Daily BriefsEvent-Driven

Event-Driven: BYJU’S, Hansoh Pharmaceutical, Li Auto Inc., Sakai Ovex, Japara Healthcare, Nature Home Holding Company and more

In today’s briefing:

  • Can After Tremors of the China Tutoring Sector Shakeup Impact India EdTech?
  • As The Dust Settles – Potential Index Changes to the FTSE China 50/A50 & HSCEI
  • Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower
  • Sakai Ovex MBO Reloaded – Up 27% from Last Weak Bump But Still Cheap
  • Japara Healthcare (JHC): Calvary Takes Charge
  • Nature Home’s Privatisation Bid

Can After Tremors of the China Tutoring Sector Shakeup Impact India EdTech?

By Devi Subhakesan

China-based after-school tutoring stocks saw the bulk of their equity value evaporate as authorities decided to turn the regulatory heat on this sector and also requiring the players to operate as non-profits. As the after-tremors of this move reverberate across the investment space, are the multibillion-dollar valuations of India’s rapidly growing edtech players at risk? Well-known private equity players ranging from Sequoia Capital to Tiger Global have invested in India’s fast-growing online education players – notably, BYJU’S (1391510D IN)  (valued at USD16.5 Bn) and Unacademy (valued at USD 2Bn) amongst others.

In this insight, we discuss if India’s rapidly growing online education sector is vulnerable to regulatory risks similar to that faced by after-school tutoring companies in China and how this could potentially affect large online tutoring players like Byju’s and Unacademy. We also look at leading investors in this space – and how they could be impacted.

As The Dust Settles – Potential Index Changes to the FTSE China 50/A50 & HSCEI

By Brian Freitas

As regulations have changed in China, and as the market positions for regulations that could be changed in China, the fallout has resulted in markets selling off with a few sectors firmly in the crosshairs.

What started off with the ‘three red lines’ for real estate companies, the pulled IPO of Ant Financial Services Group (6688 HK) in November 2020 and regulating monopolies in big-tech has spread to the online education industry, food delivery industry, property service companies and the market is bracing for regulation of the medical and pharmaceutical industry.

The rampant selling of stocks that are affected by the regulations or could be affected will have an impact on the upcoming September index rebalances for the FTSE China 50 Index and FTSE China A50 Index (XIN9I INDEX) and the December rebalance for the Hang Seng China Enterprises Index (HSCEI INDEX).

In addition, there will be a lot more mainland China companies that will list in Hong Kong since they will not need to (or will find it easier to) get approval from the Cyberspace Administration of China. That will also have implications for these indices.

In this Insight, we look at the potential changes to the FTSE China 50, FTSE China A50 Index (XIN9I INDEX) and Hang Seng China Enterprises Index (HSCEI INDEX) in the upcoming reviews based on the close of trading on 27 July.

Li Auto (LI US) Dual Primary Listing: HSCI Fast Entry; HSCEI Dec Inclusion & Div Futures Lower

By Brian Freitas

Li Auto Inc. (LI US) has got approval from the HKEX (388 HK) for a dual primary listing. Media reports indicate that the company could raise between US$1bn-2bn in the offering. Based on the XPeng (9868 HK) timeline, Li Auto could list around 6-9 August.

Xpeng (XPEV US) / XPeng (9868 HK) raised US$1.8bn via a dual primary listing earlier this month and Li Auto Inc. (LI US) is following closely behind. Maybe NIO Inc (NIO US) comes next.

We expect Li Auto Inc. (LI US) to get Fast Entry to the Hang Seng Composite Index (HSCI) though, as a WVR security, the stock will only be eligible for Stock Connect once it has completed 6 months of listing plus 20 trading days.

Li Auto could also be included in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December review. This will lead to a further drop in the HSCEI 2022 dividend futures since we do not expect Li Auto Inc. (LI US) to pay dividends in the near future, while the potential deletion is a higher dividend yielding stock.

Sakai Ovex MBO Reloaded – Up 27% from Last Weak Bump But Still Cheap

By Travis Lundy

In early February 2021, the CEO of Sakai Ovex (3408 JP), who owned very few shares, and an activist investor decided to launch an MBO for the company at ¥2,850/share. 

The stock had been trading cheap, and the price was “high” but the price was wrong. It needed to be 40% higher – at a minimum – in my opinion. I wrote a detailed breakdown of why I thought so in Sakai Ovex MBO – Wrong Price (And the Bidder Knows It). The management forecasts had been low-balled and I called that out, and the equity affiliate earnings somewhat ignored. Get rid of the financial assets and the Offer Price was at negative enterprise value.  

My conclusions on 9 February were as follows:

Not long after that, the bidders offered a very weak bump to ¥3,000/share, discussed in Savai Ovex MBO – A Very Weak Bump. This was not enough. The shares traded above terms and revised terms, only falling below when the Tender Offer went ex-. 

In the end, the bid was not successful. They ended up missing by 3% of the shares. BUT…. in the process, they gained an activist in Murakami-san, who did indeed pop in to own 6.9%, through City Index Eleventh, discussed in Sakai Ovex Tender Offer Fails But The Stock Gains an Activistafter the Tender failed. CIE later revised their position to 7.93% which meant they were the fulcrum investor to get this deal over the line the next time, and now they own 8.33% according to today’s document.

Since Then…

The shares have traded at or around ¥3,000/share ± ¥100/share for the past three months, trading in lower-than-pre-announcement volumes.

Earnings were decent when reported in May. And the forecast for the year to March 2022 turned out to be substantially higher (revenues nearly 10% higher than the management forecast included in the Tender Offer documentation, and OP 35% higher).

And today we have new news.

The Bidders are back. And now City Index Eleventh is joining them. It pays to be the fulcrum investor. 

And now they are bidding ¥3,810. Which is still cheap. 

Much more below the fold. 

Japara Healthcare (JHC): Calvary Takes Charge

By David Blennerhassett

On the 30 April, aged-care Australian listed operator Japara Healthcare (JHC AU) announced it had received an unsolicited, indicative, conditional, and non-binding Offer from Little Company of Mary Health Care – otherwise known as Calvary – by way of a Scheme, at A$1.04/share.

On the 5 June, Calvary increased the indicative Offer price to A$1.20/share.  JHC’s board concluded it was appropriate to grant Calvary due diligence access.

On the 15 June, the Bolton Clarke Group made a conditional, non-binding indicative proposal by way of a Scheme, at A$1.22/share. The Offer was subject to due diligence, financing, unanimous support from JHC’s directors, and final approval from the Bolton Clarke board. 

Due diligence access, consistent with that afforded to Calvary, was also provided.

JHC has now announced that it has entered into a Scheme Implementation Deed (SID) with Calvary, by way of a Scheme at A$1.40/share. The consideration will be reduced by any dividends paid. 

JHC’s board of directors have unanimously recommended the Scheme, in the absence of a superior proposal and subject to an independent expert concluding the Scheme is fair & reasonable. 

This looks done & dusted. 

Nature Home’s Privatisation Bid

By Arun George

Nature Home Holding Company (2083 HK) manufactures and sells flooring products and customised home decoration products. After market close on Tuesday, it announced a privatisation offer by way of a scheme of arrangement from New Modern Home Limited. The offeror will offer HK$1.70 cash per scheme share. The bid represents a premium of 39.3% over the closing price of HK$1.22 per share on the last full trading day (16 July 2021 prior to the trading halt). 

The key condition precedents are the headcount test along with the scheme approved by at least 75% disinterested shareholders and <10% rejection by all disinterested shareholders. As disinterested scheme shareholders represent 292.1 million shares or 21.20% of shares outstanding, the 10% blocking stake is 29.2 million shares or 2.12% of shares outstanding. No shareholder holds a blocking stake. 

Post-privatisation, the offeror plans to re-list all or part of its businesses in the PRC which while refreshingly honest, may not sit well with some shareholders. Overall, we think the offer price is attractive and that the privatisation bid will be successful. 

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