expect the judge’s final decision to side with MET and therefore, move to put the Scheme to a shareholder vote.
  • Seeking endorsement from shareholders on whether to proceed with litigation may have a small net negative impact. Given this is a long-dated deal, some active investors may trim positions. It is possible APVG/EQT may face reputational damage dragging out this process, and potentially seek a compromise.  I remain positive this deal will get up.

Kingswood Enterprise Co., Ltd. (600255 CH) (Mkt Cap: $0.3bn; Liquidity: $6mn)

Wuhu Chuheng Investment, the second-largest shareholder in Kingswood with 2.30% of shares out, is seeking to raise its stake to 15.00% via a partial Tender Offer, in an RMB269.6mn (~US$38mn) transaction. The Tender Offer is RMB1.20/share, a ~13% premium to the undisturbed close. The minimum pro-ration is 13.05%.  Sans a punchy premium, the low pro-ration appears unattractive.  However, recent partial Offers in China have shown remarkably high pro-rations. That’s worth a second look.  And Kingswood is relatively liquid.

STUBS

I see Melco’s discount to NAV at ~28%, bang in line with its 12-month average. But it’s Lawrence Ho’s insider buying that is worthy of a discussion. According to the HKEx, Lawrence has added 2.06% in Melco or 31.5mn shares year-to-date, taking his direct take in Melco to 57.95% and elevating his look-thru stake in MLCO to 33%. Technically, >30% gives a shareholder “control” in the company – largely premised on the fact 30% is the takeover trigger threshold, and is sufficient to block an unsolicited takeover offer. Therefore, Lawrence could collapse the Melco Holdco structure and maintain control. 

  • As discussed in StubWorld: Melco Steps Back From Crown; Ayala Hands Over Control Of Manila Water, Melco stub ops are largely inconsequential/immaterial, encompassing various “perpetual” trademarks and goodwill (after Melco gained control of MLCO), the Jumbo restaurant in Aberdeen (est. at $370mn for its 86.678% stake – perhaps a lot less since the restaurant is currently closed),  and slot machines and a social gaming developer Entertainment Gaming Asia (implied value of HK$265mn).
  • Collapsing the Holdco structure? Not dissimilar to my Hang Lung (10 HK) commentary last week (StubWorld: Hang Lung Group (10 HK) Is A Buy), this could be achieved via a takeover of Melco (giving Lawrence majority control), in-specie-ing MLCO (giving Lawrence 33% direct into MLCO) or a reverse takeover of Melco by MLCO, perhaps by a scrip/cash offer, wherein Lawrence would opt for the scrip only. This may give Lawrence a higher direct % into MLCO, depending on the scrip ration and who takes up the scrip/cash option. Lawrence would need to abstain from voting in a takeover of Melco – and more likely abstain in a reverse takeover.
  • I would take advantage of any weakness in Melco to build a position. Lawrence was okay with buying at a more expensive implied stub than where it is now. It is worth noting the acquisition of shares Melco by Lawrence this year was primarily done at an implied stub higher the current level.

EVENTS

Evergrande Real Estate Group (3333 HK)  (Mkt Cap: $30bn; Liquidity: $38mn)

Evergrande commenced buying back stock for the first time in two years on 4 May 2020. At the time, because of various options which had been exercised before their expiry (since the end of the buyback in 2018), they had the ability to buy a certain number of shares. The shareholder permission granting of a general mandate to the Directors to “repurchase Shares not exceeding 10% of the existing issued share capital of the Company at the date of passing this resolution.”

  • But that wasn’t the actual flexibility. The actual limit was closer to 208mm shares because of the Exchange rule limiting them to a float of 22.04% or more. As of the previous Friday’s close, that room to repurchase shares was halved at 103mm shares. The first half took 17 trading days out of the 18 since they started buying back shares. The pace slowed a bit after the initial flurry of larger orders, but even if they average 5 million shares/day, they will reach their limit by end-June.  
  • Travis expects shorting near the tail end of the buyback is worthwhile as I expect property stimulus may remain a zone where China policymakers don’t yet want to go because of the ease in which it expands debt, household leverage, and high interest rate equity check borrowing, which causes financial hardship unless property prices go up forever.
  • This insight is labelled BEARISH because I expect sometime in the next two weeks will be the time to sell one’s long and/or short the shares. I believe there is still a little room for the company to push before those who would short will be happy to add marginal risk. 

(link to Travis’ insight: Evergrande (3333 HK) Buyback Half Done)


Singapore Airlines (SIA SP)  (Mkt Cap: $3.7bn; Liquidity: $35mn)

SIA has now announced the distribution of the rights and the rights not taken up. A surprising number of rights were NOT taken up. The announcement does not say the division of the distribution between those who will be allocated the excess rights in order to cover oddlots and those which will be distributed to Excess Rights Applications. The likelihood of another 14% gain on SIA shares is now sharply diminished. This is because there is no V-shaped recovery in the shares to come. Arithmetically, with 150% more shares, EPS will fall 60% on a pro-forma basis. That is not a recipe for seeing the shares at their old price. People looking at charts need to not look at stock price but look at EV “price”. Another 10% higher on the shares would get Forward EV to the same level as calendar Q4 2019.

  • Near-term? there may be selling pressure. If you have shares or borrow and are inclined to sell to buy back, Travis expect there is an opportunity to do so on 3-5 June. Long-term? there should be no V-shaped rebound. The shares are substantially de-levered from before. That means a lot less EPS and theoretically, a lot lower capital structure volatility on a gross basis (shares should be less volatile than before. Medium-term? Travis would not be surprised to see the shares run a bit too far because float is small, there are still shorts, borrow will become easier next week again, and coming out of lockdown will mean people will feel better about doing things.
  • Comparatively? Cathay Pacific Airways (293 HK) and others which have not raised capital are still operating under the old share price paradigm. Theoretically, their shares should be more volatile than SIA’s. That introduces theoretical beta vs realised beta problems for those who manage risk. Cathay still needs capital. SIA doesn’t, and can get another S$6+bn from Temasek over the next year in the form of MCBs. And Cathay still needs capital and will likely still get diluted from here. 
  • And about the MCBs? Something of a disaster of an offering. Out of S$3.496bn, only S$145mm will be tradable. It is possible that these have a very lonely life on the exchange. It also means that aggressive market-makers will be able to trade these at the bond equivalent spread of 10 cents on exchange.

(link to Travis’ insight: Singapore Air – The Rights Distribution – Vol Is Your Friend)


China Pacific Insurance (2601 HK) (Mkt Cap: $3.7bn; Liquidity: $35mn)

CPI released an announcement that it had received permission from the China Securities Regulatory Commission (CSRC) to issue up to but not more than 125,734,000 GDRs which corresponds to a newly issued number of A-Shares of China Pacific Insurance (Group) Co., (601601 CH) (CPIC) of not more than 628,670,000. That comes to an underlying value of US$2.5bn or so, though one might expect a decent discount at issue. The company also announced a cornerstone agreement with Swiss Re agreeing to buy a number of shares which would not exceed 1.5% of the resulting post-offering outstanding number of shares. Required remaining approvals are the FCA and the London Stock Exchange. 

  • The Trade? Bid for and get LSE-listed GDRs of CPIC, then sell the A-share equivalent (GDR ratio-adjusted) of what you can buy on Shanghai.  If you did not get enough, buy more on the market on the LSE once they start trading, then sell a commensurate quantity in Shanghai. If your A-share portfolio is 3% CPIC, and you can buy at a 15% discount, you will earn 45bp outperformance on your entire portfolio just from this trade. There is no other FX to hedge. It is a USD-denominated A-share. It will deliver an amount in RMB equal to the CPIC share price. 
  • At the end of 120 days when the GDRs become fungible, check with your broker how they will be converted (the brokers will probably either sell A-shares VWAP or something similar, but check the method they will “price” your GDRs at), and then do the opposite. If the broker sells the A-shares VWAP on Day X, then you should buy A-shares on Day X, VWAP. The reason you do this is that the conversion the broker will do is not a ‘real’ conversion. You don’t get A-shares. You get the money from them selling A-shares on your behalf. To keep the exposure, you need to buy A-shares while they are selling them. 
  • The other trade? If you are a hedge fund and want to buy a large block of stock cheap, and you like the insurance sector as a whole, buy a block and you are long a slow-rolling block trade where the discount will shrink over the next four months, but you may not make anything just from your long position in the GDR. But you have a bigger buffer against loss. It is effectively a “cornerstone” buy of a block of A-shares where you are locked up for just over four months. But it’s a big enough discount to care.

(link to Travis’ insight: CPIC (601601 SH / 2601 HK) – GDR Issuance Incoming!)


SK Biopharmaceuticals (BIO SK) could reopen the Korean IPO market with its listing that is expected later this month. With 19.58m shares being offered in the IPO at a price range of KRW 36,000 – KRW 49,000 per share, there is a possibility that the stock could get fast entry into the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) and other global indices bringing in passive flows and supporting the stock price. In SK Biopharmaceuticals – Fast Index Entry Possibilities, Brian Freitas takes a look at a few details of the IPO and assesses the likelihood of the stock getting fast entry into indices that have significant assets benchmarked to them.

M&A – EUROPE

Masmovil Ibercom (MAS SM) (Mkt Cap: $3.4bn; Liquidity: $17mn)

A trio of PE funds – KKR, Cinven, and Providence – have launched a takeover bid to acquire a majority stake in Spanish telecom operator MásMóvil Ibercom, S.A. If the Deal goes through, all three PE firms will hold an equal stake in the company. The Offer Price is EUR22.50/share (20.2% premium to the undisturbed) valuing the company at a market cap of ~EUR3.0bn and an enterprise value of EUR 5.011bn. Providence is currently the second-largest shareholder with (9.16%) and including them, shareholders collectively holding 29.56% have agreed to sell. 

  • MásMóvil has been a unique success story in an over-saturated and fiercely competitive European Telecom Industry. The company has disrupted larger competitors by providing low-cost bundles of mobile phone and internet services and also has inorganically strengthened its market position by acquiring brands such as Yoigo, Pepephone, Lyca and Lebara in the last few years. However, the company will need more financial resources to remain competitive against the other local players such as Telefónica, Orange, Vodafone, and Euskaltel. This Deal will probably give them that financial backing. 
  • The Deal has a minimum acceptance condition of 50% and MásMóvil’s shares are currently trading above terms at EUR23.18.  Janaghan feels there is some fundamental backing for an improvement to the current offer – either in the form of a bump from the current bidders or an overbid from other competitive bidders who could potentially be one of MásMóvil’s rivals. MásMóvil has a wholesale agreement with Orange to resell services using Orange’s Spanish network and this can probably attract strategic buyers who could be interested in unlocking synergies. Janaghan recommends buying in the low EUR 23s.
  • Separately Jesus Rodriguez Aguilar has a target price of EUR 26.

M&A – NORTH AMERICA

Cineplex Inc (CGX CN) (Mkt Cap: $0.7bn; Liquidity: $8mn)

On June 1st, Cineplex provided an update on the status of Investment Canada review in connection to the Cineplex-Cineworld Deal – officially, the Deal is still alive. With less than a month to the Outside Date (30th June), the Deal remains conditional mainly on the ICA Approval, fulfilment of certain covenants in the arrangement agreement (SEDAR link), and Cineplex maintaining its debt level under C$725mn (the “Debt Condition”). 
  • Janaghan feels the ICA approval might depend on Cineworld coming to terms with the competition authority on certain matters. The reason for extension of the ICA approval deadline from June 1st to June 15th is not explicitly stated on Cineplex’s announcement. We feel that this could be related to concern of potential closure of screens and the consequent loss of employment that could result from this transaction.
  • With shareholders of both companies having voted in favour of the Deal, the Cineworld’s board of directors is bound by their good faith obligations in the Arrangement Agreement which means IF ICA Approval is granted AND all other conditions including the Debt Condition is met, we feel that it will be highly unlikely for Cineworld to be able to walk away without having to face a lawsuit and discovery. 
  • If ICA Approval is granted on time, there could possibly be some short-lived excitement around the share price. This presents some trading opportunities for punters in the run up to the ICA Approval deadline – June 15th. If you expect short-lived excitement, but eventual deal break, you could make a quick bet on buying to the upside, or you could borrow shares and wait for the stock to pop then short-sell it, but if you do the latter, you should be very sure this deal does not get renegotiated. For fundamental bets on the recovery of Cineplex, wait for the Deal to break and if it does break, buy if the shares fall well below the estimated range for the theoretical break price. 
(link to Janaghan’s insight: Cineplex-Cineworld: The Final Countdown

M&A – MIDDLE EAST

DP World (DPW DU)  (Mkt Cap: $13bn; Liquidity: $11mn)
DP World announced that it had received a Court Date for the hearing to sanction the Scheme. That court date is 16 June.  There are no market holidays between here and there. This remains the easiest short-term risk arb deal in the world right now. Travis doesn’t understand why more people haven’t been doing this trade. There is still juice. If you buy Sunday at the closing offer, and pay 15bp commission, the return is 127bp for less than a month in USD. Easy money is not always easy to find. Get involved.

(link to Travis’ insight: DP World – Ticking Down To The Last Trade)

INDEX RE-BALS

The Stock Exchange of Thailand (SET) will announce the results of the semi-annual review of the SET50 index in June and the changes will be effective from 1 July 2020. Passive funds and index arb desks will need to trade at (or by) the close on 30 June 2020. In SET50 Rebalance Preview: The Final Cut, Brian expects TTW Pcl (TTW TB) and Banpu Power PCL (BPP TB) will be included in the SET50 index replacing Banpu Public (BANPU TB) and WHA Corp Pcl (WHA TB).


STOXX Ltd., the operator of Qontigo’s index business has announced the changes to the STOXX Europe 600 index for the upcoming review. The rebalance will be effective as of the opening of European markets on 22 June and passive funds will need to trade at the close on 19 June. There are 21 inclusions and exclusions in this review. As discussed by Brian in STOXX Europe 600 Index Review: Adds Outperforming Deletes, based on passive assets tracking the STOXX Europe 600 index and the associated size and sector indices, there is significant volume to trade on quite a few stocks. The adds have significantly outperformed the deletes over the last year, with the bulk of the outperformance coming over the last few months


FTSE Russell has just announced the results of the June index review for the FTSE China A50 Index (XIN9I INDEX). The next rebalance will be effective 22 June and passive funds will need to trade at the close on 19 June. As discussed by Brian in FTSE China A50 Index Review – Couple of Changes, there are 2 additions and 2 deletions in the June review. The additions are Beijing-Shanghai High Speed Railway (601816 CH) and WuXi AppTec Co Ltd (603259 CH) and the deletions are 360 Security Technology Inc. (601360 CH) and Boe Technology Group (000725 CH).


For FTSE China 50 index, as discussed by Brian in FTSE China 50 Index Review – Alibaba, Hansoh Pharma, Alibaba Health Included, there are 3 additions and 3 deletions in the June review. The additions are Alibaba Group (9988 HK)Alibaba Health Information Technology (241 HK) and Hansoh Pharmaceutical (3692 HK), while the deletions are Shenzhou Intl Group Holdings (2313 HK)New China Life Insurance (1336 HK) and China Communications Construction (1800 HK).


For the FTSE Straits Times Index (STI) (STI INDEX), as discussed by Brian in STI Index Review – And Ironic It Is!, there is 1 addition Mapletree Industrial Trust (MINT SP) and 1 deletion Singapore Press Holdings (SPH SP) in this review. Brian estimates more than 1.5 days of ADV to buy on MINT and around 0.9 days of ‘normal’ ADV to sell on SPH.


For the  Kuala Lumpur Composite Index (Klci) (FBMKLCI INDEX), as discussed by Brian in KLCI Index Review – Liquidity Play, there are 2 additions, Telekom Malaysia (T MK) and KLCCP Stapled (KLCCSS MK), and 2 deletions Malaysia Airports Hldgs (MAHB MK) and Ammb Holdings (AMM MK) in this review. There are significant days to trade on KLCCP and AMMB and the stocks could move from now to implementation day.


STOXX announced the results of the Deutscher Aktienindex (DAX) index review. The constituent changes will be effective from 22 June and the rebalancing trades will need to be done at the close on 19 June. As discussed by Brian in DAX Index Review – BIG Impact on Deutsche Wohnen, as expectedDeutsche Wohnen Ag (DWNI GR) has been included in the index and Deutsche Lufthansa Ag (LHA GR) has been excluded. This marks the end of a 32 year stay in the index Deutsche Lufthansa – the stock was part of the initial DAX index composition from 30 December 1987.

OTHER M&A & EVENT UPDATES

CCASS

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

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

Name

%chg

Into

Out of

51.05%
Excel
Pacific Found
UTS (6113 HK)
14.62%
Citi
RHB
62.65%
HSBC
Outside CCASS
Wine’s Link (8509 HK)
42.00%
HSBC
BNP
AL Group (8360 HK)
24.20%
Chaoshang
Outside CCASS
32.01%
HSBC
Outside CCASS
Kingland (1751 HK)
18.75%
Gransing
Outside CCASS
Grater Bay Ara (1189 HK)
18.71%
Satinu
Get Nice
18.77%
HSBC
Outside CCASS
13.19%
EFG
Easy One
11.70%
JPM
Outside CCASS
34.39%
CLSA
Outside CCASS
22.76%
UBS
Prime
11.70%
Elstone
Outside CCASS
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Contel (1912 HK)
15.63%
HSBC
Outside CCASS
57.82%
CMB
Outside CCASS
Source: HKEx

3. Shape of Recovery: Square Root & Hockey Stick

Chart%203

While GDP data for Q1 are now “old” and seemingly of limited use, it makes little sense to forecast global growth in Q2 and beyond without at least knowing the starting point.

We estimate, based on data for 19 major economies, that global GDP growth slowed to -2.6% yoy in Q1 from +3.0% yoy in Q4 2019 and to -4.3% qoq from +0.6% qoq in Q4. Of these 19 major economies only Chile recorded positive quarter-on-quarter growth in Q1.

The outlook for Q2 and beyond is clouded by the unpredictable interplay between the:

1) Complex mathematics and science behind the spread of the covid-19 pandemic;

2) Often unprecedented measures which governments have taken to contain the pandemic, including national lockdowns varied in their length, scope and efficacy; and

3) Multiplication of policy measures designed to mitigate the slump in global growth.

Nevertheless, the consensus forecast for Q2, which we share, is that global GDP will likely contract even more sharply than in Q1. We forecast, based partly on the fall in the global PMI Composite Output index in April-May, that global GDP will contract 9% qoq in Q2, with most major economies in recession. This would imply that global GDP in Q2 will be similar to that of Q4 2015 and that four years’ worth of growth was wiped out in H1 2020.

We forecast global GDP growth in Q3 and Q4 at respectively +3.0% qoq and +3.5% qoq, and to resemble that of a square-root. Our core scenario is that most national lockdowns will continue to be eased and that widespread central bank policy rate cuts in the past year will have a lagged, positive impact on borrowing, expenditure and investment.

In level terms this implies that GDP’s path will be asymmetric, with its recovery in H2 2020 far more modest than its collapse in H1 2020, and will resemble that of a hockey stick. We estimate that GDP in Q4 would be at a similar level as three years prior.

We have some sympathy with the view that global GDP (level) may follow a W-shaped path (in the event of a “second wave” of covid-19 cases) but attribute low odds of a U and in particular L-shaped recovery (i.e. a depression rather than a recession).

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Brief Singapore: Bank Credit Weekly: Return of Risk-On Sentiment and more

By | Daily Briefs, Singapore

In this briefing:

  1. Bank Credit Weekly: Return of Risk-On Sentiment
  2. Last Week in Event SPACE: Infigen, Huadian Fuxin, Melco, Evergrande, Hitachi, Sing Air, DP World
  3. Shape of Recovery: Square Root & Hockey Stick
  4. OUE Ltd. – Bonds Not Joining the Party

1. Bank Credit Weekly: Return of Risk-On Sentiment

Week%2023%20 %20hibor%20vs%20libor

For every Asia-headquartered bank bond that widened during the week, eight tightened. Risk-on sentiment rose in Asia’s high yield market with option adjusted spreads tightening by almost as much as the US market over the last week. The end-of-the week surprise in US non-farm payroll numbers with a rise in employment during May, as opposed to another large decline, may drive Asia HY risk sentiment as this week opens.

Senior unsecured bank debt continued to outperform in this week’s return to risk-on environment, although each class of bank securities tightened week-on-week. Inherently volatile bonds of India-headquartered finance companies retained their high beta nature by outperforming this week, following last week’s underperformance. Meanwhile, newly improved risk sentiment in Thailand and Vietnam continued to be rewarded in bank bonds that had underperformed so far this year. At the same time, capital inflows into emerging market economies rose as investors’ EM risk perceptions declined.

Hong Kong inter-bank rates retraced recent rises. We expect a negative Q2 result impact on banks with less attractive deposit franchises although banks with valuable deposit franchises should benefit from this recent volatility. Concurrently, US$ Libor continued to flatten, although a rise in three-month Treasury rates suggests that net interest margin compression should be arrested. For three weeks in a row, three-month US LIBOR rates fell by only 2bps week-on-week. Nonetheless, LIBOR rates are down 113bps since the end of Q1. Combined with lower credit growth, this could lead to lower quarterly-sequential net interest revenue for many banks.

Moody’s downgrade of India and the subsequent downgrade of India-headquartered banks had low-to-no impact on investor risk sentiment regarding these assets, as this move was price-in weeks ago. In fact, the limited downgrade amount may have contributed to the risk-on sentiment for India-headquartered bank assets.

Market Outlook: Improved sentiment as coronavirus contagion risks reduce are likely to continue to reprice credit risk tighter, although geo-political risks may prove disadvantageous. Senior unsecured may continue to be best positioned for continued defensive tightening. At the same time, our general preference would be non-Hong Kong centric risk assets, such as India-headquartered bank bonds.

 Inside: In this weekly, we review recent changes in bank bond spread moves over the last week, as well as LIBOR and HIBOR moves, to identify possible investment opportunities and potential pitfalls.

2. Last Week in Event SPACE: Infigen, Huadian Fuxin, Melco, Evergrande, Hitachi, Sing Air, DP World

Image?1591332840

Last Week in Event SPACE …

  • Plus, other events, CCASS movements and Mood Spins.

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


M&A – ASIA

Infigen Energy (IFN AU) (Mkt Cap: $0.5bn; Liquidity: $2mn)

UAC Energy (75% owned by AC Energy, which is a wholly-owned subsidiary of Ayala Corporation (AC PM), and 25% owned by UPC Renewableshas launched a Takeover Bid on an unsolicited basis for Infigen at A$0.80/stapled security. The stake claimed and filed is 12.82% which is 9.9% outright and a Total Return Swap of 2.92%. Interestingly, The Children’s Investment Fund (TCI) announced earlier the same day of the Offer that it had raised its stake to 33.09% from 32.62%. TCI was, according to the AFR yesterday, widely tipped to be a seller at the right price. 

  • This is a starting salvo. How power/energy markets, rates, volatility, politics evolve may determine whether there is market appetite to push it near-term. Travis expects this goes to FIRB first, and takes six months. I expect that any negotiation which happens between UAC and Infigen management will be slow-walked because there is no need to get agreement at A$0.90 before FIRB comes out. 
  • This asset is sub-scale, and sub-scale assets trade cheaper than large scale assets. This could be an attractive target for someone like Shell to bolt on to their Erm Power Ltd (EPW AU) acquisition of late 2019. They want “green cred” and adding this would give it some.  Brookfield sold in February at a price 10% lower. That suggests that after two years, they could not get traction with management, or did not feel a bid was likely to be successful. Travis expects they were low-balling their bid.
  • This stock may be “dead money” near-term, but on the whole Travis would rather be long than not.

Huadian Fuxin Energy Corp (816 HK) (Mkt Cap: $2.6bn; Liquidity: $3mn)

Following the suspension of its shares on the 28 May, HEFC announced its major shareholder, Huadian with 62.76% – via wholly-owned listed vehicle Fujian Huadian Furui (the Offeror) – has tabled a privatisation Offer by way of a Merger by Absorption. The Offer price of $2.50/share, is a 65.56% premium to last close and 85.34% premium to the average closing for the 90 days prior to the Offer announcement. The Offer Price is Final. A final dividend of RMB0.054/share (~HK$0.0587/share) will also be added to the consideration price. Unlike recent merger by absorptions, there is no tendering condition. I have no idea why.

  • If simply pegging to windpower and clean energy peers, HFEC’s Offer price is fair. The pushback is that the entire peer basket is off 12% YTD.  Dissension rights are discussed in HFEC’s AoA. However, there is no administrative guidance on the substantive as well as procedural rules as to how the “fair price” will be determined under PRC Laws. 
  • Note – there are pre-conditions with respect to approvals from NDRC, Ministry of Commerce and SAFE. The ultimate Offeror is Huadian, an SOE controlled by SASAC. Apart from possible timing delays, these approvals should all be forthcoming. 

Hitachi Ltd (6501 JP) (Mkt Cap: $33bn; Liquidity: $130mn)

After the close on Friday, Hitachi released its full-year earnings (with a news releasepresentation, and supplemental materials). It also released an update on Progress of the Mid-Term Management Plan, with a webcast and a presentation deck. The contents surprised even Travis. He did not expect to be so underwhelmed.

  • There was no comment about Hitachi Transport System (9086 JP) or Hitachi Capital (8586 JP) and there are ongoing investor questions about the former. 
  • It is at least a year, and probably more like three, given that the COVID-19 situation will effectively contaminate this year, and to some extent the following year, before a really solid sale process can start for the two remaining listed subs. 
  • If indeed the two consolidated listed subs end up for sale, Travis would expect a beauty contest for buyers like occurred for Hitachi Chemical, Hitachi Koki, and others. And those sale processes got great results for both Hitachi and minorities. For that, even if a sale is a few years down the road, any deep dip on the two stocks due to market selloff or flow patterns would be an opportunity to buy the dip. I have my doubts that they will both be world-beating enterprises by the time they are let free from the Hitachi name, but Travis expects they will be worthwhile enough that buyers will compete, especially for HCM.

Zenith Energy Ltd/AU (ZEN AU) (Mkt Cap: $0.1bn; Liquidity: $1mn)

Back on the 6 March, remote power generator Zenith Energy announced an Offer, by way of a Scheme, from Elemental Infrastructure BidCo, a Pacific Equity Partners (PEP) entity, at $1.01/share in cash, a 45.3% premium to last close.  The Offer had been unanimously recommended by Zenith’s board of directors, and valued Zenith’s equity at ~A$150mn (US$98mn) and an enterprise value of ~$250mn.

  • On the 6 April, an initial substantial shareholder announcement (15.45%) was made by Apex Opportunities, an entity controlled by Infrastructure Specialist Asset Management, a trustee of Diversified Infrastructure Trust/Infrastructure Capital Group (ICG) and OPSEU Pension Plant Trust Fund (OPTrust). This stake was bumped to 17.61% on the 22 April.
  • On the 6 May, PEP noted Apex’s holding, and that it would be challenging to implement the Scheme if Apex were to vote against the resolutions. So PEP reached out to Apex such that Apex’s consortium members could take an equity position in the Elemental/PEP group holding structure. If an agreement could be reached, a revised proposal would be tabled.
  • And so it was on the 29 May, Zenith announced Apex had joined PEP/Elemental’s proposed Scheme. There are no other material changes to the Scheme implementation deed announced on the 6 March. This was previously viewed as a clean takeover situation. You have an agreed deal, a solid premium to last close, together with major shareholders support – albeit with a rollover for key shareholders. I expect this deal to get up. But it is not a particularly liquid arb situation.

Onevue Holdings (OVH AU) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

On 1st June 2020, Australian financial markets software company Iress Ltd (IRE AU) signed an scheme implementation agreement to acquire 100% of OneVue valuing the company at a market cap of A$107mn.  The Acquirer announced they will also be simultaneously raising AS$170mn of equity but the OneVue Deal will not be conditional on financing.  The Deal currently requires approvals from Target Shareholders and regulatory authorities.  The Offer Price is A$0.40/share and the consideration will be in the form of cash.

  • In 2019, OneVue sold its trustee business Diversa to financial technology and infrastructure company Sargon for a consideration of $43mn. Out of this, A$31mn was to be settled by Nov 2019 but Sargon failed to make this payment. In January 2019, Sargon went into receivership forcing OneVue to write down a significant portion of the money owed to them by Sargon. 
  • This Deal comes at a premium of 66.7% to the pre-announcement closing price of A$0.24. It is also 281.0% higher than the all-time low of A$0.11 reached in March 2020.  There is some uncertainty regarding the potential recovery of Sargon receivables and the restriction on dividends/buybacks makes it unattractive to hold the stock.  However, the Deal requires approval from at least 75% of votes cast. Janaghan Jeyakumar feels the outcome of the shareholder vote may depend somewhat on the progress in recovering the Sargon receivables between now and the Scheme Meeting in early-September. 
  • This is not a large deal. ADV is about US$300k which is actually on the high side given how private the shareholder register appears to be. The spread is wide and the deal timeline is short but there is some uncertainty to this deal because of the low price. Janaghan expects this to trade with a lot of noise until there is more clarity on the Sargon Receivables. Until then, we recommend avoiding this situation considering the large gap risk (~35% fall to pre-announcement close). 
(link to Janaghan’s insight: OneVue-Iress: Australian Deal Trading Wide)

Metlifecare Ltd (MET NZ) (Mkt Cap: $0.6bn; Liquidity: $4mn)

The  High Court of New Zealand passed down its decision, clarifying the dispute regarding the validity of the notice to terminate the Scheme Implementation Agreement entered with Asia Pacific Village Group Limited (APVG/EQT) should be resolved before MET shareholders vote on the Scheme plan.  The High Court decision provides no insight or context as to whether the termination of the SIA was valid/correct, or not, in the eyes of law. This decision by the judge is purely a judgment on whether the Scheme meeting should be held before the outcome of the litigation.

  • In the interim, MET will hold a shareholder meeting mid-July to seek a formal endorsement from shareholders on whether to continue, or not, with its legal action challenging APVG’s termination of the SIA. MET anticipates dispatching the Notice of Meeting next week. This meeting is MET’s own doing, not a requirement from the Court. The endorsement may require a special resolution – i.e. a 75% approval – for the litigation to continue. No doubt shareholders will overwhelmingly support the litigation – and why wouldn’t they, given the substantial premium over the price at which the company’s shares are currently trading at.
  • Separately, and as previously noted, MET had filed a Statement of Claim in the High Court on the 15 May, seeking orders to compel APVG/EQT to fulfill their contractual obligations under the SIA, The High Court has set an expedited court timetable for the dispute, with the trial scheduled to commence on 23 November 2020. A decision may be available in late January 2021.  I argued (so far, unsuccessfully to date) it would be challenging for EQT to get out of the MAC carve-out. I expect the judge’s final decision to side with MET and therefore, move to put the Scheme to a shareholder vote.
  • Seeking endorsement from shareholders on whether to proceed with litigation may have a small net negative impact. Given this is a long-dated deal, some active investors may trim positions. It is possible APVG/EQT may face reputational damage dragging out this process, and potentially seek a compromise.  I remain positive this deal will get up.

Kingswood Enterprise Co., Ltd. (600255 CH) (Mkt Cap: $0.3bn; Liquidity: $6mn)

Wuhu Chuheng Investment, the second-largest shareholder in Kingswood with 2.30% of shares out, is seeking to raise its stake to 15.00% via a partial Tender Offer, in an RMB269.6mn (~US$38mn) transaction. The Tender Offer is RMB1.20/share, a ~13% premium to the undisturbed close. The minimum pro-ration is 13.05%.  Sans a punchy premium, the low pro-ration appears unattractive.  However, recent partial Offers in China have shown remarkably high pro-rations. That’s worth a second look.  And Kingswood is relatively liquid.

STUBS

I see Melco’s discount to NAV at ~28%, bang in line with its 12-month average. But it’s Lawrence Ho’s insider buying that is worthy of a discussion. According to the HKEx, Lawrence has added 2.06% in Melco or 31.5mn shares year-to-date, taking his direct take in Melco to 57.95% and elevating his look-thru stake in MLCO to 33%. Technically, >30% gives a shareholder “control” in the company – largely premised on the fact 30% is the takeover trigger threshold, and is sufficient to block an unsolicited takeover offer. Therefore, Lawrence could collapse the Melco Holdco structure and maintain control. 

  • As discussed in StubWorld: Melco Steps Back From Crown; Ayala Hands Over Control Of Manila Water, Melco stub ops are largely inconsequential/immaterial, encompassing various “perpetual” trademarks and goodwill (after Melco gained control of MLCO), the Jumbo restaurant in Aberdeen (est. at $370mn for its 86.678% stake – perhaps a lot less since the restaurant is currently closed),  and slot machines and a social gaming developer Entertainment Gaming Asia (implied value of HK$265mn).
  • Collapsing the Holdco structure? Not dissimilar to my Hang Lung (10 HK) commentary last week (StubWorld: Hang Lung Group (10 HK) Is A Buy), this could be achieved via a takeover of Melco (giving Lawrence majority control), in-specie-ing MLCO (giving Lawrence 33% direct into MLCO) or a reverse takeover of Melco by MLCO, perhaps by a scrip/cash offer, wherein Lawrence would opt for the scrip only. This may give Lawrence a higher direct % into MLCO, depending on the scrip ration and who takes up the scrip/cash option. Lawrence would need to abstain from voting in a takeover of Melco – and more likely abstain in a reverse takeover.
  • I would take advantage of any weakness in Melco to build a position. Lawrence was okay with buying at a more expensive implied stub than where it is now. It is worth noting the acquisition of shares Melco by Lawrence this year was primarily done at an implied stub higher the current level.

EVENTS

Evergrande Real Estate Group (3333 HK)  (Mkt Cap: $30bn; Liquidity: $38mn)

Evergrande commenced buying back stock for the first time in two years on 4 May 2020. At the time, because of various options which had been exercised before their expiry (since the end of the buyback in 2018), they had the ability to buy a certain number of shares. The shareholder permission granting of a general mandate to the Directors to “repurchase Shares not exceeding 10% of the existing issued share capital of the Company at the date of passing this resolution.”

  • But that wasn’t the actual flexibility. The actual limit was closer to 208mm shares because of the Exchange rule limiting them to a float of 22.04% or more. As of the previous Friday’s close, that room to repurchase shares was halved at 103mm shares. The first half took 17 trading days out of the 18 since they started buying back shares. The pace slowed a bit after the initial flurry of larger orders, but even if they average 5 million shares/day, they will reach their limit by end-June.  
  • Travis expects shorting near the tail end of the buyback is worthwhile as I expect property stimulus may remain a zone where China policymakers don’t yet want to go because of the ease in which it expands debt, household leverage, and high interest rate equity check borrowing, which causes financial hardship unless property prices go up forever.
  • This insight is labelled BEARISH because I expect sometime in the next two weeks will be the time to sell one’s long and/or short the shares. I believe there is still a little room for the company to push before those who would short will be happy to add marginal risk. 

(link to Travis’ insight: Evergrande (3333 HK) Buyback Half Done)


Singapore Airlines (SIA SP)  (Mkt Cap: $3.7bn; Liquidity: $35mn)

SIA has now announced the distribution of the rights and the rights not taken up. A surprising number of rights were NOT taken up. The announcement does not say the division of the distribution between those who will be allocated the excess rights in order to cover oddlots and those which will be distributed to Excess Rights Applications. The likelihood of another 14% gain on SIA shares is now sharply diminished. This is because there is no V-shaped recovery in the shares to come. Arithmetically, with 150% more shares, EPS will fall 60% on a pro-forma basis. That is not a recipe for seeing the shares at their old price. People looking at charts need to not look at stock price but look at EV “price”. Another 10% higher on the shares would get Forward EV to the same level as calendar Q4 2019.

  • Near-term? there may be selling pressure. If you have shares or borrow and are inclined to sell to buy back, Travis expect there is an opportunity to do so on 3-5 June. Long-term? there should be no V-shaped rebound. The shares are substantially de-levered from before. That means a lot less EPS and theoretically, a lot lower capital structure volatility on a gross basis (shares should be less volatile than before. Medium-term? Travis would not be surprised to see the shares run a bit too far because float is small, there are still shorts, borrow will become easier next week again, and coming out of lockdown will mean people will feel better about doing things.
  • Comparatively? Cathay Pacific Airways (293 HK) and others which have not raised capital are still operating under the old share price paradigm. Theoretically, their shares should be more volatile than SIA’s. That introduces theoretical beta vs realised beta problems for those who manage risk. Cathay still needs capital. SIA doesn’t, and can get another S$6+bn from Temasek over the next year in the form of MCBs. And Cathay still needs capital and will likely still get diluted from here. 
  • And about the MCBs? Something of a disaster of an offering. Out of S$3.496bn, only S$145mm will be tradable. It is possible that these have a very lonely life on the exchange. It also means that aggressive market-makers will be able to trade these at the bond equivalent spread of 10 cents on exchange.

(link to Travis’ insight: Singapore Air – The Rights Distribution – Vol Is Your Friend)


China Pacific Insurance (2601 HK) (Mkt Cap: $3.7bn; Liquidity: $35mn)

CPI released an announcement that it had received permission from the China Securities Regulatory Commission (CSRC) to issue up to but not more than 125,734,000 GDRs which corresponds to a newly issued number of A-Shares of China Pacific Insurance (Group) Co., (601601 CH) (CPIC) of not more than 628,670,000. That comes to an underlying value of US$2.5bn or so, though one might expect a decent discount at issue. The company also announced a cornerstone agreement with Swiss Re agreeing to buy a number of shares which would not exceed 1.5% of the resulting post-offering outstanding number of shares. Required remaining approvals are the FCA and the London Stock Exchange. 

  • The Trade? Bid for and get LSE-listed GDRs of CPIC, then sell the A-share equivalent (GDR ratio-adjusted) of what you can buy on Shanghai.  If you did not get enough, buy more on the market on the LSE once they start trading, then sell a commensurate quantity in Shanghai. If your A-share portfolio is 3% CPIC, and you can buy at a 15% discount, you will earn 45bp outperformance on your entire portfolio just from this trade. There is no other FX to hedge. It is a USD-denominated A-share. It will deliver an amount in RMB equal to the CPIC share price. 
  • At the end of 120 days when the GDRs become fungible, check with your broker how they will be converted (the brokers will probably either sell A-shares VWAP or something similar, but check the method they will “price” your GDRs at), and then do the opposite. If the broker sells the A-shares VWAP on Day X, then you should buy A-shares on Day X, VWAP. The reason you do this is that the conversion the broker will do is not a ‘real’ conversion. You don’t get A-shares. You get the money from them selling A-shares on your behalf. To keep the exposure, you need to buy A-shares while they are selling them. 
  • The other trade? If you are a hedge fund and want to buy a large block of stock cheap, and you like the insurance sector as a whole, buy a block and you are long a slow-rolling block trade where the discount will shrink over the next four months, but you may not make anything just from your long position in the GDR. But you have a bigger buffer against loss. It is effectively a “cornerstone” buy of a block of A-shares where you are locked up for just over four months. But it’s a big enough discount to care.

(link to Travis’ insight: CPIC (601601 SH / 2601 HK) – GDR Issuance Incoming!)


SK Biopharmaceuticals (BIO SK) could reopen the Korean IPO market with its listing that is expected later this month. With 19.58m shares being offered in the IPO at a price range of KRW 36,000 – KRW 49,000 per share, there is a possibility that the stock could get fast entry into the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) and other global indices bringing in passive flows and supporting the stock price. In SK Biopharmaceuticals – Fast Index Entry Possibilities, Brian Freitas takes a look at a few details of the IPO and assesses the likelihood of the stock getting fast entry into indices that have significant assets benchmarked to them.

M&A – EUROPE

Masmovil Ibercom (MAS SM) (Mkt Cap: $3.4bn; Liquidity: $17mn)

A trio of PE funds – KKR, Cinven, and Providence – have launched a takeover bid to acquire a majority stake in Spanish telecom operator MásMóvil Ibercom, S.A. If the Deal goes through, all three PE firms will hold an equal stake in the company. The Offer Price is EUR22.50/share (20.2% premium to the undisturbed) valuing the company at a market cap of ~EUR3.0bn and an enterprise value of EUR 5.011bn. Providence is currently the second-largest shareholder with (9.16%) and including them, shareholders collectively holding 29.56% have agreed to sell. 

  • MásMóvil has been a unique success story in an over-saturated and fiercely competitive European Telecom Industry. The company has disrupted larger competitors by providing low-cost bundles of mobile phone and internet services and also has inorganically strengthened its market position by acquiring brands such as Yoigo, Pepephone, Lyca and Lebara in the last few years. However, the company will need more financial resources to remain competitive against the other local players such as Telefónica, Orange, Vodafone, and Euskaltel. This Deal will probably give them that financial backing. 
  • The Deal has a minimum acceptance condition of 50% and MásMóvil’s shares are currently trading above terms at EUR23.18.  Janaghan feels there is some fundamental backing for an improvement to the current offer – either in the form of a bump from the current bidders or an overbid from other competitive bidders who could potentially be one of MásMóvil’s rivals. MásMóvil has a wholesale agreement with Orange to resell services using Orange’s Spanish network and this can probably attract strategic buyers who could be interested in unlocking synergies. Janaghan recommends buying in the low EUR 23s.
  • Separately Jesus Rodriguez Aguilar has a target price of EUR 26.

M&A – NORTH AMERICA

Cineplex Inc (CGX CN) (Mkt Cap: $0.7bn; Liquidity: $8mn)

On June 1st, Cineplex provided an update on the status of Investment Canada review in connection to the Cineplex-Cineworld Deal – officially, the Deal is still alive. With less than a month to the Outside Date (30th June), the Deal remains conditional mainly on the ICA Approval, fulfilment of certain covenants in the arrangement agreement (SEDAR link), and Cineplex maintaining its debt level under C$725mn (the “Debt Condition”). 
  • Janaghan feels the ICA approval might depend on Cineworld coming to terms with the competition authority on certain matters. The reason for extension of the ICA approval deadline from June 1st to June 15th is not explicitly stated on Cineplex’s announcement. We feel that this could be related to concern of potential closure of screens and the consequent loss of employment that could result from this transaction.
  • With shareholders of both companies having voted in favour of the Deal, the Cineworld’s board of directors is bound by their good faith obligations in the Arrangement Agreement which means IF ICA Approval is granted AND all other conditions including the Debt Condition is met, we feel that it will be highly unlikely for Cineworld to be able to walk away without having to face a lawsuit and discovery. 
  • If ICA Approval is granted on time, there could possibly be some short-lived excitement around the share price. This presents some trading opportunities for punters in the run up to the ICA Approval deadline – June 15th. If you expect short-lived excitement, but eventual deal break, you could make a quick bet on buying to the upside, or you could borrow shares and wait for the stock to pop then short-sell it, but if you do the latter, you should be very sure this deal does not get renegotiated. For fundamental bets on the recovery of Cineplex, wait for the Deal to break and if it does break, buy if the shares fall well below the estimated range for the theoretical break price. 
(link to Janaghan’s insight: Cineplex-Cineworld: The Final Countdown

M&A – MIDDLE EAST

DP World (DPW DU)  (Mkt Cap: $13bn; Liquidity: $11mn)
DP World announced that it had received a Court Date for the hearing to sanction the Scheme. That court date is 16 June.  There are no market holidays between here and there. This remains the easiest short-term risk arb deal in the world right now. Travis doesn’t understand why more people haven’t been doing this trade. There is still juice. If you buy Sunday at the closing offer, and pay 15bp commission, the return is 127bp for less than a month in USD. Easy money is not always easy to find. Get involved.

(link to Travis’ insight: DP World – Ticking Down To The Last Trade)

INDEX RE-BALS

The Stock Exchange of Thailand (SET) will announce the results of the semi-annual review of the SET50 index in June and the changes will be effective from 1 July 2020. Passive funds and index arb desks will need to trade at (or by) the close on 30 June 2020. In SET50 Rebalance Preview: The Final Cut, Brian expects TTW Pcl (TTW TB) and Banpu Power PCL (BPP TB) will be included in the SET50 index replacing Banpu Public (BANPU TB) and WHA Corp Pcl (WHA TB).


STOXX Ltd., the operator of Qontigo’s index business has announced the changes to the STOXX Europe 600 index for the upcoming review. The rebalance will be effective as of the opening of European markets on 22 June and passive funds will need to trade at the close on 19 June. There are 21 inclusions and exclusions in this review. As discussed by Brian in STOXX Europe 600 Index Review: Adds Outperforming Deletes, based on passive assets tracking the STOXX Europe 600 index and the associated size and sector indices, there is significant volume to trade on quite a few stocks. The adds have significantly outperformed the deletes over the last year, with the bulk of the outperformance coming over the last few months


FTSE Russell has just announced the results of the June index review for the FTSE China A50 Index (XIN9I INDEX). The next rebalance will be effective 22 June and passive funds will need to trade at the close on 19 June. As discussed by Brian in FTSE China A50 Index Review – Couple of Changes, there are 2 additions and 2 deletions in the June review. The additions are Beijing-Shanghai High Speed Railway (601816 CH) and WuXi AppTec Co Ltd (603259 CH) and the deletions are 360 Security Technology Inc. (601360 CH) and Boe Technology Group (000725 CH).


For FTSE China 50 index, as discussed by Brian in FTSE China 50 Index Review – Alibaba, Hansoh Pharma, Alibaba Health Included, there are 3 additions and 3 deletions in the June review. The additions are Alibaba Group (9988 HK)Alibaba Health Information Technology (241 HK) and Hansoh Pharmaceutical (3692 HK), while the deletions are Shenzhou Intl Group Holdings (2313 HK)New China Life Insurance (1336 HK) and China Communications Construction (1800 HK).


For the FTSE Straits Times Index (STI) (STI INDEX), as discussed by Brian in STI Index Review – And Ironic It Is!, there is 1 addition Mapletree Industrial Trust (MINT SP) and 1 deletion Singapore Press Holdings (SPH SP) in this review. Brian estimates more than 1.5 days of ADV to buy on MINT and around 0.9 days of ‘normal’ ADV to sell on SPH.


For the  Kuala Lumpur Composite Index (Klci) (FBMKLCI INDEX), as discussed by Brian in KLCI Index Review – Liquidity Play, there are 2 additions, Telekom Malaysia (T MK) and KLCCP Stapled (KLCCSS MK), and 2 deletions Malaysia Airports Hldgs (MAHB MK) and Ammb Holdings (AMM MK) in this review. There are significant days to trade on KLCCP and AMMB and the stocks could move from now to implementation day.


STOXX announced the results of the Deutscher Aktienindex (DAX) index review. The constituent changes will be effective from 22 June and the rebalancing trades will need to be done at the close on 19 June. As discussed by Brian in DAX Index Review – BIG Impact on Deutsche Wohnen, as expectedDeutsche Wohnen Ag (DWNI GR) has been included in the index and Deutsche Lufthansa Ag (LHA GR) has been excluded. This marks the end of a 32 year stay in the index Deutsche Lufthansa – the stock was part of the initial DAX index composition from 30 December 1987.

OTHER M&A & EVENT UPDATES

CCASS

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

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

Name

%chg

Into

Out of

51.05%
Excel
Pacific Found
UTS (6113 HK)
14.62%
Citi
RHB
62.65%
HSBC
Outside CCASS
Wine’s Link (8509 HK)
42.00%
HSBC
BNP
AL Group (8360 HK)
24.20%
Chaoshang
Outside CCASS
32.01%
HSBC
Outside CCASS
Kingland (1751 HK)
18.75%
Gransing
Outside CCASS
Grater Bay Ara (1189 HK)
18.71%
Satinu
Get Nice
18.77%
HSBC
Outside CCASS
13.19%
EFG
Easy One
11.70%
JPM
Outside CCASS
34.39%
CLSA
Outside CCASS
22.76%
UBS
Prime
11.70%
Elstone
Outside CCASS
Source: HKEx

The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Contel (1912 HK)
15.63%
HSBC
Outside CCASS
57.82%
CMB
Outside CCASS
Source: HKEx

3. Shape of Recovery: Square Root & Hockey Stick

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While GDP data for Q1 are now “old” and seemingly of limited use, it makes little sense to forecast global growth in Q2 and beyond without at least knowing the starting point.

We estimate, based on data for 19 major economies, that global GDP growth slowed to -2.6% yoy in Q1 from +3.0% yoy in Q4 2019 and to -4.3% qoq from +0.6% qoq in Q4. Of these 19 major economies only Chile recorded positive quarter-on-quarter growth in Q1.

The outlook for Q2 and beyond is clouded by the unpredictable interplay between the:

1) Complex mathematics and science behind the spread of the covid-19 pandemic;

2) Often unprecedented measures which governments have taken to contain the pandemic, including national lockdowns varied in their length, scope and efficacy; and

3) Multiplication of policy measures designed to mitigate the slump in global growth.

Nevertheless, the consensus forecast for Q2, which we share, is that global GDP will likely contract even more sharply than in Q1. We forecast, based partly on the fall in the global PMI Composite Output index in April-May, that global GDP will contract 9% qoq in Q2, with most major economies in recession. This would imply that global GDP in Q2 will be similar to that of Q4 2015 and that four years’ worth of growth was wiped out in H1 2020.

We forecast global GDP growth in Q3 and Q4 at respectively +3.0% qoq and +3.5% qoq, and to resemble that of a square-root. Our core scenario is that most national lockdowns will continue to be eased and that widespread central bank policy rate cuts in the past year will have a lagged, positive impact on borrowing, expenditure and investment.

In level terms this implies that GDP’s path will be asymmetric, with its recovery in H2 2020 far more modest than its collapse in H1 2020, and will resemble that of a hockey stick. We estimate that GDP in Q4 would be at a similar level as three years prior.

We have some sympathy with the view that global GDP (level) may follow a W-shaped path (in the event of a “second wave” of covid-19 cases) but attribute low odds of a U and in particular L-shaped recovery (i.e. a depression rather than a recession).

4. OUE Ltd. – Bonds Not Joining the Party

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We rate the OUE Ltd (OUE SP) SGD bond due 2023 “Hold” at current levels, although they have not participated meaningfully in the recent rally in credit markets.  The upcoming debt repayments at the OUE level are manageable, in our view. However, given the large amounts of debt coming due at OUE-CREIT, we prefer to remain cautious. We would suggest investors in OUE bonds keep an eye on the progress of debt refinancing at the REIT level.

Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.

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Brief Singapore: Comfort Delgro (CD): Back-To-Office (BTO) and more

By | Daily Briefs, Singapore

In this briefing:

  1. Comfort Delgro (CD): Back-To-Office (BTO)

1. Comfort Delgro (CD): Back-To-Office (BTO)

Image 80500250921591247061815

The company’s share price has been bashed down following a difficult period during COVID-19 when tourism dried up and Singapore was in Circuit Breaker, keeping the public transport and taxi ridership at the bare minimum. 

As the Circuit Breaker is lifted and people have started to come back to work, there will be more ridership for public transport and, to a smaller proportion, the taxi division that will boost Comfortdelgro Corp (CD SP) ‘s revenue for the rest of the year. 

Trading at a 29% discount to its one-year average PER, at 12x PER, and the company is positioned for a clearly mapped recovery in its share price. Start to accumulate positions in Comfortdelgro Corp (CD SP) as Back-to-Office (BTO) is slowly replacing Work-from-Home (WFH). 

source: Capital IQ

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Brief Singapore: Bank Credit Weekly: Risk Restart and more

By | Daily Briefs, Singapore

In this briefing:

  1. Bank Credit Weekly: Risk Restart
  2. Hong Kong: Uncertain Times But…
  3. COVID-19: A Second Wave & A Second Lockdown?
  4. Bank Credit Compass: Asia’s Q2 Winners and Losers; What Looks Mispriced into H2
  5. Moore’s Law Has Ended… Again!

1. Bank Credit Weekly: Risk Restart

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Emerging market capital inflows restarted with the beginning of the third quarter.  Nonetheless, risk sentiment remained decoupled globally as positive momentum in the US contrasted with slightly negative sentiment in Asia. This is exactly the opposite of prior week results as holiday calendars drive investor attention. In the US, positive vaccine developments offset concerns over an increase in Coronavirus infections, as early trials of experimental shots showed promise. We expect Asia to follow as the week opens.  

In Hong Kong, one-month HIBOR declined 4 basis points (bps) to retest multi-year lows. It is difficult to envision Hong Kong’s interest rates staying at these low levels without substantial central bank intervention. End of week rates were set prior to the first enforcement of Hong Kong’s new security law. Bloomberg reports that a protesting resident was arresting for inciting secession by chanting a slogan. While investors prefer stability to instability, censorship and free markets do not go together.

Consistent with Asia’s slightly lower risk tone, three bank bonds tightened for every two that widened during the week. As such, spread widening was more prominent than during prior weeks. Amongst Asia-headquartered banks bonds, cross-over senior unsecured bonds outperformed for the second week in a row. Investors switched from lower duration bonds, which outperformed in the second quarter, into high duration bonds which lagged during the past quarter.

The Treasury-Eurodollar spread closed the week unchanged at 17bps versus a 2019 average of 24bps. The lower bound of Treasury note interest rates should drive LIBOR upwards as economic recovery pushes Treasury yields higher in a bull market effect. Net interest margins should rise from here.

In other notable bank-related developments, Credit Suisse was recently mandated to lead a high yield Additional Tier 1 (AT1) bond issue by Philippine-headquartered Rizal Commercial Banking (RCB PM). In addition, Emirates NBD (EBIUH) managed to squeeze an AT1 US$-bond into the market, despite the shortened US work week. The new bond was issued at the six-year US Treasury yield + 365.5bps for a yield of 6 1/8%. Concurrently, EBIUH’s 6 3/8% coupon bond is callable in Sept. At current interest rates, this resets to a 4.643% coupon if not called, fully 1.48 percentage points lower that the newly issued bond. Emirati banks may take the title of “Most Bondholder Friendly Issuers” in 2020.

Market Outlook: The Fed’s Secondary Market Corporate Credit Facility, combined with unconventional monetary policy stimulus globally, should continue to push investors into high yield and emerging market bonds over the next few months. At the same time, we expect a livelier H2 in terms of international borrowing from emerging market companies, including banks in Asia. Tactically, cross-over senior unsecured may be best for defensive positioning; however, given the improved interest rate environment, higher beta senior unsecured as well as longer duration high yield and cross-over subordinated debt are better positioned for further risk taking.

Inside: In this weekly, we review recent changes in bank bond spread moves over the last week, as well as LIBOR and HIBOR moves, to identify possible investment opportunities and potential pitfalls.

2. Hong Kong: Uncertain Times But…

Capture1

Hong Kong’s economy is in deep downturn and her future uncertain. The passage of the new national security bill has made sure that the island is not going back to the pre-protests Hong Kong. However Beijing will be hard pushed to replace Hong Kong. Aside from its dependence on the island’s financial markets, services industry, independent legal system and the central role it plays in China’s GBA and BRI initiatives, it is not in Beijing’s interest to do so. For now China will want to continue to leverage off Hong Kong’s international reputation. The introduction this week of the Hong Kong-Greater Bay Area wealth management connect is a case in point. There are no immediate alternatives. Five years out from now is a different story.

3. COVID-19: A Second Wave & A Second Lockdown?

Rising 2

In this insight, we discuss the upcoming “Second Wave” of COVID-19 pandemic in 2H 2020. This insight should help the reader to visually assess some of the key countries that are improving or having greater difficulties in controlling COVID-19. 

In particular, we focus on the top 25 countries in terms of the total new cases of COVID-19. As of 1 July 2020, there were 10.6 million cases of COVID-19 in the world, of which the top 25 countries accounted for 85.8% of total cases. As of 1 July 2020, there were 0.5 million deaths related to COVID-19 in the world, of which the top 25 countries represented 89.1% of the total number of deaths. 

With so many deaths and economic hardships, the COVID-19 will become an even bigger political issue leading up to the U.S. election in November. Although it is difficult to tell the exact tipping point number, if the total number of new daily cases exceed 50k in the U.S., for example, there could be a more co-ordinated efforts by many members of the U.S. government to re-institute some kind of second lockdown measures, especially in the key western and southern states that are facing a big jump in new cases. In addition, if there is a second lockdown in many states, this will likely have big negative impact on these states’ economies and could cause further negative pressure on the stock markets. 

4. Bank Credit Compass: Asia’s Q2 Winners and Losers; What Looks Mispriced into H2

Bcs%20 %20snr%20unscd%202%20q2%20winners%20and%20losers

Alpha generation remains available within individual Asian bank bonds. We expect security selection to have a greater impact during the second half of 2020.

In this the third and final portion of our trilogy on our expectations for Asia bank credit, we identify individual securities which appear mispriced based on Q2 performance. Please see: Crowding-In and Asia Bank Credit: The Context for H2 Expectations as well as Bank Credit Strategy: Asia HY Remains Oversold, our first and second pieces of this trilogy, respectively, for more insight regarding these expectations.  

Asia’s US$-denominated Additional Tier 1 (AT1), Tier 2 and Senior Unsecured bonds saw more spread tightening than widening during Q2 overall. In fact, only 30 securities, out of the 105 bank-issued bonds that we track widened since the end of March. Investors that were long bank credit at the peak of the Coronavirus pandemic panic and remained invested were rewarded.

Amongst AT1 bonds, Q2 winners and losers were short- and long-call dated, respectively. With call risk repricing to more normal levels, the market is likely to focus more on credit fundamentals. We have underweight recommendations on State Bank Of India (SBIIN) and United Overseas Bank’ (UOBSP) AT1 securities for this reason. SBI’s AT1 remains overbought.  

Within Tier 2 securities, Q2 winners and losers were China- and Hong Kong-centric, respectively. With geopolitical dynamics deteriorating and a US election fast approaching, we are not convinced that Hong Kong’s Tier 2 underperformance will reverse materially during H2 2020. Concurrently, we see more upside potential in Bank Tabungan Negara’s (BBTNIJ) Tier 2 than amongst other Q2 outperformers.

In senior unsecured, Q2 winners and losers were almost exclusively India-centric. The volatility of India-headquartered senior unsecured bonds may remain over the second half of 2020. Securities with shorter maturity dates could prove particularly volatile as jump to default risk is priced in and out of these securities. Nonetheless, we see some of ICICI Bank (ICICI) and Axis Bank’s (AXSBIN) securities as oversold.

In conclusion, we believe that continued crowding-into US$- denominated credit is the likely outcome of the Fed’s Secondary Market Corporate Credit Facility as investors grab for yield outside the US market. Concurrently with the ECB effectively paying banks to lend while also continuing to buy corporate credit, investors will be pushed further away from investment grade, low duration, and developed country credit.

High yield, long duration emerging market debt should benefit, and the technical knock-on effects are already being priced into credit, globally. Despite the relief rally felt since the announcement of these unconventional policy measures, a wall of money still awaits to be re-invested in the market. As such, unconventional monetary policy stimulus globally, should continue to push investors into risk asset over the next few months.

5. Moore’s Law Has Ended… Again!

Dram

Moore’s Law, originally published in 1965, has been expected to end several times over its 55-year history, but never seems to fulfill those promises.  This SmartKarma Insight looks at the history and likely future of this amazing phenomenon.

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Brief Singapore: Olam International: Cocoa Against COVID and more

By | Daily Briefs, Singapore

In this briefing:

  1. Olam International: Cocoa Against COVID
  2. STI Index Review – And Ironic It Is!

1. Olam International: Cocoa Against COVID

Olamjune20ex15

We initiate our coverage of Olam International (OLAM SP) (Olam), a leading global food and agri-business with >30 years of track record, headquartered in Singapore and majority-owned by the Singapore quasi-sovereign Temasek Holdings Pte Ltd (TMSK SP). The group laid out its 6-year strategic plan in 2019 to streamline its operations to be more focused on growth food segments, in line with healthy living and staples that are recession-proof so as to achieve its target to be the most differentiated and valuable global food and agri-business by 2024. This has resulted in divestments of non-prioritized businesses and assets since 2019 and more will be seen this year.

Olam’s core business has been relatively low-margin and often exposed to the volatilities inherent in the agricultural and commodity sectors. As such, management looks to shift to a more value-added ingredient business and to add significant investments in mid-stream and processing activities so as to have greater pricing power and greater customer loyalty. As such, we expect the Group to remain highly leveraged on its capex stemming from expansion plans. Nevertheless, net gearing fell to a more comfortable 0.3x last December, after adjusting for realisable marketable inventories, secured receivables, and cash. We believe the two new separate entities will go for separate listings (IPOs) to bring in fresh equity funds when market conditions improve. We expect free cashflows to remain positive this year and next, due to full-year contributions from new investments in 2019, and proceeds from its ongoing divestments.

Based on YTMs at time of writing, we believe the maturing OLAMPSP 20s are fairly-valued and assign a NEUTRAL recommendation. The rest of OLAMSP USD complex (EXHIBIT 1) is attractive against the “B+” benchmark and we assign an OVERWEIGHT recommendation which is based on (1) Olam’s potential revenue growth from its cocoa, grain, and animal feeds, and (2) potential IPOs of the Group’s two key businesses which would de-lever the Group’s balance sheets. On the other hand, the OLAMSP SGD complex is unattractive versus its USD counterparts and we assign an UNDERWEIGHT recommendation.

2. STI Index Review – And Ironic It Is!

Image

FTSE Russell has just announced the results of the June index review for the FTSE Straits Times Index (STI) (STI INDEX). The next rebalance will be effective 22 June and passive funds will need to trade at the close on 19 June.

As we expected, there is 1 addition Mapletree Industrial Trust (MINT SP) and 1 deletion Singapore Press Holdings (SPH SP) in this review.

We estimate more than 1.5 days of ADV to buy on Mapletree Industrial Trust (MINT SP) and around 0.9 days of ‘normal’ ADV to sell on Singapore Press Holdings (SPH SP).

Singapore Press Holdings (SPH SP) being deleted is ironic since they created the FTSE Straits Times Index (STI) (STI INDEX).

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