Brief Industrials: Snippets #40: Thai Airways Bailout, Tycoon Successions and more

In this briefing:

  1. Snippets #40: Thai Airways Bailout, Tycoon Successions
  2. Morning Views Asia: Softbank Group, Tahps Group Bhd, Zoomlion Heavy Industry H
  3. Shanghai International Airport (600009 CH): Solid Apr Freight Added to Aircraft Movement Recovery
  4. Last Week in Event SPACE: Singapore Air, Reliance, Kingsoft, GMO Internet, Li & Fung, Bank Permata
  5. Harmonic Drive – 1Q Guidance for a Small Profit Positive; Still Wildly Overvalued

1. Snippets #40: Thai Airways Bailout, Tycoon Successions

Five interesting news/development we noticed recently that may affect Thai equities include:

  • Sayonara to Thai retail. Japanese retailer Isetan announces plans to leave Thailand after 28 years. Max Valu, a unit of  financier AEONTS, also plans to close down 20 of its Tanjai stores.
  • The government announces a Bt54bn bailout of Thai Airways, but quickly runs into a slew of problems with the union, the company’s operating loss, and multiple critics.
  • Singha’s Machida teams up with Bonchon to come up with a new flavor. Interestingly, they are the only brand still growing in 2019. 
  • Change of Guard. In the last few years, we noticed that a number of major business groups in Thailand have changed leadership either through deaths or retirement of their tycoons, including BEC, King Power, KBANK, LH, BDMS, and most recently Bangkok Land.
  • JMART, Kookmin gets into credit cards with a new joint venture. The deal involves new share issuance and would dilute JMART’s holdings in J Fintech.

2. Morning Views Asia: Softbank Group, Tahps Group Bhd, Zoomlion Heavy Industry H

Lucror Analytics Morning Views comprise our fundamental credit analysis, opinions and trade recommendations on high yield issuers in the region, based on key company-specific developments in the past 24 hours. Our Morning Views include a section with a brief market commentary, key market indicators and a macroeconomic and corporate event calendar.

3. Shanghai International Airport (600009 CH): Solid Apr Freight Added to Aircraft Movement Recovery

Apr%20aircraft%20movement

Shanghai International Airport Co, Ltd. (600009 CH) recorded a 10.1% YoY increase in freight traffic in Apr, significantly outperformed a 54.2% drop at Beijing Capital International Airport (BCIA) (694 HK) and 21.9% decline at Guangzhou Baiyun International Airport (600004 CH), showcasing its strength in the freight handling and helping to partly offset the lower passenger traffic YoY. Its aircraft movement also recorded the best MoM improvement when compared with these two peers.

We expect SIAC’s traffic strength to carry on, fuelled by freight demand and passenger traffic recovery. YTD, share price of SIAC has outperformed BCIA by 18.9pp and GBIA by 4.8pp. In our view, SIAC faces less competitive pressure from traffic diversion and new airport in the medium term, and we continue to regard it as the best pick in the Chinese airport sector.

4. Last Week in Event SPACE: Singapore Air, Reliance, Kingsoft, GMO Internet, Li & Fung, Bank Permata

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Last Week in Event SPACE …

  • The new Singapore Airlines (SIA SP) rights started trading earlier this week. The trade was to be long the shares super-short-term, then short the shares post ex-date, and be short from then on. If you owned the rights, sell them on the demand pop post-trading debut. 

  • Reliance Industries (RIL IN)‘s rights are a bit weird. They are “partly paid-up” rights. There is a down payment, then a capital call. It is worth understanding the details. New news this weekend shows the rights issue opens 20 May and will remain open til June 3. One quarter of the payment will need to be made then, with the rest of the payment coming later.

  • Kingsoft Cloud (KC US) rockets on debut; yet Kingsoft Corp (3888 HK)‘s subsequent price action has been largely “meh”. 
  • With the buyback winding down, now is not the time to Short GMO Internet (9449 JP) with the stub trading cheapish.
  • Li & Fung Ltd (494 HK)‘s Scheme comfortably got up. One wonders if Silchester abstained from voting so as to let the retail investors cast judgment on the Offer.
  • Bank Permata (BNLI IJ)‘s BVPS came in within the expected range. The Trade? Get long. Be long.
  • 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)

EVENTS

Singapore Airlines (SIA SP) (Mkt Cap: $7.9bn; Liquidity: $25mn)

The rights have started trading. A lot of equity delta is likely to come out. Travis Lundy thought there would be a squeeze on the rights vs shares (i.e. they will trade relatively rich on an intrinsic basis, even if they do not trade at a premium) on Day 1, and then they would trade cheaper to the shares later in the trading period. He expected there would be a possibility there are not enough shares to borrow to be able to fully arb the rights.  The borrow has indeed, become very tight.

Travis expected the rights to trade VERY liquidly. They are low-priced with a wide bid-offer, encouraging day-trading. He said this might also make them trade a little rich early on.  From a pricing perspective, the Rights MCBs are VERY tough to price and therefore the Rights MCB Entitlements are also tough to price. 

  • There will definitely be Rights MCB Entitlements for sale. Shorts will buy theirs back on Day 1, and Passive Funds will sell theirs on Index Provider Announcement + 2. Others will sell them and get the cash, if any. As it turns out, the MCB Entitlements opened at 0.001, jumped to the teens, and then fell back to 0.001-0.002. People are not terribly excited to own the MCBs.
  • The Rights MCB entitlements will trade large quantities, and Travis expects there will be enormous amounts of day-trading and for that, people may trade them slightly rich, but there will be an ebb and flow because most of the day-traders who trade them will not actually want to exercise them to get the Rights MCBs. 
  • If you don’t think the MCBs will trade at par or above, then the Rights MCB entitlements are worth zero. Travis personally thinks the Rights MCBs are a tough enough instrument that Travis would not be aggressive in owning them, or paying for the rights without knowing more about the makeup of the eventual buyer and owner demand and what kind of leverage banks will provide against them. They could end up being horribly illiquid. And if not leverage-able, then many will not want to own them. 

(link to Travis’ insight: Singapore Air Rights Entitlements – Flow Dynamics)


Reliance Industries (RIL IN) (Mkt Cap: $113bn; Liquidity: $379mn)

Following a couple of days of speculation, on 30 April, Reliance made an announcement of an intended 1:15 rights offering with the intention to raise ₹53,125 crore at an offer price of ₹1,257 a share. This is the first time in 29 years that RIL is tapping the market for equity-like capital.  The promoter and promoter group led by Mukesh Ambani will need ₹26,600 crore to subscribe to its portion of the rights issue, but they confirmed they would subscribe to the full extent of their aggregate rights entitlement. In addition, they announced they will also subscribe to all the unsubscribed shares in the Issue. The shares are now ex-. 

  • If you owned the shares and get the rights, those rights are worth something. Not a lot, but something.  You will be asked at some point to pony up one-quarter of the strike price to keep your place until later. As long as the shares are trading reasonably above the strike price, it is worthwhile doing so. 
  • If you are long the rights entitlements and you don’t particularly want to own the extra risk, you can sell shares to the extent you own the rights. You had 15 shares. Now you have 15 shares and 1 right. Sell 1 share so now you have 14 shares and 1 right. You now have a “free” put option on 1/15th of your former position.  If you buy the shares from now on, note that as the share price goes up from here, it will become incrementally more attractive for those WITH the rights to sell (because they have a lower-cost replacement) and the overhang becomes incrementally larger. Given that these are only 1:15, that is not a lot. 
  • Watch out for weakness in other places when it comes time for the subscription. It will involve investors finding a few billion dollars of loose change behind the sofa cushions to pay for the shares. Travis is currently bearish as he thinks the shares could slow down their excitement because of a lack of new deals, and the possibility that the Aramco deal gets downgraded in price and/or ambition because of oil price woes. 

(link to Travis’ insight: The Reliance Industries [RIL] Rights Offering)


Daiko Tsusan (7673 JP) (Mkt Cap: $0.1bn; Liquidity: $1mn)

Daiko Tsusan confirmed (J-only) on 11th May it had received approval to move from the MOTHERS section to the First Section of the Tokyo Stock Exchange as of 18th May.  TSE1 reassignment triggers inclusion into the TOPIX Index and we expect the inclusion event will be at the close of trading 29th June 2020. Daiko Tsusan first made its TSE1 listing ambitions clear in its stock-split announcement (J-only) in October 2019. So the market has known this for a while. 

  • Janaghan Jeyakumar expects the inclusion size to be around 0.2-0.3 mn shares which means the impact of the TOPIX inclusion will be between 6-8 days of volume. This is not significant in comparison to the volume impact of other recent TOPIX Inclusions. 
  • Like most TOPIX Inclusion events, the stock has been enjoying strong momentum in the market following the announcement of TSE1 Approval (on 11th May) and we expect this to continue over the next few trading days. However, given the small size, low impact, and the recent overheating, he feels it is better to avoid this event altogether. 

(link to Janaghan’s insight: TOPIX Inclusion (7673 JP): Daiko Tsusan


About a month ago, Posco (005490 KS) announced a major share buyback program worth ₩1tn (US$830mn), which represented nearly 6.5% of the company’s total market cap. In POSCO: Steel Production Cut & Share Buyback Update, Douglas Kim discussed Posco’s intention to reduce its steel production, which would be the first time in 12 years that the company has cut steel production. 

STUBS

I estimated Kingsoft is trading at a discount to NAV of ~62%, a shade below the one-year average. KC was up 53% since its debut the previous Friday, yet Kingsoft is trading flat. At 19%/20% of NAV/GAV, KC is a lower contributor to the NAV compared to 68%/73% for Beijing Kingsoft. As seen with many Holdcos, extracting fair value at the parent level is often left wanting from a “weak” holding.  Keep in mind Kingsoft is up ~48% since last November when it announced the possibility of spinning off KC. 

  • 87% of Kingsoft’s NAV is held in cross-border entities. Cross-border Holdco structures often (but not always) exhibit wider NAV discounts to structures encapsulated in one stock exchange. But cross-border structures into China and/or the US, will invariably incur a wider discount. The recent delisting (AVIC: Just Ignore The Market-Based Value) of AVIC International Holdings (161 HK) at a huge discount to its listed parts provides some context for a Holdco primarily holding Chinse-listed entities. I didn’t expect Kingsoft’s discount to narrow significantly from here. Kingsoft may play some catch-up if KC continues its outperformance. But I wouldn’t chase it. 
  • In contrast, Ke Yan reckoned KC’s 40.2% gain on the first day of trading, and the fact the stake in KC represents 44% of Kingsoft Corp’s market value, he would be long Kingsoft Corp this past Monday at open. A 40.2% price increase in KC translates to a 4.9% increment to the Kingsoft Corp’s NAV. 

links to:
my insight: StubWorld: Kingsoft Not In the Cloud; CH Karnchang Tests New Lows
Ke Yan’s: Buy Kingsoft Corp as a Proxy to Kingsoft Cloud’s +40% Debut

CK was trading at a 51% discount to NAV, its widest inside a year. Stripping out its listed holdings, the implied stub is approaching a multi-year low. The stub comprises general construction services, such as general civil works, advanced construction technology, and project management. At the analyst briefing last month, CK announced its current construction backlog at Bt39bn, the lowest since 2011.

  • The low backlog, pedestrian progress on upcoming public tenders, and the ever-present Chinese contractor competition suggest a cautious approach to Thai contractors. This may be further compounded by a minimum wage hike.  Bear in mind, CK is not unique – Thailand is not short on contractors.
  • I would avoid setting up this stub. A 49% discount to NAV is an attractive entry here. A long-term view, with mean reversion in mind, is probably valid. Near-term less so. Bangkok Expressway And Metro (BEM TB) is not without issue amidst this pandemic but is a more resilient investment here. The implied stub, ex-listed holdings, has been lower in the past six months.

(link to my insight: StubWorld: Kingsoft Not In the Cloud; CH Karnchang Tests New Lows)

M&A – ASIA

GMO Internet (9449 JP) (Mkt Cap: $2.6bn; Liquidity: $15mn)

In mid-February 2020, upon releasing full-year earnings, GMO announced a buyback programme which looked big but had some interesting and distinguishing characteristics given where the shares were and what the ownership structure was. This was discussed in GMO Internet (9449) Buyback – Bigger Than It Looks, Smaller Than It Looks. Q1 earnings were out on the 12th. Revenues were up 14.6% yoy, OP is up 65%, and Net Profit is +11.4%. The stock gained more than 10% yesterday on the highest volume since Q1 earnings last year, and fell back a bit today. Then, after announcing the progress programme-to-date of its buyback on 12 May (1.28mm shares for ¥2.48bn), the company announced a ToSTNeT-3 buyback, of up to 3.153mm shares and up to ¥8bn. 

  • Assuming the company buys back all 3.153mm shares they bid, that will mean 70% of the monies allocated for the buyback program lasting through next February will have been used, and at (then) current price, that would mean the company could buy back another 1.78mm shares, maximum. That is about 1.6% of shares out and a bit under three days of volume. 
  • Should I sell GMO Internet into the ToSTNeT-3?    Travis wouldn’t. The  Stub and or/ Holdco Discount doesn’t warrant it. The remaining buy amount is still 15% of ex-Baillie Gifford float. Once done, ex-Baillie-Gifford float remains low.  It’s growing top line and bottom line in COVID-19 year. Beat that. 
  • Is this buyback a sign of things to come? No. The buyback policy is now that the company will endeavor to return 33% of profits to shareholders via a dividend, and will return the difference of 50% – 33% (i.e. 17%) of profits to shareholders via a buyback. At 35x earnings, it means 17% of 2.86% of shares out will be bought back, on average, every year. That is less than 0.5% of shares out. That’s not huge. In fact, it is simple.  Future share price growth comes from revenue and earnings growth, not accretion or capital policy. 

(link to Travis’ insight: GMO Buyback – Approaching The End But….


As discussed in Done Deal As Li & Fung’s Offer Get up, the resolution to approve Li & Fung Ltd (494 HK)‘s Scheme was approved by the Scheme Shareholders at the Court Meeting. Turnout was 2,513.6mn shares (of Disinterested Shareholders), or 44.2% of those independent shareholders eligible to vote on the Scheme resolutions.  Of those shares present or via proxy, 97.14% voted for the Scheme, and only 1.26% of All Disinterested Shareholders, voted against. Silchester, with 10.9% of shares out, clearly did not vote against the Scheme. But it is not clear it voted For the Scheme. The “majority in number” headcount test was also comfortably satisfied. There was some twitchy trading the day before the vote as discussed in Li & Fung: Nervous Action Ahead of Scheme Vote. Share ceased to trade this past Friday. 


Bank Permata (BNLI IJ) (Mkt Cap: $2.3bn; Liquidity: $1mn)

Bank Permata announced its 1Q20 results. The BVPS appears to IDR 828.9677, within expected ranges, which if not adjusted further, would make for a Transaction Price (and likely subsequent Mandatory Tender Offer Floor Price) of IDR 1,351.2174 (IDR 23.246526mm of Net Assets divided by the sum of 26,880,234 Class A Shares and 28,015,858,971 Class B Shares). Because the exact terms of the adjustments, if any, to book value are not public, it is possible that the Transaction Price could be different than 1.63x reported net equity per share.

  • At IDR 1225 (the price at the time of the insight), assuming an end-July pay date for the MTO gets you a 40% annualised return if you count a 1% buffer on the FX transaction. If you assume end-August, it is more like 32%. If you assume end-September, it is just over 25%.  These are all acceptably good carry returns. 
  • Nota Bene:  Indonesian MTOs or Standby Purchase Transactions can have record dates that come well before the actual launch of the MTO, depending on the structure of how they are done. In this case, Travis would expect a later-rather-than-sooner record date, but we will not know until the circular comes out in the paper. 
  • This is a good quality risk arb transaction. But Travis would not want to be outright long the shares for the medium-term because once the deal is done, there will be a future overhang due to the OJK requirement to sell down to increase the float within two years of the Takeover (though it might be dangerous to be short during that time because of the utter illiquidity of the shares post-Tender).  

Allied Properties Hk (56 HK) (Mkt Cap: $1.6bn; Liquidity: <$1mn)

On the 20 April, Allied Group Limited (373 HK) (AGL) made an Offer for APH, by way of a Scheme, at $1.92/share, a 34.2% premium to last close. The Offer is Final. The consideration will be split between a $0.42/share Scheme Consideration and $1.50 Scheme Dividend. An interim dividend of HK$0.08/share  for the year ended 31st December, 2019, whose names appear on the register on the 8th May, was also added, taking the total payout to $2/share. In the initial announcement, it was guided for completion around October. APH has now announced that the “Executive has granted its consent to extend the date of despatch of the Scheme Document to a date no later than 30th June, 2020.” This suggests everything could be wrapped up late August, a full six weeks ahead of the prior indicated schedule.

  • The blocking stake at the Court Meeting will be 170.33mn shares or 2.5004%. Chong Sok Un, the ex-chairman of Apac Resources (1104 HK), holds 6.11% in APH, and is just in the money. Chong is also an 8.62% shareholder in AGL. There is extensive history between the Lee family (controlling AGL, and in turn APH) and APAC. It is fair to assume Chong was sounded out ahead of the Offer, and is onboard. 
  • Assuming completion on or around the 23 August, at $1.88 (at the time of my insight), that’s a gross/annualised spread of 2.1%/8.0%. Not bad. Even better if you can buy in at $1.87. 

(link to my insight: Allied Prop (56 HK)’s Accelerated Offer)


Seino Holdings (9076 JP) (Mkt Cap: $2.4bn; Liquidity: $9mn)

Seino reported its full-year earnings (Japanese only) to March 31, with revenue +1.4%yoy, OP -5.7%, and Net Profit +21%. Somewhat unusually, it provided a forecast for the year to March 31, 2021. And it isn’t pretty. To mitigate the potential damage from this, the company announced (also only in Japanese) a large buyback. It is up to 20 million shares for up to ¥‎20bn, to be executed between 14 May 2020 and 23 December 2020.
  • The company is cheap – cheapest of the majors in its sector on an EV/EBITDA basis at 3.3x, and closer to 1x Adjusted EV/EBITDA (where Adjusted EV takes into account cross-holdings, bond holdings, and net receivables) at the current price, and that would leave ¥300bn of PP&E (net of accumulated depreciation) unaccounted for. Warehousing assets could be sold and leased back for business purposes. Logistics REITs need more assets. 
  • The founding family’s Taguchi Foundation owns 12.5% of shares out. The Taguchi family members own another 1%, but other cross-holders and the ESOP and Treasury shares (now) make up another 43+% of shares out. If the shares purchased in this buyback come from float, it will mean the Taguchi family would effectively control 60% of voting rights. It would be an easy step to an MBO to control 67% and squeeze out minorities. Travis would not be surprised at all to see an MBO in this situation. It – and minority shareholders – look like sitting ducks. 
  • This is a longer-term buy. It is cheap. It grows longer-term. And it is now buying back a lot of shares.  This company deserves to be an activist target. There is a lot to want to own here for the medium to long-term.

Vedanta Ltd (VEDL IN)  (Mkt Cap: $4.4bn; Liquidity: $39mn)

VEDL announced that Vedanta Resources (VED LN) has expressed its intention to acquire all the public shareholding in VEDL and delist the shares from the stock exchanges, followed by the delisting of the ADRs from the NYSE. VED and other members of the promoter group hold 50.14% of the outstanding shares in VEDL. The Indicative Offer Price is INR 87.50 per share. The Board of VEDL will meet on 18 May to review the due diligence report of the Merchant banker and to approve or reject the delisting proposal.

  • VEDL is trading near a 4 year low and this, according to Brian Freitas, this is an extremely opportunistic move to buy out the public shareholding at an extremely low price and multiple.
  • The Offer will cost ~INR 162bn (US$2.15bn) to take the company private. VED has outstanding debt of US$6.6bn as of 30 September 2019. The company can raise funds in the debt markets to finance the privatization or pledge their shares in VEDL to raise funds. The question is how much higher than their ‘Indicative Offer Price’ they will need to go to get shareholders to agree to the privatization and how that will affect their ability to raise funds.

(link to Brian’s insight: Vedanta Ltd – Opportunistic Move to Go Private)


Nichii Gakkan Co (9792 JP) (Mkt Cap: $1bn; Liquidity: $4mn)

On Friday, medical and healthcare support and services company Nichii announced a Bain entity had decided to launch an MBO, and that the Board of Directors had decided to support the transaction.  This was not put up for auction or any kind of beauty contest. It came in at a price which was lower than the market price when the transaction was first considered positively by the Private Equity person involved. The document from the Board of Nichii Gakkan says that the deal feasibility is not impacted by the novel coronavirus and its onset in Japan. This is not surprising. The prospects of medical service and support companies do not suffer when medical care becomes more meaningful, precious, or expensive. 

  • The fact that banks are offering loans up to the entire purchase price means this is getting done too cheaply.  The fact that the MD and Representative Director of Bain got first and last look at this deal when the stock was at ¥1600/share, pre-covid, and would have figured he needed to pay ¥2100/share to get it done (a 30% premium) tells you that at ¥1500/share, this is getting done ¥600 too cheaply. 
  • The FA for the Board seems to have come up with a “fair” value which ignores some of the assets. And this deal has no majority of minority hurdle. It only needs 41% of non-family/insider minorities to tender to make the deal successful.  What is UNKNOWN is what Effissimo will do. They own 11.4% with an average purchase price of under ¥900/share. They first went significant on this stock in September 2014 with a 6.1% stake.
  • If Effissimo agrees, then the 2.85mm shares from MUFG and Nippon Life plus the 1mm shares in a Mizuho Bank Retirement Trust Account and the 1mm shares in the Nichii Gakkan ESOP would with Effissimo’s 8.32mm shares get them to 13.1mm shares, which is just 2 million shares shy of getting this deal over the hump.  For that, it probably all comes down to Effissimo. 
  • Since the launch of the deal, the stock has not traded (except for the first day limit up allocation) below terms, and 5.5mm shares, 8% of shares out or almost 20% of float, have traded above terms. The shares closed 4+% through terms on Friday. This is starting to look exciting.

(link to Travis’ insight: Nichii Gakkan MBO:  Great Deal for the Buyers (Not so Much for Minorities))


Northeast Pharmaceutical A (000597 CH) (Mkt Cap: $1bn; Liquidity: $23mn)

Fangda Steel, the largest shareholder in Northeast Pharm with 28.64% of shares out, is seeking to raise its stake by 10% via a partial Tender Offer, in an RMB700mn transaction. The Tender Offer is RMB7.72/share, a 3.7% premium to the close. The minimum pro-ration is 14%.  Prima facie, this doesn’t appear an Offer worth a second glance. However, recent partial Offers in China have shown remarkably high pro-rations. 

(link to my insight: Northeast Pharm (000597 CH): Partial Offer)


Yamada Denki (9831 JP) (Mkt Cap: $3.6bn; Liquidity: $24mn)

Yamada Denki announced it would buy back up to 40mn shares for up to ¥20.36bn, i.e. at a price of ¥509/share. That is up to 4.87% of shares out on top of the roughly 2.67% of shares out already bought back in the first 43 days. It is also, by itself, about 10% of the Real World Float, which suggests that it is not aimed at buying “float”, but aimed at buying out an existing large holder. If the company buys back all the rest of the shares in the next 11 months, that will be <4% of ADV given the last twelve months of volume as a reference. 

  • The stock is not cheap, per se, and COVID-19 is not making it cheaper nor is it making Yamada Denki a standout in the space. Brick & Mortar stores will likely be suffering for a while on both the economic and sociologic fallout. The sharp downturn on inbound tourism will also no doubt hurt Yamada Denki compared to what estimates might have been several months ago. 
  • The post COVID-19 March 2020 global selloff has been mitigated, and for those stocks which have rebounded most of the way, taking stock of what one wants to own on a relative basis is worthwhile. Travis was bullish on this, saying it was a bullish but risky bet. We are now getting to the risky portion. Here is the exit, 20% higher, and here is where there will be less buyback impact going forward. The risk-reward profile due to flow shifts worse with this buyback out of the way. 
  • The trade?  If Travis had a long, he would sell. If he were inclined to short, he would use this event to avoid the friction of executing a decent-sized short. 
  • Post-insight:  Yamada Denki executed the 40mm share buyback, and the shares drifted higher for 90 minutes before the company announced the results, and the fact it was discontinuing the remainder of the buyback. The shares fell 10% in the next 1.5 trading days.

(link to Travis’ insight: Yamada Denki BIG ToSTNeT-3 Buyback


Golden Land Prop Dvlp (GOLD TB)  (Mkt Cap: $0.6bn; Liquidity: <$1mn)

Almost a year ago to the day, shareholders of Frasers Property (Thailand) Pcl (FPT TB) approved at its EGM the acquisition of GOLD by means of a voluntary tender offer (VTO) at Bt8.50/share. There was an intention to delist GOLD although it required FPT securing 90%+ in the VTO process, in the first step towards that delisting. At the close of the Offer, FPT held 94.5%.  GOLD has now announced that FPT intends to make a tender offer to delist GOLD’s shares at THB 8.50. The purchase of shares may commence this month, suggesting payment by July-end.

  • The exact wording in the latest notification is that FPT “expects to submit the Tender Offer for Securities (Form 247-4) and begin purchasing the remaining shares of GOLD within the month of May 2020“. There does not appear a hard and fast rule as to when Form 247-4 should now be submitted. To begin purchasing shares this month, the Form will need to be submitted within the next two weeks.
  • Assuming 45 days for the tender offer period – similar to the delisting of Glow Energy Pcl (GLOW TB) last year – payment can be expected late July. That places the gross/annualised spread at 1.8%/8.7% at the current price of THB 8.35, which looks okay.

(link to my insight: Golden Land (GOLD TB): Delisting Offer)


Sequent Scientific (SEQ IN) (Mkt Cap: $0.3bn; Liquidity: <$1mn)

Sequent, India’s largest pure-play animal healthcare company, announced that The Carlyle Group had entered into binding agreements with promoter shareholders to acquire a majority stake in the company. In accordance with SEBI’s takeover regulations, this transaction triggered a mandatory open offer for 26% of total shares. Together, these transactions will allow the Acquirer to increase their stake in the company up to 74% and the Acquirer will become the new promoter of the company.  The Deal will be conditional on receiving regulatory approvals and is expected to close in 3Q20. The Offer price will be INR86.00 per share in cash. Sequent’s shares last closed at 82.20.

  • The news of this deal has been out at least since the 6th December 2019.  The Offer Price translates to premia of 7.2%, 9.5%, and 9.9% to the pre-announcement closing price, 3-month VWAP, and 6-month VWAP respectively. While these appear weak, it must be remembered that the price had moved up since news broke out in December 2019.  Furthermore, the Offer translates to EV/Revenue and EV/EBITDA multiples of 2.0x and 14.1x for the company which are 20% and 24% higher than the median for peers. 
  • This is a Partial Tender Offer. Assuming the shareholders who have agreed to sell in the SPAs (61.38%) do not tender their shares and all the remaining shareholders (38.62%) tender their shares, the minimum fill ratio will be 67.3%.  For someone buying the stock at the current price (INR82.20), the minimum fill ratio of 67.3% would mean a theoretical breakeven exit price of INR74.63.
  • The company has grown quickly and clearly deserves a premium multiple to market, but the Tender Offer Price is 25% above where it was trading in early December, and the market is almost 25% lower than early December. That means, the stock is probably a buy-on-dip situation. Buy on weakness below INR 80 and load up a few percent below that if you can.

(link to Janaghan’s insight: Partial Tender Offer for Sequent Scientific)


Kaneshita Construction Co (1897 JP) (Mkt Cap: $0.1bn; Liquidity: <$1mn)

One business day after the company on the previous Friday recorded a sharp gain in revenue, OP, and net profit in Q1 (it’s a December-end company), raising full-year estimates, the company is now looking to buy back another large stake – up to 200,000 shares or 8.8% of shares outstanding – at today’s closing price of ¥4,405/share, as announced after the close. 

  • Kaneshita Construction has been a  buyback machine.  By the close of 12 May 2020, treasury shares should be about 45.8% of shares out.  That leaves the CEO – who owns 3.9% of the shares – virtually controlling 57% of the shares out. And the company has a virtual negative Enterprise Value. Travis expects an MBO is coming. And expects that it is virtually wrapped up. 
  • The company has a “Classical Enterprise Value” of ¥3.9bn, but also has securities holdings of ¥6.3bn and a huge pile of receivables (and some land). The Receivables less ALL OTHER LIABILITIES is worth another ¥2.7bn. That is a virtual negative EV of ¥5bn or about ¥2500/share.  At 2x EBITDA, you could add ¥3000/share to the share price to take it over and still have the land left for free. 
  • This is a small company with VERY low float. Liquidity is near-zero. Nonetheless, for the principle of the thing, Travis would own shares, and he would not mind paying up to own them.  If it turns out that the seller is not KI Enterprise (i.e., if the buyback is less than 198,000 shares), that would be, if anything, GREATER confirmation of a buyout to come. KI Enterprise and Kaneshita Construction have a business relationship, and have long had a cross-holding relationship (which only ended when KI Enterprise was taken private). Longer-term, Travis would not be surprised to see KI Enterprise buy out Kaneshita because the younger Uehara is at least a decade younger than CEO Kaneshita-san, who appears to have no heir at the company.

(link to Travis’ insight: Another HUGE Buyback at Kaneshita Construction (1897) – MBO Coming?)


Lai Sun Development (488 HK) (LSD) announced a conditional takeunder for Lai Fung Holdings (1125 HK) (LFH) at $8.99/share versus the last price of $9.73. The Offer was also an 85% discount to the revalued NAV. The IFAs said the Offer was not fair. But esun holdings (571 HK)‘s disinterested shareholders still went ahead and approved the sale of its 50.99% stake in LFH, as discussed in ESun (571 HK): It Beggars Belief. The deal is now unconditional in all respects, so that’s that. 


In Korea M&A Spotlight: A Merger Between Hanil Cement & HLK Holdings, Douglas discussed the Hanil Holdings (003300 KS) announcement that Hanil Cement Co Ltd/New (300720 KS) will merge with HLK Holdings (HLK), vertically integrating the cement subsidiaries of the Hanil Group. Hanil Cement becomes the surviving company and HLK Holdings will cease as a company. The merger ratio is 1 share of Hanil Cement to 0.5024632 shares of HLK. After this merger is completed, Hanil Holdings will have a 73.32% stake in Hanil Cement. In addition, Hanil Cement will secure an 84.24% stake in Hanil Hyundai Cement and include it as a subsidiary. 


In ARRK-Mitsui Chem Merger: Done Deal, Janaghan discussed Mitsui Chemicals (4183 JP) announcement of a merger deal to buy out minorities in Arrk Corp (7873 JP). The share exchange ratio will be 0.0511 Mitsui Chem Share for 1 Arrk Corp Share. The effective date of the share exchange is scheduled to be 1st August 2020.  The deal requires approval from Target shareholders representing at least two-thirds of total shares outstanding and the Acquirer already directly owns 74.66% of total shares outstanding. They will vote for. The exchange ratio offered is a 4-year high. It is also 34.3% higher than the 3-month average price ratio of 0.038.  This will be a straight-forward rate-of-return trade involving no deal risk. It is simply illiquid. 

M&A – EUROPE

Imperial Brands (IMB LN) announced the sale of its premium cigar business for GBP 1,074mn  and will use the cash to reduce its debt. Imperial also holds a 50.01% in Logista (LOG SM). In Imperial Brands (IMB LN): Trade Ideas for a Potential Sale of Logista (LOG SM), Jesus Rodriguez Aguilar reckons this will also be sold. So he’s long both Imperial AND Logista. 

SHARE CLASS

Over the last couple of months, the premium on Wipro Ltd Adr (WIT US) has gone from around 7% to reach a high of 31% and is trading at just over 24% as of the US close. Over the same period, the local stock Wipro Ltd (WPRO IN) is down 24.33% and the INR (USDINR CURNCY) is weaker by 5.64% against the USD (USD CURNCY). In Wipro (WIT) – Soaring ADR Premium Should Come Back to Earth, Brian looked at the historical premium on the ADR, shareholding patterns on the local stock and the ADR, availability of local shares to Foreign Portfolio Investors (FPI), and look at catalysts that could cause the premium on the ADR to return to the 5-8% range.


In Liquid Universe of European Ordinary and Preferred Shares: May Report, Jesus looks at eight share classes (pref vs. ords) throughout Europe, with trade recommendations thereon. 

INDEX RE-BALS

The next rebalance for the FTSE China 50 index will be effective 22 June and the changes will be announced on 3 June. Passive funds will need to trade at the close on 19 June. At the current time, Brian sees a high probability of Alibaba Hlth Infrmtn Tchnlgy (241 HK) being included in the index and of China Communications Construction (1800 HK) being deleted, and a lower probability of Hansoh Pharmaceutical (3692 HK) being included and New China Life Insurance (1336 HK) being excluded. As discussed in FTSE China 50 Rebalance Preview – One High Probability Change, One on the Cusp, China Communications Construction (1800 HK) and New China Life Insurance (1336 HK) are also possible deletes from the Hang Seng China Enterprises Index (HSCEI INDEX) June rebalance, the results of which will be announced this Friday, 15 May.


MSCI has announced the results of the May 2020 Semi-Annual Index Review (SAIR). The changes will be implemented at the close on 29 May and will be effective 1 June.

In MSCI Japan May20 Index Review – Big Changes Brian highlighted there are 9 additions and 9 deletions to the MSCI Japan Standard index with an estimated turnover of 1.07%. The inclusions are Cosmos Pharmaceutical (3349 JP)GLP J-REIT (3281 JP)Ito En Ltd (2593 JP)Kobe Bussan (3038 JP)Lasertec Corp (6920 JP)Miura Co Ltd (6005 JP)Nihon M&A Center (2127 JP)Scsk Corp (9719 JP) and TIS (3626 JP). The deletions are Aeon Financial Service Co Lt (8570 JP)Alps Alpine (6770 JP)Credit Saison (8253 JP)IHI Corp (7013 JP)J Front Retailing (3086 JP)Konica Minolta (4902 JP)Mitsui Osk Lines (9104 JP)Sankyo Co Ltd (6417 JP) and Toyo Seikan Group Holdings L (5901 JP).   

In MSCI Korea May20 Index Review – Smaller Than Expected Brian highlighted there are 2 additions and 5 deletions to the MSCI Korea Standard index with an expected turnover of 0.98%. The inclusions are Celltrion Pharm (068760 KS) AND Duzonbizon (012510 KS).  The deletions are Hanwha Life Insurance (088350 KS)HDC Hyundai Development Co-Engineering & Construction (294870 KS)Kcc Corp (002380 KS)Medy Tox Inc (086900 KS) and Oci Co Ltd (010060 KS).


In MSCI ASEAN May20 Index Review – Big Turnover in Indonesia Brian highlighted there are 6 deletions to the MSCI Indonesia Standard index, 3 additions and 1 deletion for the MSCI Thailand index, 1 deletion from the MSCI Malaysia index, and 1 addition and 1 deletion for the MSCI Philippines index. The inclusions are Asset World Corporation (AWC TB)Bangkok Commercial Asset Management (BAM TB)Krungthai Card (KTC TB) in Thailand and Puregold Price Club (PGOLD PM) in the Philippines. The deletions are Bank Tabungan Negara Persero (BBTN IJ)Tambang Batubara Bukit Asam (PTBA IJ)Bumi Serpong Damai (BSDE IJ)Jasa Marga (Persero) (JSMR IJ)Pabrik Kertas Tjiwi Kimia (TKIM IJ) and Pakuwon Jati (PWON IJ) in Indonesia, Banpu Public (BANPU TB) in Thailand, AirAsia Berhad (AIRA MK) in Malaysia, and Security Bank (SECB PM) in the Philippines.  


OTHER M&A & EVENT UPDATES

  • The FTSE will delete Singapore Airlines (SIA SP)‘s MCB Rights at the close of the day before the 18 May, which was the close of 15 May (Day 3). Assuming FTSE and MSCI are the same day, Travis would expect 200-300mm entitlements to be sold into the close and at the close. But it was only worth S$100k. 
  • Nissan Chemical Industries (4021 JP) announced a buyback to buy up to 2.6mm shares for up to ¥7bn between 18 May and 23 Sep 2020. That is 1.79% and is somewhat aggressive. 
  • Uber (UBER US) has made an approach to Grubhub Inc (GRUB US) to take them over. 
  • Luckin Coffee (LK US) has fired its CEO and its COO as a result of its fraud investigation. 
  • Orix Corp (8591 JP) announced today that it had finished its buyback at 34mm shares and ¥56bn spent. That was only about 2.75% of shares out, and just under half the buyback program, and the company only spent 56% of the monies allocated. More to come?
  • Kinden Corp (1944 JP) announced a buyback this past January of up to 12mm shares or 5.5% of shares out.  Since then, they have bought back not quite two-thirds of that amount, buying while the buying has been good.  The company has spent ¥12.5bn out of the ¥20bn allocated. So far this has been a win. The company has a LOT of excess cash and so can be expected to do this again and again. Very stable underlying business which is gaining market share. This stock is probably the wrong price.

  • At the end of March, Relia Inc (4708 JP) announced a buyback of up to 2.1mm shares for up to ¥2.5bn. That is 3.05% of shares out and more like 6-7% of Real World Float. Today, they announced that in April they bought back 614k shares. They have three more months to buy back the other 1.5mm shares. 
  • In its monthly update pursuant to the Takeovers Code, Soho China Ltd (410 HK) said there has “nothing has been done in the last month” with respect to any transaction.
  • PW Medtech announced it has sold a 2.61% take, reducing its holding in China Biologic Products (CBPO US) to 13.83%.

  • BBI Life Sciences (1035 HK)‘s Scheme scraps in – 7.4% of ALL  independent shareholders voted against the deal. Shares have ceased trading. Payment or around the 15 June.

  • The agreement to acquire an 85.73% in Holcim Philippines (HLCM PM) by San Miguel (SMC PM) has lapsed.

  • In its monthly announcement in compliance with the Takeovers Code, Haier Electronics Group Co (1169 HK) said the Offeror continues to explore a privatisation proposal.

  • Not a takeover of Realord Group Holdings (1196 HK) after all – but Realord making a pre-conditional voluntary cash Offer for micro-cap Sincere Co (244 HK), which operates a chain of department stores in Hong Kong.

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.

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

Name

% chg

Into

Out of

75.00%
UBS
Outside CCASS
Pujiang (2060 HK)
16.42%
I Win
Outside CCASS
Source: HKEx

5. Harmonic Drive – 1Q Guidance for a Small Profit Positive; Still Wildly Overvalued

Image 84786010351589548553409

Harmonic Drive posted 4Q results which were slightly mixed as revenue missed consensus slightly, but the company beat on OP and avoided a loss which was positive. While the company did not offer FY guidance, it at least provided 1Q guidance which is a helpful indicator. HDS is calling for ¥9.5bn in revenue and a slim profit of ¥200m with this backed up by 4Q orders which hit ¥8.9bn, up from the bottom of ¥5.6bn but a far cry from the peak of ¥22.1bn. All in all we considered the results and guidance to be positive, but against the context of the stock price we feel they demonstrate that risk-reward is skewed extremely heavily to the downside.

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