OFAC clarifies the clarifications of Its clarifications. NYSE walks back the walk-back and delists the Chinse Telco ADRs after all. Despite the undoubtedly countless hours spent by index providers dealing with the Treasury Department and OFAC, OFAC managed to confuse everyone.
Pre-cons can be waived, 50% acceptance condition with 47.41% in the bag. But Car Inc (699 HK) trades wide to terms as investors avoid second-guessing an opaque regulatory review process and an oddly consistent seller.
The partial tender Offer for Pressance Corp (3254 JP) looked pretty yummy at the time of the initial announcement. It still does.
If you were long the ADRs and wanted to be able to get out of the stocks but want to wait until later, Travis Lundy expected you would need to convert the shares to their underlying Hong Kong shares prior to January 11 so that you are not accused of “transacting” in the shares after 11 January. The rule is that US Persons cannot transact after 9:30am 11 January, which would mean selling on Monday 11 January Hong Kong time would be within the rules, but it appears MSCI and FTSE have decided to play it safe and delete them as of this past Friday’s close.
Travis’ insight of 5 January 2021 titled China Mobile (941 HK): Probably Too Cheap was predicated on his understanding that the OFAC list of subsidiary tickers would be the final arbiter. That understanding was based on the clarifications made in the FAQs in late December, then on 4 January, and on his confidence that the OFAC had been in communication with the global index providers who are generally better equipped at dealing with this kind of thing than are exchanges.
Longer-term, for European, Asian, etc funds who do not need to deal with the EO 13959 or for other funds, that means that there could be a buying opportunity coming imminently, especially on China Mobile. Short-term, it means the shares are likely to go down.
Travis would not rule out the possibility of political interference in the endgame here. If you NEED to sell or NEED to close out a position, sell and take the lumps. There is no good news here except for people who really like a good deal. The other “saving grace” to this situation is that the shares of China Mobile will be cheap at day end, and the index selling will be done.
After first announcing the possible spin-off and separate listing of Tianneng Battery Group (“TBG”) on the 9 November 2018, (“TPI”) announced on the 15 December that the proposed A-share listing on the Star Board had been approved by the CSRC. An Offer Price of RMB41.79/share has now been announced. That is 36% higher than the Indicative Offer Price of RMB30.65 flagged in the June 2019 prospectus. Listing is expected to take place between mid-late Jan, according to my conversation with TPI’s IR. TPI was up 204% in the past year and 35% since the CSRC approval. The relatively lacklustre share price response to TBG’s pricing would indicate TPI’s pricing is full.
Pricing surprise? No. The indicative price of RMB30.65 in June of last year was roughly based on FY18 earnings and preliminary results into the 1H19. TBG’s LTM net profit of RMB1.8bn is 49% above FY18’s profit. A 36% bump in the IPO price is well within reason. Media are reporting the IPO is 3,901x over-subscribed.
After the spin-off, TBG will account for ~96%+ TPI’s NAV – applying the indicative price of RMB41.79 for TBG, and 10x earnings for the stub ops. The indicative holding in TBG accounts for 198% of TPI’s market cap.
In my prior insight, I recommended buying TPI on the expectation it retests its July high, or 31% upside, as it as then. It has achieved that. If you were already in, I’d be taking money off the table.
When NTT announced its takeover of NTT Docomo Inc (9437 JP), the immediate market reaction was to sell. This was seen as a sign that NTT was going to “take responsibility” for giving money back to customers. Travis wasn’t sure why. Spending ¥4trln to buyback ¥200bn of minority interest net income was the equivalent of an enormous buyback. And given that doing so did not reward the government, which still holds more than one-third of NTT, in any way, NTT had to continue to reward the government through returns to shareholders – i.e. dividends and buybacks.
When shares fell, NTT in November made clear that it was a) going to change things around at the NTT Docomo subsidiary – the CEO was out even before the Tender Offer ended – and b) was going to continue providing returns to shareholders. It announced a buyback on 8 November which was going to have big impact. Investors who had to sell NTT Docomo in the Tender Offer will now have to spend their money elsewhere. That could come to NTT.
NTT will be buying stock reasonably aggressively – 12.3% of trailing ADV on average – over the next three months, with the number being more like 16-18% of eligible volume (NTT can rarely buy the open, and cannot participate in the last 30 minutes of the day).
NTT is cheap. NTT is the red dotted line in the charts above. Street analysts aren’t there yet. The trade is to be long NTT vs KDDI Corp (9433 JP) and vs Softbank Corp (9434 JP). Travis prefers Softbank Corp. The buyback impact is lower, the room to expand dividends is higher, and forecast earnings for Softbank Corp may see some ructions after the acquisition of LINE lowers Z Holdings EPS.
Following the Luckin Coffee (LK US) debacle and the ensuing fallout (discussed in Car Inc (699 HK) – Needs A Hire Purpose and Car Inc (699 HK): MBK’s Firm Offer), on the 13 November MBK tabled a pre-conditional general cash Offer of $4.00/share for Car, a 17.99% premium to last close. The pre-conditions to the Offer may be waived, either in whole or in part; the Offer is subject to only a simple merger case by SAMR; the UCAR SPA has now completed; and the Offer is subject to a 50% tendering condition – with MBK holding 47.41% at the completion of a SPA with UCAR, together with irrevocables. This looks done. Yet, the gross spread has steadily widened since the 28 December. What gives?
A simplified SAMR review has an ‘average’ review period of 30 days, which has come and gone. There was also an article out there that eHi Car Services Ltd (EHIC US) believes MBK’s acquisition of UCAR’s stake in Car was a breach of an earlier contract.
Warburg/Amber Gen has been gradually reducing their stake, from around 14.76% of shares out at the time of MBK’s firm Offer, to 7.1822% as of the recent SFC announcement. Warburg/Amber Gen was willing to sell to UCAR for $3.10/share back on the 2 July last year. But reducing every day on 1/3rd volume does make investors nervous – do they know something?
I believe this deal remains on track to complete, and well ahead of the pre-con long stop date. I previously expected the pre-cons to be wrapped up within 2-3 months of the Offer announcement, as the regulator puts this fiasco behind them. MBK also has an excellent completion rate on firm deals. Some investors may prefer enter post-SAMR approval. I would buy here.
In December, it was reported that JPI was considering an enormous buyback of its own shares from Japan Post Holdings (6178 JP) so that JPI can get JPH under 50% ownership. Travis wrote about it VERY bullishly in Huge Japan Post Insurance Buyback Mooted – Decks Cleared. Time To Buy. A couple of days later on the 25th of December, news emerged that the JPI Board of Directors had decided to postpone the consideration/decision of buying back shares from “by year end” to a later date because of the market reaction to the news leak. The key here is that apparently, if the stake held by Japan Post Holdings drops below 50%, new product launches move from an “Approval System” to an “Advance Notification System” under the complex rules which govern the Japan Post Insurance product offering suite, the Japan Post Holding post-privatisation management by regulators, and the insurance business in general.
The shares, which had popped 10% on the original news, fell back somewhat. Those who contacted Travis about this situation know that he has continued to be bullish. The shares are up 6.2% from the close of that first day’s news.
There are good reasons to expect JPI will need to buy its shares back from JPH. It may have to rely on placing some of them to outside investors, but Travis expect that IF the reason to place them is to get JPH under 50% so that the company can move to an Advance Notification System for selling new products rather than a pre-approval system based on restrictions, there would be plenty of demand, but the placement of the article and the selling of subordinated kikin debt suggests JPI is quite willing to take on leverage in the process.
There should be a TOPIX FFW upweight announced on the 8 Jan after the close. Travis sees this at 27mm shares to buy (25.3mm for TOPIX plus a little extra for JPX Nikkei 400). He sees that being worth roughly 21 days of volume to be executed over 13 trading days between today’s close and 28 January at the close. If there is overhang, expect it comes at ¥2375/share and above.
CMEC shares were suspended ahead of trading this past Friday “pursuant to The Codes on Takeovers and Mergers which constitute inside information of the Company”. CMEC is incorporated in the PRC, and as such, there are no rights to compulsorily acquire shares or to require an Offeror do so. The only mechanism available to privatise is via Merger by Absorption, incorporating a Scheme-like vote for the H shares. Such an Offer may or may not require an additional tendering acceptance condition. CMEC’s ultimate controlling shareholder is state-owned Chinese National Machinery Industry Corporation, also known as SINOMACH, which holds 77.99% of shares out, via CMEC’s domestic shares. SINOMACH holds no H shares.
CMEC is up 56.4% since the 29 December, on larger-than-average volume. Funny that.
The most interesting facet attached to CMEC is that it has (adjusted) net cash of HK$8.8bn as at 30 June 2020, compared to market cap of HK$10.5bn. Should a firm offer unfold, it is doubtful it will fully reflect the underlying business in addition to that cash pile.
In Pressance (3254 JP) Partial Tender – YUMMY! I looked at the partial tender which was being launched by the much larger Kanto-based Open House (3288 JP) on Kansai-based Pressance, a partial tender offer combined with a third-party placement by Pressance to Open House after the Tender Offer designed to get Open House to a 65% ownership level in Pressance. Travis is still inclined to view this trade positively, and believes pro-ration will be on the order of 80% plus or minus a little bit. He expects that investors do NOT want to be short this stock on the back end, therefore tendering from the short side hoping to buy back less expensively is not a great idea.
Since this trade was announced, growth has underperformed cyclicals and large caps in Japan, and it appears that foreign investors have picked up the pace of buying. That should tend to favour other stocks, but real estate as a cyclical play has a lot of value, and if the Biden White House is going to push for greater deflation, and more vaccine uptake slowly increases, then Travis would expect further extension of growth in this particular segment of the real estate market.
The stock on the back end is not expensive, and a fast-growing company has decided in the space of less than a year that it wants to own control of Pressance, with the increased purchase coming 9 months after the first purchase and through a global pandemic. It obviously likes what it sees.
Travis would want to be long the back end, and the best way to be long the back end of a stock like this in a situation like this is to be long the front end and tender one’s shares. If one sells everything, one has made a decent short-term profit, and if one sells “only” 80%, one has bought at a cheaper price on a net basis than the new owner has. And as it will be consolidating the earnings of Pressance after this purchase, it does not want to see it suffer just to buy the other 35% cheaper later.
Coming just two months after the FSC had rejected a proposal by Thai tycoon Charoen Pokphand’s holding company to purchase the 24.09% stake in Jih Sun held by Hong Kong-based Capital Target Limited, it initially looked to me like the Fubon Financial Holding Co (2881 TT)announcement of a low-premium Tender Offer at NT$13/share to purchase Jih Sun Financial, which came complete with regulator pre-approval, was likely wrapped up as a nice package to get Shinsei and Capital Target out without requiring other minorities to sell.
A couple of days afterwards, Fubon noted that it had not made any contact with either of Shinsei Bank (8303 JP) or Capital Target Limited prior to making the offer, but noted that it had wanted to purchase Jih Sun to raise its market share of Taiwanese stock market turnover (from 5.54% to 9.13% by adding Jih Sun’s 3.59%). It noted that it would issue new shares – 60% common shares and 40% preferred shares – in order to finance the acquisition.
Jih Sun has now announced the result of its board consideration of the Offer after having obtained the requisite fairness opinions. Jih Sun noted that it had not discussed the Tender Offer with Fubon prior to Fubon making its offer, and also noted that the accounting firms which had been engaged to provide fair value opinions found that a fair value per share estimated range was NT$13.89-15.71/share, and when looking at the “market price method”, the other accountant had suggested the range NT$9.63-16.93/share against the NT$13 Offer.
The news around this situation suggests Travis’ analysis of who owned Capital Target may have been wrong – that a different originally offshore Chinese person may be (or have been) the controller of Capital Target.
Still, Travis would be long Jih Sun here for the Tender Offer success and possible bump. He would also be long Shinsei for the substantial release of capital and some profit enabled by the sale of a 35% stake in Jih Sun, as discussed in 2021 High Conviction – Shinsei Bank.
Subsequent to the demerger/spinoff late November (discussed in 2021 High Conviction: LG Corp’s Decade-Low Stub), LG Corp has marginally narrowed its discount to NAV, yet still exhibits a decade-low implied stub value – net of all key listed holdings. In LG Corp: Updated SoTP Valuation Analysis & Timing of Key Upcoming Catalyst Events, Douglas Kim provided an update on the timing of key events, such as the LG Energy Solution IPO and the possibility of a dividend payout increase this quarter. The pushback. US-headquartered Whitebox has come out with a statement saying that the “spin-off does nothing to address LG’s most pressing issue, which is the unprecedented discount at which the company trades relative to its assets and, accordingly, inferior return to shareholders.” Whitebox owns ~1% in LG Corp. Like Douglas, I consider the current discount level for LG Corp to be unjustified. You can use single stock futures to sell LG E, LG H&H, and LG Chem. Or there are pockets of borrow for each at select brokers.
Bull Dog announced (Japanese only) that it had been accepted to move its shares from TSE2 to the TSE’s First Section on 14 January. That means it will be included in TOPIX some 6 weeks later. This is a small cap and illiquid stock, but the inclusion trade parameters are super attractive. I estimate the inclusion to be JPY 2.7bn (at last price) and between 20 and 140 days of volume. The last couple of days have seen very high volume. Based on that, it might be as low as 20 days of volume. Based on 3mo ADV, it is 140 days.
At 10x trailing EBITDA and 22x earnings, the shares are a bit more expensive than most “value” names but they are not expensive compared to most food names in Japan. The shares are at a 12-year high. There is some semblance of “overheating” in the shares, but the huge impact should overwhelm near-term excess volume.
Welbe, which provides employment support services for people with disabilities, announced they had received approval to move from the MOTHERS Section to the First Section of the Tokyo Stock Exchange as of 14th January 2021. TSE1 reassignment triggers inclusion into the TOPIX Index and the Inclusion Event can be expected to be at the close of trading 25th February 2021.
Although the estimated inclusion parameters are attractive there could be a substantial overhang. Janaghan Jeyakumar estimates the Inclusion quantity to be 1.1mn-1.3mn shares. This translates to an Inclusion Size of ¥1.5-1.8bn and an Impact of 5-6 days of volume based on 3-month ADV. This event is unlikely to be a surprise to the market as the company had already explicitly mentioned that they were working towards a TSE1 promotion in November 2020.
There are no obvious red flags regarding overvaluation vs peers. The current share price translates to EV/EBITDA (LTM) and PER (LTM) multiples of 19.9x and 34.0x respectively. These are somewhat in line with our estimated averages for a basket of peers. Furthermore, Capital IQ consensus projections translates to EBITDA and NP CAGRs of 16.9% and 17.4%, respectively, for the 3-year period ending March 2023E. In addition, the shares have declined since the company announced that they were working towards a TSE1 move.
Janaghan would be Bullish at or below the current price (¥1,386). Usually, those who purchase shares in the pre-event offerings do so with an intention to flip them at a small profit in the run up to the Inclusion Event potentially creating a overhang close to the Issue Price. If the share price pops well above the Issue Price (¥1,416) in the opening few days of trading, he would not chase this event.
On 29 December, the Boards of Unicaja Banco SA (UNI SM) and Liberbank SA (LBK SM) approved the merger of both entities. Unicaja will control 59.5% of the resulting entity, and Liberbank the remaining 40.5%. Unicaja + Liberbank will have combined assets pro-forma over €108.9 bn and will become the fifth-biggest bank operating in Spain. The exchange ratio is 0.360845 Unicaja shares per Liberbank share. This merger has all the chances to succeed, and should close in six to seven months. According to market consensus, it is a win-win textbook operation. In Liberbank – Unicaja Agreed Merger, Jesus Rodriguez Aguilar recommends Long 1.0 Liberbank/short 0.360845 Unicaja shares.
On 4 January Entain (ENT LN)confirmed that it had received proposals from MGM Resorts International (MGM US) regarding a possible offer. The last offer has been 0.6 MGM US x 1 ENT LN. By using the median of comparables 14.6x EV/Fwd EBITDA, the implied valuation for Entain would be 1,537p. This was 11% above MGM’s offer at the time of Jesus’ insight. In MGM’s Prospective Offer for Entain, he is long Entain. Entain has rejected the bid, saying it “significantly undervalues” the company.
M&A – US
In SpinTalk: Multiple Envy Propels XPO Logistics’ Break-Up Move To Get Its Mojo Back, Robert Sassoon discusses Xpo Logistics (XPO US)‘s management proposal to break up the company into two, one a Logistics company, the other a Transportation company, on a tax-free basis to its shareholders. The market has responded warmly to the plan, but the shares still reflect a wide valuation gap to purer play peers whether in the logistics segment or in the transportation category. This leaves the prospect of substantial value upside over the next 12 to 18 months, which will be all the greater should XPO at the same time deliver on its goal to deleverage its balance sheet.
This update is the latest in a series dating back to Legend’s Conversion of Domestic Shares in June 2018. To date, 20 companies have sought approval to convert their domestic shares into H shares, which would then be eligible to be listed and traded on Hong Kong’s stock exchange. 13 companies have now been given CSRC and Hong Kong listing approval to convert such shares. Only two of those have seen any noticeable movement in the converted shares. In the past four months, two companies have withdrawn their application to convert their domestic shares, citing further improvement in the rules and regulations of the domestic capital market, among other factors.
Full conversion provides the means for (mainly state) investors to exit or reduce their holdings, and improve the liquidity of the listed companies. It may be viewed as an overhang on those companies given the go-ahead to convert. But permitting a company to convert its domestic shares is ostensibly an endorsement from higher up as to the existing internal framework and operations of the company. Sentiment-wise, that should positive.
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.
It values Enlabs at around SEK 2,796.98 mn (c. £250 mn), for an implied EV of SEK 2,820.39 mn.
This represents c. 3.4x EV/Fwd Revenue, 14.3 EV/Fwd EBITDA and 17x P/Fwd EPS, in line with comps.
Enlabs shareholders holding in aggregate around 42.2% of the total number of Enlabs shares have irrevocably undertaken to accept the offer. Minimum acceptance condition of 90% plus one share (necessary to squeeze out and delist). Entain therefore needs c. 82.7% of acceptances from the remaining shareholders, which is quite high.
Entain Entain is buying market share and a platform for expansion in the fast growing Baltic region and into Ukraine and Belarus.
By using EV/EBITDA median comps, the implied equity value is SEK 41.59 per share, 3.9% above Entain’s offer. On this basis, the offer looks cheap, but not outrageous.
With 42.2% irrevocable undertakings, and no likely interlopers, the offer is highly likely to succeed.
The shares closed at SEK 40.8, 0.5% below the previous close, but still 2% above the offer price.
I would wait for the share price to weaken below the offer price before setting up the spread.
Entain is also very upbeat about their own trading statement (21 January).
(This Insight is labelled bearish as I do not see a trading opportunity until the share price of Enlabs drops below the offer price, a sweetened offer is not very likely, in my view).