In this briefing:
- HK Connect Ideas: Five Weeks of Inflows, Dalian Port Outflows (2019-06-14)
- Naspers ➔ NewCo Spinoff III: The Most Interesting Arb In The World. Again.
- Nexon Sale: Kakao Is Emerging as the Leading Horse
- Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech
In our weekly HK Connect Snippet series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine, and highlight interesting observations.
We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.
In this insight, we will highlight the five weeks’ consecutive inflow into HK Stocks via the southbound trade, led by Financials sector. Inflows into Tencent have been consistently positive. We also highlight strong outflows from Dalian Port. In the mid-cap space, we highlight Man Wah, a furniture exporter.
In the first two pieces Naspers ➔ NewCo Spinoff I: Structure, Ownership, Index Effects and Naspers ➔ NewCo Spinoff II: Thoughts on the Appropriate Discount I looked at index effects from the issuance of NewCo shares.
The treatment of NewCo N is considerably complicated by the nature of the Netherlands-SA tax treaty which enables the extremely considerate treatment of NewCo going forward.
The way different investor types deal with this and the structural nature of NewCo’s difference to Naspers creates the possibility for dramatically different flow than expected around the event.
It is NOT a small thing. And it is not as people expect.
And it is not necessarily easy to understand, or clear in its outcome even if it were. But for international investors and South African institutional investors in particular, getting into the details earlier rather than later is probably a good idea.
This is, once again, quite simply…
The Most Interesting Arb In The World.
Yeah, Nexon event is very quiet. Even we didn’t have rumor report from local media lately since the main bid closing. So, we are hearing all kinds of worrying voices that the deal may be falling apart. Then, MK, one of Korea’s top tier economic daily, put out a follow-up report on this event late today. MK quoted someone familiar with the matter, possibly a banker working on this deal or a Nexon insider, but MK doesn’t specify the identity further. This “someone” told MK that the deal is still very much alive. Just, it now seems that KKR and Bain are no longer in the race. According to MK (well actually this “someone”), it is now a three-horse race between Kakao, Netmarble and MBK. Is this a surprise? Of course, it is not. What’s really bothering me is why this “someone inside” has always been leaking inside info and mood to local media, mainly MK and HK. Is Nexon doing it on purpose to buttress the share price so that they can keep having the upper hand in the deal talking? Well, it may be, or I don’t know for sure. Alright, let’s put this intention thing aside for now, and let’s first take a look at what this “someone” told MK.
BTW, this is the link of this latest MK report. (Title is quite provocative…)
4. Last Week in Event SPACE: Huatai Securities, Hanjin Kal, Vocus, Cocokara, Ruralco, SKC, United Tech
Last Week in Event SPACE …
- The Huatai Securities Co Ltd (A) (601688 CH) GDR is the one single trade that everyone is looking at.
- Death and taxes – but there is no urgency for the Cho family to sell their shares in Hanjin Kal Corp (180640 KS).
- AGL Energy Ltd (AGL AU) goes off-script and joins an ever-growing list of suitors for Vocus Communications (VOC AU).
- Drug-fuelled marriages and macho shachos amidst Cocokara Fine (3098 JP)‘s two or three-way merger.
- A potential divestment of stores may be required to allay ACCC’s merchandising concerns triggered by the Ruralco Holdings (RHL AU) / Nutrien Ltd (NTR CN) deal.
- KKR makes a (large) fast buck selling its 100% stake in KCF Technologies to Skc Co Ltd (011790 KS) for US$1bn.
Plus, other events, CCASS movements and Mood Spins.
(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)
Huatai Securities Co Ltd (A) (601688 CH) (Mkt Cap: $20.7bn; Liquidity: $234mn)
The Huatai Sec GDR (Global Depositary Receipt) pricing came out the 11th of June at US$20.00 to US$24.50 per GDR, conveniently after a day with a 5% gain in both the H-share and the A-share issues, announcing the deal at a then 12.5-28+% discount, which was wider than most seemed to have expected. Now with the deal well-subscribed at the low end, there are warnings investors need to be bid higher than the bottom end to get any paper.
- There is widespread scepticism as to why the deal needs to be done in the first place, and that gives many people some pause. Because of the discount and the liquidity on the A-shares, and the fact that the low end priced at a four to five year low, the margin of safety people perceive is quite high.
- There is a lot of talk about how the shares haven’t seen the bottom end price even in the trough post June 2015 A-share crash so that provides a kind of “virtual floor” at around RMB 14/share. The 2015 low price of around RMB 14/share in late Q3 early Q4 2015, was almost exactly one year after they were trading at RMB 8/share in 2014 before the margin-trading bubble-induced runup.
- Travis Lundy is bullish the GDRs Huatai Securities Co Ltd (HTSC LI) and not necessarily the A shares. He thinks the trade will end up making money for people, whether perfectly hedged or not. As of now, he would expect some softness in the As on the unwind. He also expected those with patience to go past 140 days could see the As rebound a bit after everyone assumes the GDR converters are out of their trade.
(link to Travis’ insight: Huatai GDRs – Prices Lower, Then Sooner, Then Later, Then Higher)
STUBS & HOLDCOS
Hanjin Kal Corp (180640 KS) (Mkt Cap: $1.9bn; Liquidity: $95mn)
KCGI has accumulated 15.95% in Hanjin at a cost of ₩270bn, the last 1% at a 5.3% premium to last close. KCGI appears to be angling for management takeover. The question is whether the Cho family – holding 28.93% of the common shares and 3.02% of the prefs – are willing/forced sellers. And there are also rumours Mirae is asking KCGI for full repayment on ₩40bn worth of stock collateral loans.
- Cho Yang-ho, the patriarch of the Cho family, passed away on the 8 April. Inheritance tax is calculated based on the closing prices of shares held two months either side of the death. Together with inheritable real estate assets, Sanghyun Park calculates a total tax bill of ₩230~240bn.
- But that need not be paid at once, and can be paid over 5 years, with that clock starting in October. Taking into account Cho’s severance pay (net of inheritance tax) and stock collateral loans (up to 50% of their stock value), there doesn’t appear to be any urgency on the Cho family’s behalf to unload shares in Hanjin Kal to foot the tax bill.
- At the time of Sanghyun’s note, Hanjin Kal was trading at a 28% premium to NAV. The trade approach was pretty straightforward – short it. That was the right call. I see the premium now at 6%.
M&A – ASIA-PAC
Vocus Communications (VOC AU) (Mkt Cap: $1.9bn; Liquidity: $10mn)
Vocus has announced it has received an A$3.02bn (US$2.1bn) non-binding, indicative proposal from Aussie energy outfit AGL Energy Ltd (AGL AU) by way of a Scheme, at A$4.85/share in cash, a 26.63% premium to last close. This proposal arrives one week after Swedish PE outfit EQT and Vocus terminated takeover talks – and just two weeks since that lofty $5.25/share indicative offer was first announced.
- For EQT’s “hairy” pre-event proposal, I said that there was value; and there (potentially) were/are multiple players out there who could look at this situation, given Vocus’ fibre network offers efficient scale characteristics.
- AGL views Vocus as providing a stronger product set/mix to its customers in the long-term. The opposing view is that AGL is getting desperate in the face of increased scrutiny of its electricity prices forcing a shift away from its core competence. AGL was down 7.2% on the news, although this was probably compounded by a reduced profit guidance announcement after an extended unit outage.
- IF a deal does get done – this may complete around mid-November. That remains a big “IF”. Currently trading at A$4.36, which shows a return/risk of 11% up to the indicative offer vs. 12% down, roughly similar to where shares traded in response to EQT’s proposal.
(link to my insight: AGL Takes A Turn At Vocus)
Cocokara Fine (3098 JP) (Mkt Cap: $1.2bn; Liquidity: $7mn)
Japan’s drugstore industry began a new era of consolidation after a decade of already unprecedented growth at the top. Cocokara Fine, the seventh-ranked drugstore retailer in Japan announced it was not only in talks with fourth-ranked Matsumotokiyoshi (Matsukiyo), as it had already confirmed a month before, but had now also begun negotiations with Sugi Holdings (7649 JP), the sixth largest firm. This was also discussed in Travis’ Insight Cocokara Fine は Cocokara いいね.
- Unlike supermarkets and home centres, drugstore consolidation is not just about melding regional power into a national chain but is also about the additional pressure to acquire share in drugstore merchandise categories where the acquirer is weak.
- Michael Causton believes a merger between Sugi and Cocokara Fine is a natural fit because of the synergistic regional coverage but also their differing merchandise strengths. But, Matsukiyo also needs to acquire or merge, and fast. While it has stores in 45 of 47 prefectures, its presence outside the Tokyo region is minimal and it has dropped from first place to fourth in just three years, with even more headwinds going forward.
- If there is a two or three-way merger, Aeon and Tsuruha are unlikely to stand still since even just a Sugi/Cocokara deal would create a new sector leader by sales. Aeon and Tsuruha already work together on sourcing and private brands through the Aeon-led Hapicom buying group. If the pressure builds and Aeon tries to force a merger on Tsuruha as it did with CFS in 2007-8, Tsuruha and Matsukiyo may find common cause and arrange partial merger.
(link to Michael’s insight: Drug-Fuelled Marriages and Macho Shachos* in Japan)
Ruralco Holdings (RHL AU) (Mkt Cap: $302mn; Liquidity: $1mn)
Although the release of the ACCC’s Statement of Issues (SOI) is less than ideal development in the Nutrien Ltd (NTR CN) / Ruralco merger – an informal clearance from the ACCC would have been preferable – it was not an unforeseen development, nor is it viewed as a deal breaker. The ACCC’s concerns are not definitive or strongly worded, therefore the possibility of a formal clearance remains. But on balance, my read is that there is sufficient weight surrounding merchandising issues such that a divestment of stores is likely required for this deal to get up.
The ACCC highlighted 7 areas (one each in WA and NSW, two in Queensland and three in the Northern Territories) where the remaining competition – subsequent to a successful merger – is limited. The ACCC also flagged some regional centres only source wholesale supplied from either Ruralco or Nutrien. This may lead to the amalgamated company discriminating on prices and supplies to stores within its own network compared to independent stores in the same catchment.
- To this, Nutrien could lodge a proposed undertaking with the ACCC to divest certain stores in the 7 highlighted (by the ACCC) catchments to address competition concerns. Such a submission would likely be premised on the ACCC accepting the court-enforceable divestment proposal, and a rescheduled Scheme Meeting could probably be reconvened in around a month after the undertaking proposal. Should this transpire, I would expect no change to the Scheme Offer Price.
- Currently trading at a gross/annualised spread of 5.5%/21% – with the annualised % roughly in line with the figure prior to the SOI announcement, suggesting a positive remedy to the issues raised by the ACCC is expected. The risk/reward looks attractive here.
(link to my insight: ACCC Raises Concerns With Ruralco/Nutrien)
Skc Co Ltd (011790 KS) (Mkt Cap: $1.1bn; Liquidity: $4mn)
SKC has agreed to acquire a 100% stake in KCFT (KCF Technologies) for ₩1tn (US$1bn) from KKR. SKC plans to use about ₩400bn-₩500bn of its own equity capital to fund the transaction with the remaining ₩700bn-₩800bn sourced from debt financing. KKR will make a tidy profit from the deal – in February 2018, it acquired a 100% stake of LS Mtron’s copper foil and thin film business for ₩300bn and renamed it KCFT.
- KCFT has the number one market share globally (15% share) for making copper foil and thin film products used in lithium ion battery based EVs.
- SK Group is currently the third largest player in the EV batteries and related components/materials in Korea, after LG Chem Ltd (051910 KS) and Samsung Sdi (006400 KS). The acquisition of KCFT should accelerate SK Group’s efforts to vertically integrate the value chain of the lithium ion batteries/components/materials.
- KCFT’s finances are mainly kept under wraps, however, based on the acquisition price, this suggests 4x P/S and 40x P/E, using estimated sales and net profits in 2018.
(link to Douglas Kim‘s insight: Korea M&A Spotlight: SKC Acquires KCFT for $1 Billion)
Reportedly LG Corp (003550 KS) plans to sell a 35% or more stake of LG CNS for about ₩1tn. LG CNS is the system integration IT service unit of the LG Group. Douglas believes this sale will provide a positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends. (link to Douglas’ insight: Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won)
M&A – US
United Technologies (UTX US) (Mkt Cap: $108bn; Liquidity: $100mn)
The market raction to the proposed ‘merger of equals’ between aerospace giant UTX and US defense contractor Raytheon Company (RTN US) announced at the beginning of the week, has so far been underwhelming.
- Robert Sassoon believes the major complicating factor in this situation is that UTX is a company in the process of transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price.
- This has significant ramifications for an all-stock deal in which the substantially undervalued UTX stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which he assesses should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected.
(link to Robert’s insight: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms)
M&A – EUROPE
The Italian banking system’s lack of concentration makes it, on paper at least, ripe for M&A consolidation, and open to cross-border M&A. Yet prospective Italian banking M&A activity has more recently been domestic, largely due to Italian-specific challenges, which have acted as “poison pills”, and are still a drag on bank M&A domestically.
- Victor Galliano believes Italian bank stock valuations are driven by the challenging domestic macro-economic and political outlook; yet for the longer term, he likes UniCredit SpA (UCG IM) with its attractive dividend yield and higher payout potential, with Unione Di Banche Italiane (UBI IM) and Banco BPM SpA (BAMI IM) as the higher risk, deep value stock picks.
- In M&A land, Intesa Sanpaolo (ISP IM) and UniCredit SpA (UCG IM) are the potential acquirers; Unione Di Banche Italiane (UBI IM), Banco BPM SpA (BAMI IM) and Banca Popolare Dell’Emilia Rom (BPE IM) are both potential acquirers of smaller banks and possible targets or merger candidates; Banca Monte Dei Paschi Di Sien (BMPS IM) is in consolidation limbo, government-controlled and with yet more de-risking to do; and Banca Carige (CRG IM) and Credito Valtellinese Sc (CVAL IM) are confined to being acquisition targets for banks with high risk appetites
(link to Victor’s insight: Italian Banks M&A – The Complex Italian Job)
OTHER M&A UPDATES
Three weeks have now elapsed since the Offer for Harbin Electric Co Ltd H (1133 HK) was extended. That means shareholders who had previously tendered are now entitled to withdraw their acceptances, if they so choose, which takes about 10 days. I estimate ~9.2mn shares have additionally tendered since the extension, or 1.4%, giving a total acceptance level of 87.2%. But, 9.5mn shares or ~1.4% have now moved back into CCASS – which appear to be shares to be withdrawn. Shares closed Friday at $4.41, the lowest since the extension announcement. ~5.8% of issued shares have changed hands since the extension, more than enough for the deal to get up.
Shortly after publishing my insight, Netcomm Wireless (NTC AU) released the supplementary disclosure. The directors reaffirm their recommendation to vote for the Scheme. The disclosure sought to clarify how the directors can recommend the Offer yet maintain a bright future. In short, the directors consider the Scheme crystalises value now. There doesn’t appear to be any news out of the ordinary here. But delaying the vote so as to make this disclosure is unusual. Shares closed firm at $1.08 compared to the $1.10/share Scheme Offer. The Scheme Meeting will be held on the 18th June.
- DuluxGroup Ltd (DLX AU)‘s Scheme Meeting will be held on the 31 July.
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
RMH (8437 HK)
HK Stock Link
Ever Sunshine (1995 HK)
For the past fifteen months, I’ve flagged 345 large moves (>10%) in my weekly Event SPACE insights. So I analysed those moves across 112 brokers. Some of the observations include:
- Overall, 50% of stocks demonstrating a large CCASS movement underperformed the HSI in the first week after the share transfer, which is neither here nor there, however, this number gradually increased over time, touching 70% one-year after the share transfer.
- Share transfers involving stocks with a market capitalisation of less than US$250mn AND between US$500mn to US$1bn, were the worst performers, in absolute terms and relative to the HSI.
- When combining the % CCASS change and market capitalisation, stocks with a market capitalisation in excess of US$1bn at the time of the shares transferred displayed a reduced tendency to underperform.
(link to my insight: CCASS: Why Large Moves Matter Redux)