Daily BriefsEvent-Driven

Event-Driven: Aarti Drugs Ltd, Vedanta Ltd and more

By September 13, 2020 No Comments

In today’s briefing:

  • India Small Caps: Position for Outperformance Vs Large & Mid Caps
  • Last Week in Event SPACE: Vedanta, Cardinal Res., Japan Retail Fund, HSBC, Opticomm, Tiffany/LVMH

India Small Caps: Position for Outperformance Vs Large & Mid Caps

By Brian Freitas

Late Friday evening, the Securities and Exchange Board of India (SEBI) published a blandly titled ‘Circular on Asset Allocation of Multi Cap Funds‘. The implications of the circular, however, are not as bland and will result in a big shift in allocation among market cap segments in Indian mutual funds and drive trading activity over the next few months.

SEBI has now mandated that Mutual Fund schemes classified as ‘Multi Cap Funds’ need to invest a minimum of 75% of their total scheme assets in equities and equity related investments with a minimum 25% allocation to each segment: large caps, mid caps and small caps. Currently, the top 11 multi cap schemes by assets (making up 85% of total multi cap assets) hold 78% of their assets in large cap stocks, 16.6% in mid cap stocks, and only 5.4% in small cap stocks.

All Multi Cap funds have till the first week of February 2021 to meet the new requirements. While there will not be a big impact on large cap stocks, there could be a very big impact on small cap funds. The Nifty Smallcap 250 index has underperformed the Nifty 100 and the Nifty Midcap 150 index over the last year and could outperform over the next few months.


Last Week in Event SPACE: Vedanta, Cardinal Res., Japan Retail Fund, HSBC, Opticomm, Tiffany/LVMH

By David Blennerhassett

Last Week in Event SPACE …

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

M&A – ASIA

Vedanta Ltd (VEDL IN) (Mkt Cap: $6.6bn; Liquidity: $31mn)

VEDR theoretically has until the third week of September to file with the Exchange in order to complete but that is playing it as unsafe as possible. Travis would not be surprised to see an Approval In-Principle this week or next. Then the timeline is fixed, and VERY short. There is US$3.15bn of funding taken down. US$1.75bn of that is very short-term. Another US$0.6-1.1bn should probably be taken down near-term in terms of a letter of credit against the syndicated loan VEDL has taken down this past week. If VEDR wants, it could relatively easily pay ₹200/share. 

  • There is a non-negligible possibility that Vedanta does not attract 90% of the shares (i.e. 80% of the minorities). There are a very large number of very small shareholders who together hold about 6.95% of shares out. They may abstain. There was 4.37% of shares out held in the American Depositary Receipts. They cannot participate. The rest is institutional shareholders who likely will participate. If retail participates to half, this just gets to 90%, but the price may be “too high”.
  • If VEDL proposes too low a price, this won’t get done. Investors can see the value. The Value Per VEDL share of the Hindustan Zinc holding is – as of Friday 4 Sep – ₹164 per Vedanta share. That gets you the rest of Vedanta for free. The rest of Vedanta produces more EBITDA than Hindustan Zinc does and has a book value of roughly ₹89/share (wholly coincidental to the “Book Value” proposed last week). 
  • VEDL is worth more than people think it is. If VEDR buys Hindustan Zinc from VEDL minorities at a 20% discount to market price despite zinc trading near 52-week highs and HZL cash costs trading lower than ever, and silver at 6-8yr highs, that means the rest of VEDL is currently trading for ZERO.  The trade is still to be long.  If you want to play it super safe, buy the ADS and convert to onshore shares.  As we trade higher, it makes more sense to have something of a sector hedge on, but it doesn’t make tremendous sense. This is quite binary. The deal gets done and you get taken out – most likely at a higher price. OR… It doesn’t get done, the price probably falls, and VEDL will still be cheap to peers. If the deal fails, THEN you put on your sector hedge.

(link to Travis Lundy‘s insight: Vedanta: Reaching The End Game)

Cardinal Resources Ltd (CDV CN) (Mkt Cap: $0.4bn; Liquidity: $2mn)

CDV announced that Shandong Gold Mining Co., Ltd. (1787 HK) intends to increase its Offer Price to A$1.00/share. This Offer remains subject to a minimum acceptance condition of 50.1%.  Shandong’s offer is a 118% premium to Nordgold’s initial proposal back in March, and 300% above the one-day undisturbed price. The price of gold is up ~30% since Nordgold’s March Offer. The key question is – how much more are Nordgold and Shandong willing to pay? A starting point is estimating the NPV of the Namdini Project. 

  • My back-of-the-napkin calculation suggests the IRR was 24% at the time of Nordgold’s initial Offer. If using the current gold price, I estimate Shandong/Nordgold could theoretically pay up to A$1.25/share, assuming an IRR of 24% is desired. This is VERY sensitive to gold prices. 
  • If you are already in, then ride out the end game of this competitive bidding situation.  I believe any subsequent bidding increments will be in the order of 10% or single digits from here, should they unfold. There may be more to come, but a 194% premium to the 20-day VWAP to 13 March 2020, currently Shandong’s Offer, is full. And I question whether Nordgold can accept a lower IRR than SOE-backed Shandong.  Nordgold has extended its Offer to the 24 September. 

(link to my insight: Cardinal Resources (CDV AU): Shandong Trumps Nordgold’s Knockout Offer)

Capitaland Commercial Trust (CCT SP)  (Mkt Cap: $4.8bn; Liquidity: $14mn)

The original recommendation to be short Capitaland Mall Trust (CT SP) (“CMT”) or short CMT vs the rest of the S-REIT sector has worked well, with about 10-11% outperformance including dividends in the intervening 7+ months against the average basket of other S-REITs.

  • The Eight Deal-Related Documents released 4 Sep are linked here and here.  The approvals should be easy. It depends on the retail shareholders of CCT more than anything else, and they have been offered a DPU uplift. In all likelihood they say yes.  The vote will be here in just over 3 weeks, then we wait for the Court. This should be done by 6-7 weeks from now and CCT shareholders should get their cash and new shares in CMT in 7+ weeks (28 Oct). 
  • At this point, it is less interesting to go short, vs the comps, and with the variability and volatility of reopening and crowd uptake post COVID lockdowns, I am less convinced I know the right trade going forward. Travis’ inclination is to cover the CMT or CCT short vs the rest of the sector and reconsider.  While he would not consider myself BULLISH per se, the right way to label something where one is closing out a short or BEARISH trade is to say BULLISH, so this is labeled Bullish. 

(link to Travis’ insight: Capitaland Mall and CCT Merger: Circular Finally Out. Looks Done)

OptiComm Ltd (OPC AU)  (Mkt Cap: $0.4bn; Liquidity: $1mn)

Back on the 15 June, Adelaide-based outfit Uniti Group Ltd (UWL AU) tabled a cash/scrip Offer by way of a Scheme for fiber network operator OPC.  The consideration price under the Scheme was A$5.20/share, including a fully-franked $0.10/share dividend. The Offer appeared more than fair, and has largely traded around terms. The Scheme Booklet was registered with ASIC on the 7 August and a Scheme Meeting convened for the 10 September.  But on the 28 August, OPC responded to media speculation regarding a  potential alternative suitor. OPC said it has not received any competing proposal, nor has it been made aware of interest from any other party.

  • OPC has now announced it had received a non-binding and conditional competing proposal, by way of a Scheme, from First State Superannuation (FSS). The cash consideration under this competing proposal – which is subject to allowing FSS due diligence – is A$5.85/share, a 12.5% premium to Uniti’s Scheme price of A$5.20 under its all-cash consideration alternative (ignoring the potential scale-back). Not surprisingly, the Scheme Meeting has been postponed.
  • If successful, this would be the first privatisation where a super fund has stumped up 100% equity. It is also the first time a super fund is bidding on its own without an investment manager. Ironically, Uniti acquired LBNCo from a consortium comprising ROC Partners (a Sydney-based investment manager) and FSS last August. FSS is not a shareholder in either OPC or Uniti. 

  • Because of the value premium, OPC has given FSS limited due diligence – in line with that provided to Uniti – up until the 18 September, or 10 days all-in. FSS is requested to submit a binding proposal no later than the 18 September.  Uniti’s shares tanked 9.4% on FSS’s intervention. As Uniti’s Offer comprises scrip, this makes it more challenging for Uniti to compete with FSS. Trading tight. Given FSS’ last-minute intervention, and the unprecedented “go-it-alone-by-a-super-fund” proposal, on balance, a firm Offer is likely to unfold.

(link to my insight: OptiComm: First State Gatecrashes Uniti’s Offer)

Japan Retail Fund Investment (8953 JP) (Mkt Cap: $3.7bn; Liquidity: $24mn)

On 28th August 2020, J-REITs JRF and Mcubs Midcity Investment Cor (3227 JP) (“MMI”) announced an absorption-type Merger which is expected to form the largest diversified J-REIT based on current asset values. JRF will be the surviving corporation and MMI will be the dissolving corporation in the merger. The newly formed combined entity will be named Japan Metropolitan Fund Investment Corporation (JMF). The exchange ratio for the transaction has been set at 0.5 JRF Shares per MMI Share.  The Deal is conditional on receiving approval from the shareholders of both the Target and the Acquirer. Both shareholder meetings are expected to take place in October 2020 and the Deal is expected to complete in March 2021. 

  • The Deal seems to be reasonable for both parties. JRF has been looking to reduce their retail exposure. MMI shareholders are expected to experience strong DPU accretion following the completion of the merger according to official estimates.  Diversified REITs currently garner a better price/NAV multiple than do Retail Sector REITs.
  • The Deal requires approval from both MMI and JRF shareholders representing at least a two-thirds majority of the votes of the attending unitholders with the unitholders in attendance holding over half of the units outstanding. Considering the friendly nature of the transaction and the benefits of the Deal to either party, Janaghan Jeyakumar expects both sets of shareholders to vote in favour. 
  • Both MMI and JRF are currently trading at PBV multiples that are well below the peer average. The combined entity is expected to be the largest J-REIT by asset value. Considering this size factor and the benefits of a more-diversified asset composition post-merger, there is good reason to expect the combined entity to enjoy a PBV multiple that is at least as high as the average for Diversified J-REITs. Janaghan recommends going long JRF vs a diversified basket of large REITs.

(link to Janaghan’s insight: MCUBS Midcity (3227 JP): Scrip Deal Trading Tight But There’s a BETTER Trade)

Yuanshengtai Dairy Farm (1431 HK) (Mkt Cap: $0.4bn; Liquidity: $1mn)

YST announced the previous weekend a conditional voluntary general offer from China Feihe (6186 HK). The Offer Consideration is HK$0.63/share, a 1.6% premium to last close, and a 39.4% premium to the 90-day average close. The Offer price is final. The Offer has a low 50% acceptance condition. All other conditions can be waived. Feihe currently holds no shares in YST. No irrevocable commitments have been tabled.

  • It is surprising there are no irrevocables. This Offer will be difficult to get up if Zhao Hongliang (Chairman, 28.17% of shares out) does not tender. My bet is that he will tender in all or some of his shares such that Feihe gets over the 50% threshold – or when Feihe is close to the 50% threshold. 
  • No dividend has been declared. If a dividend was paid, it would be netted off the offer price.
  • You have a hard floor near-term. I would buy just below terms. This may well trade through terms on the expectation of closer ties with Feihe. But again this is not a terribly liquid arb situation.

Hinokiya Holdings (1413 JP)(Mkt Cap: $0.2bn; Liquidity: $1mn)

Yamada Denki (9831 JP), Japan’s largest electronics retailer, well-known for running large and shiny stores with more aisle space than the more aggressive electronics retailers like Bic and Yodobashi in urban areas, has agreed to buy 45.6-50.1% of Tokyo-based custom homebuilder  Hinokiya from the founder and his relatives in a Partial Tender Offer at ¥2,000/share which is ~12% premium to last. The price comes out to 4.5x EBITDA, 10x PER, and 1.3x book. It isn’t very impressive as a price

  • This deal appears odd, but it is less odd than you’d think. When houses get built, they get furnished with new TVs, kitchen equipment, furniture, etc. Yamada Denki sells a lot of that. And if you wanted to build your new house with all the modcons and wired to the rafters with ethernet, wifi, etc., you might want to have a house built in collaboration with someone who knew how to execute on a wired home. It isn’t necessary for a home builder to tie up with an electronics retailer, but I’ve seen worse ideas. 
  • For long onlies, if you like the stock, it will suddenly get a LOT more liquid (relatively speaking) around the Tender Offer price. That would be a time to buy more shares if you liked the company and were looking for liquidity.  For arbs, a priori Travis expects the trade is to buy shares at a few percent discount and tender them. If you can borrow shares, you can play the ex-date fall as well, but now that it is only two days, there isn’t much room to play that. There is every possibility that this trades illiquidly.

(link to Travis Lundy‘s insights: Yamada Denki Partial TOB For Hinokiya (1413 JP) & Hinokiya (1413 JP) Partial Tender Arb Grids & ProRation)

Changshouhua Food (1006 HK) (Mkt Cap: $0.3bn; Liquidity: <$1mn)

After entering a trading halt on the 3 September “pursuant to the Hong Kong Code on Takeovers and Mergers”, CFC announced a privatisation by way of a Scheme. The Cancellation price of HK$4.19/share is a 16.4% premium to last close, but a 43.2% and 64.1% premium over the average closing price on a 30-day and 60-day basis. The price is Final. No dividends are expected to be paid. Optically, the offer is pitched at a key resistance level over the past four and a half years. It is also a 104% premium to its YTD low of HK$2.05/share on the 29 June. 

  • The Offeror, holding 52.14% of shares out, is a wholly-owned subsidiary of Sanxing Group. Independent Shareholders hold 46.82% of shares out.  Typical Scheme conditions apply: at least 75% of Independent Shares FOR & not more than 10% of ALL Independent Shares against. Therefore the blocking stake is 4.682% of shares out, or 26.85mn shares. Two shareholders have sufficient shares to block the vote – one has been a passive investor for almost five years; the other, FIL, was selling earlier this month at $3.50. The headcount test applies as CFC is Cayman incorporated. 
  • As at 30 June 2020, CFC had net cash of HK$2bn. It’s a self-funding deal for the Offeror. Almost 100% of the market cap prior to this Scheme announcement, and 83% of the market cap under the Offer. In effect, you are getting the edible oil business for free.   That simply indicates this Offer price is wrong. But CFC has perennially traded cheap to its net cash and business ops. 
  • The Offer price appears sufficient to get this deal up. Trading at a gross/annualised return of 4.5%/17.6%, reflecting the shareholder vote risk. And the fact this is arguably the wrong price. I’d buy here – although it’s not a particularly liquid arb situation.

Kirindo Holdings (3194 JP) (Mkt Cap: $0.4bn; Liquidity: $2mn)

Bain and the founding family (founder and son) are going to own the company via a Tender Offer. Currently, the founder and son own 11.2%. The founder is tendering a small bit, his company is tendering its shares, the family is tendering a lot more (or agreeing to sell afterward). The founder and his will own 10.1% of the shares out post-deal and that will get them 40% of the ownership of the Buyout Entity. Bain will own the other 60%.  This is yet another slightly offensively cheap MBO. Investors need to understand this will only continue. There are very specific reasons why this kind of structure works for inheritance/estate and succession planning. I expect this trend to only accelerate from here.

  • It is at a 39% premium to “undisturbed” and the price is just off a lifetime high close. That is painting the best picture there is for this deal.  The Cash Flow Return on Equity Check here is very, very high. The implied IRR to the buyers is VERY, VERY high. Some people may get upset.  Is it fairly priced? No.  Can they block it? Probably not. That would be difficult. 
  • This will trade very tight. Travis would buy just below terms. Someone might get upset and try to push for a bump a la Nichii Gakkan. That had a similar goal and similarly offensively high purchaser IRR. It also had weak governance and weak adherence to the METI Fair M&A Guidelines.  Travis doubts this one has the room for a bump though. Someone would have to be aggressive and public quickly. I simply think a block here is difficult. Not numerically impossible, but difficult. 

Allied Properties (H.K.) (56 HK) 

Back on the 20 April, Allied Group Limited (373 HK) (AGL) made an Offer for 75%-held APH, by way of a Scheme, at $1.92/share (cash), a 34.2% premium to last close. The Offer consideration was Final, and would be split between a $0.42/share Scheme Consideration and a $1.50 Scheme Dividend.  The Scheme Doc was despatched on the 19 June. The Court Meeting was held on the 15 July and the resolutions to approve the Scheme was approved. Shares continue to trade until the 14 August (inclusive). Cheques were supposed to be despatched on or before the 8 Sept. Then something went awry. 

  • The sanctioning of the Scheme has now thrice been delayed by the High Court. At the last session on the 7 September, submissions from APL were made to the Court “whether the Scheme was approved by a majority in a number of APL Shareholders present and voting in person or by proxy at the Court Meeting“. Huh? The headcount test doesn’t apply to Hong Kong-incorporated companies like APH.
  • What’s going on? The short answer is – I don’t know. Deferring the hearing thrice would suggest, to me, something was “off”. Perhaps the SFC received a complaint of voting irregularities or hidden controller-votes in the float? 
  • I assume all is okay and sanctioning will be forthcoming within a week or so, pushing the payment date out to late September. It is probably a tad premature to start making a grey market in APH …

(link to my insight: Allied Props (56 HK). Stalled At The Finish)

Hexaware Technologies (HEXW IN) (Mkt Cap: $1.7bn; Liquidity: $6mn)

On 3 September, Hexaware announced that the Exchange had granted In-Principle Approval the day before. Hexaware’s Public Announcement went out on the 3rd.  The completion of the Despatch of the Offer Letter was announced on 6 September. The Reverse Book Build Auction will open on the 9th of September and close on the 15th.  The last possible day to announce a counter-offer would be the 17th of September. Settlement would be expected to be the 29 September. 

  • The Reverse Book Build Auction is about to start and while share prices have gained over the last three months since the announcement, seen against 31 December 2019, or against the last quarter or half of 2019, or against the past three years, Hexaware shares have not outperformed its peers despite the possibility of a takeout. 
  • On a fundamental basis, Hexaware is not over-priced compared to its peers, local or global.  To get to the same average or median price/EV metric, Hexaware’s price would need to be 13-22% higher (i.e. INR 460-496). To get to a 20% premium to comps, it would have to be INR 550-595.  To get to a”healthy” Exit Multiple (say 2.4x Revenue, 14x EV/NTM EBITDA, or 22x PER) would mean getting to INR 500+/share. 
  • Travis thinks there is upside. He’d still be long and I’d buy more. You have a few days. On a fundamental basis, he does not see a lot of downside warranted. The stock has not materially outperformed its peers on price, or underperformed its peers in earnings growth expectations.

(link to Travis’ insight: Hexaware Technologies Reverse Book Build Auction – It’s On)

In Daelim Industrial Divestiture: Terms & Trading Situations (1P Diversion), Sanghyun Park discusses Daelim Industrial (000210 KS)‘s three-way demerger plan.

Doosan Heavy Industries & Construction (034020 KS) announced a major rights offering worth ₩1.3tn ($1.1bn), representing 32% of its total market cap of ₩4.1tn. The expected rights offering price of Doosan Heavy Industries is ₩10,700 , which is 34% lower than the current price of ₩16,100. The expected rights offering price of Doosan Fuel Cell is ₩34,200 , which is 42% lower than the current price of ₩59,300 . More info in Douglas Kim‘s insight: Doosan Heavy Industries & Doosan Fuel Cell (Rights Offerings of $1.1bn & $0.3bn).

Sembcorp Marine (SMM SP) reported the Results of the Rights Issue.  Sembcorp Industries (SCI SP) shareholders are going to get a lot of it. Today Sembcorp Industries confirmed the distribution to be 4.911 shares per 1 share of Sembcorp Industries held (subject to minor rounding differentials). Former minority owners of SMM get 11.7% of the company.  SCI minorities get 35.3%.  Other punters who bought the SMM shares get 10.0% of the company. Together, those who wanted to own new shares and put their money down total about 18% of the company. The rest own it because they owned it before and hadn’t sold, or get it from SCI. SCI at S$1.92/share is CHEAP. The SMM Rights Shares started trading on 11 September. Link to Travis’ insight: Sembcorp Marine Rights Issue Results : Looks Like a Scheme of Introduction

STUBS

I see the HSBC NAV discount at ~53% – a one-year low – versus the 12-month average of 35%. I’ve simply de-consolidated Hang Seng, and netted off associates (Bank Of Communications Co H (3328 HK) and Saudi British Bank (SABB AB) ) to arrive at my stub ops. It’s not a strong stub – the stake in Hang Seng accounts for 21% of HSBC’s market cap.  But the long-term implied stub (netting all listco investments) to de-consolidated/net book is at a multi-year low of 0.38x. vs the long-term average of 0.85x.

  • Political neutrality is a delicate line to walk, with allegations concerning  Huawei, US-China tensions, and Hong Kong’s new security law, all adding to a “challenging situation”  as HSBC’s Chairman Noel Quinn put it – plus the added fallout from COVID-19 and the cessation of the 4Q20 dividend as directed by the BoE.
  • HSBC reports ~50% of revenue from Asia, ~30% from Europe, and ~10% from North America. But HSBC makes in excess of 90% of its profits from Asia, especially from Hong Kong. Perhaps HSBC should be broken up, enabling HSBC to return to its root and focus on HK, China & Asia, and take on the slogan “Asia’s Local Bank”. 
  • From a fundamental angle, HSBC appears to have overshot to the downside. Since the stock market low in late March of this year, the market is assigning HK$232bn (US$29.7bn) LESS for HSBC’s unlisted stub ops. HSBC looks cheap here – I see 35% upside if bringing the implied stub level back to the 12-month average. 

(link to my insight: StubWorld: Walking The Fine Line With HSBC

Intouch Holdings PCL (INTUCH-R TB) / Advanced Info Service PCL (ADVANC TB) 

Athaporn Arayasantiparb looks into Intouch Holdings (INTUCH TB), ex-Advanced Info Service (ADVANC TB). After all, Intouch owns Invent, the largest venture capital firm in Thailand. Reality Check XXVI: How Much Are the Other Intuch VC Investments Worth?

M&A – EUROPE/UK

Tiffany & Co (TIF US) (Mkt Cap: $13.9bn; Liquidity: $185mn)

In a very brief press release, LVMH said it will not be able to complete the Tiffany acquisition, in compliance with a directive from the French European and Foreign Affairs Minister to defer the merger. LVMH also said Tiffany had undergone a Material Adverse Affect (MAE). In a strongly-worded, detailed response, Tiffany said it has no choice but to file a lawsuit to enforce the Merger. LVMH said it would lodge its own lawsuit. But, oddly, will still lodge its EU submission. 

  • There are some fighting words on both sides of the Atlantic. Did LVMH procure the letter? Was the letter a directive or advice?  Doesn’t the US tariff sanctions have zero bearings on LVMH – in fact, buying Tiffany would help it to diversify its geographic footprint? Can a pandemic trigger an MAE? WAs LVMH in non-compliance with respect to antitrust filings?
  • The MAE is somewhat opaque and open to interpretation – which is why MAEs are not often triggered, and considered watertight without a specific carve-out to hang your hat on. It is not at all clear the merger can be unwound by LVMH due to the pandemic. Clearly Tiffany believes there is no force majeure. And unlike in Metlifecare Ltd (MET NZ), where the target had a strong hand but opted to compromise to expedite proceedings, LVMH/Tiffany is a much bigger deal, one in which Tiffany is unlikely to concede/negotiate.  
  • The Trade?  I like Tiffany’s chances of getting this deal back on track. And at the full Offer price of US$135/share. I recommended getting involved at US$114/share.

(link to my insight: LVMH/Tiffany: In The Rough. Acts of God and Legal Restraint)

CaixaBank SA (CABK SM) and Bankia SA (BKIA SM)  announced that they were having conversations with the aim to merge both financial institutions (link to Bankia release). Due-diligence is being carried out. Both entities have recent experience in integration processes (CaixaBank acquired Banca Cívica and Banco de Valencia, whilst Bankia acquired Baco Mare Nostrum, and prior to that, CajaMadrid acquired Bancaja). This operation is in a fact a takeover of Bankia by CaixaBank. The operation has the blessings of the Bank of Spain, the European Central Bank and the Spanish Government. The parties are currently negotiating this ratio and the takeover premium for Bankia’s shareholders. More info in Jesus’ insight CaixaBank – Bankia Negotiations:La Caixa, Approvals, Badwill, Exchange Ratio and Synergies.

SIX Group has now communicated it had reached 95.315% of Bolsas Y Mercados Espanoles Sh (BME SM)‘s shares. SIX will now ask the suspension of trading of BME’s shares to occur after closing on 14 September and will squeeze-out the remaining shares on 14 September (at EUR 32.98 per share).More info in Jesus’ insight Bolsas Y Mercados – SIX Group: Squeeze-Out.

In  IAG’s Jumbo Rights Issue Takes Off, Jesus Rodriguez Aguilar discusses International Consolidated Airlines Group (IAG LN)‘s rights which were approved at the AGM on 8 September. The funds -EUR 2,741 mn (GBP 2,491 mn), c. 63% of its current market capitalisation – will be used to strengthen the balance sheet and reduce debt (increasing for solvency). This approach rules out state aid, as has happened with Lufthansa or KLM-AirFrance. Qatar Airways (25.1% holding), has irrevocably undertaken to subscribe for its pro-rata entitlement. The right issue would be expected to be completed by the end of September.

TOPIX INCLUSIONS!

Medpeer Inc (6095 JP)(Mkt Cap: $0.9bn; Liquidity: $36mn)

TSE Mothers-listed Medpeer announced (J-only) after market close today it had received approval to move to TSE1 as of 15th September 2020.  TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 29th October 2020. 

  • On both LTM and NTM bases, Medpeer’s EV/Revenue, EV/EBITDA, and PER multiples are much higher than the estimated means and medians for a selected group of peers which included other companies operating similar knowledge-sharing platforms.  More importantly, in its full-year presentation in December 2019, the company set a target to reach a market capitalization of over JPY50bn in FY09/20. At present, the company’s market cap is ¥96bn – almost double. This seems like a good reason to be cautious. 
  • Pure “TOPIX-Inclusion” Trade – AVOID: This seems like very low-impact event and although this event might have not been highly anticipated (due to long listed history and a lack of pre-event signals such as equity offerings) Janaghan feels the stock has overheated in recent months. 
  • Long-term Fundamental Angle – Bullish on prospects: Although Janaghan is not particularly excited by the TOPIX Inclusion event, he feels the business model is quite interesting. In the long term, stocks with comparatively larger market cap and better liquidity (than typical TSE1 promotion candidates) like MedPeer are also more likely to attract more analyst coverage and/or investor attention. At Forward EV/EBITDA of 50+x, this is “cheap” compared to its largest competitor M3 Inc (2413 JP) which trades at 80x. This is a covid-19 residual effect and it is not clear that is anywhere near the right price, HOWEVER, stocks like these can go from super-expensive to even more expensive on sentiment.

(link to Janaghan’s insight: TOPIX Inclusion (6095 JP): MedPeer Inc)

TSE’s LISTING CRITERIA REVISION

The only really important thing for the vast majority of institutional investors in Japan is how it changes the listing requirements for TSE1. Most people will not care about the listing requirements for MOTHERS and small caps loosening, or the governance hurdles going up. Those are generally salutary.
  • Travis expects the public comment to come up with little new or of note. 
  • He expects the only major change would be to clarify that Continuing Listing Requirements might be different from Initial Listing Requirements. It would not make much sense to exempt large companies from getting demoted immediately if they have negative equity in one year. That usually requires a “special loss” of some magnitude. Getting back that loss so that one meets the two-year requirement of JPY 2.5bn in profit over two years seems like a tall order, unless there is a grace period. Even with a grace period, it seems odd to allow grace periods which are then broken, then another grace period is applied, then met, then broken again… 
  • Unaddressed in this is the TSE’s ability to create derivatives on the TSE STANDARD section which will be important. Access to the style bias itself would be highly valuable, and the ability to create borrow baskets would be quite important. 
  • Longer-term the really big change will be the availability of borrow in what are currently the bottom 1000 or so names in TOPIX. 

PAIRS

In Japanese Household Goods Pair Trade: Let The Lion Pounce As The Pigeon Lands, Oshadhi Kumarasiri concludes that all things considered, with a target Pigeon Corp (7956 JP)/ Lion Corp (4912 JP) price ratio of 1.7x, a Long Short pair trade between Lion and Pigeon could yield about 30% in market-neutral returns.

INDEX REBALS

Sensex Index Rebalance Preview. At the current time, Brian Freitas see a high probability of Dr. Reddy’S Laboratories (DRRD IN) being included in the index, and of Oil & Natural Gas Corp (ONGC IN) being deleted. Depending on movements in the stock price from now to end October, Britannia Industries (BRIT IN) could also be included in the index, while Tata Steel Ltd (TATA IN) could be deleted.  Sensex Index Rebalance Preview: Early Look Sees One Change, Maybe Two

China STAR Board. If the market participants and FTSE  Russell choose to include the STAR market stocks into the indices, Brian sees around 76 of the 170 STAR Board listed stocks being included in the FTSE Emerging Market All Cap China A Inclusion Index. We do not see any stocks making the cut to be included in the FTSE China A50 Index (XIN9I INDEX) in the December review, but Ant Financial (1051260D CH) could be included in the index in the March 2021 review if it lists prior to 20 November this year. China STAR Board: Potential Inclusion in FTSE EM and China A50 Indices; GEIS Inclusion Needs Connect

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

33.56%
Yuet Sheung
Sinopac
Golden Throat (6896 HK)
17.43%
BNP
HSBC
21.41%
Haitong
Outside CCASS
23.98%
CIS
Morton
32.78%
Citi
China Merch
Time Intercom (1729 HK)
10.00%
Xin Yogan
China Ind
29.99%
Chong Hing
Get Nice
10.00%
Soochow
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

29.76%
BNP
Outside CCASS
17.26%
ML
Outside CCASS
Jianzhong (589 HK)
10.67%
China Ind
Outside CCASS
China New Energy (1156 HK)
16.82%
Silverbricks
Outside CCASS
Macau E&M (1408 HK)
11.89%
Kingkey
Outside CCASS
11.17%
HSBC
CCB
Source: HKEx

Before it’s here, it’s on Smartkarma