Daily BriefsEvent-Driven

Event-Driven: CNOOC Ltd, Japan Post Insurance, Datang International, SK Holdings, Suez and more

In today’s briefing:

  • CNOOC – MSCI and FTSE Deletion Looming Along with NYSE Delisting
  • The Delayed TOPIX FFW Rebalance: $32bn To Trade
  • Quiddity Weekly H/A:  Nat’l Team Buys MSCI Deletions, Cyclicals Jump; Avg Trade +0.90%, 55+ Recos
  • SK Holdings: Sum-Of-The Parts Valuation Analysis & Key Catalysts
  • Veolia Steps up Pressure on Suez

CNOOC – MSCI and FTSE Deletion Looming Along with NYSE Delisting

By Brian Freitas

Post the US market close on Friday, OFAC updated the Non-SDN Communist Chinese Military Companies List to specifically name China Mobile (941 HK)/ China Mobile Ltd Spon Adr (CHL US), China Telecom Corp Ltd (H) (728 HK)/ China Telecom Corp Ltd (Adr) (CHA US) and China Unicom Hong Kong (762 HK)/ China Unicom Hong Kong (Adr) (CHU US). More importantly, CNOOC Ltd (ADR) (CEO US)/ CNOOC Ltd (883 HK) / CNU CA was also added to the list.

OFAC also issued a General License that authorizes transactions in entities whose name closely matches the name of a Communist Chinese military company identified in the Annex to Executive Order 13959 but that has not been listed on the OFAC’s Non-SDN Communist Chinese Military Companies List, through 9.30am EST on January 28, 2021.

FTSE and MSCI made announcements that they were reviewing the latest OFAC update and would issue further updates in the event of changes to their indices. In FTSE’s case, the announcement will be made in the coming week.

The timing of the CNOOC Ltd (883 HK) deletion is uncertain at the moment. The stock was not included in the Annex to EO 13959 and the latest date it can be deleted is the close of trading on 8 March, though we expect the deletion to happen sooner than that. Impact is pretty big through pre-positions are already being built up on the stock.

The stock is trading cheaper than its peers, both domestic and international. While there could be further downside in the near term due to active and passive selling, there could be upside once the deletion from the MSCI and FTSE indices is out of the way.


The Delayed TOPIX FFW Rebalance: $32bn To Trade

By Travis Lundy

On Friday after the close, the TSE belatedly released its annual TSE Free Float Weight adjustments for stocks with fiscal year ends in March. Normally this comes out in October, and is executed at the end of October, but for the 2020 Free Float Weight Rebalance, as per an announcement made by the TSE on 22 June 2020, special measures were taken in light of the covid-19 pandemic, and the rebalance was delayed by 3 months. 

There are no major surprises that I see. Some buybacks from the market have led to slightly lower FFW coefficients. Some secondary offerings have led to increases in FFW coefficients. As discussed in Japan Post Insurance Update – Three Reasons To Buy. Any Overhang Slightly Higher on Friday, one of the big names to the buy side is indeed Japan Post Insurance (7181 JP).

For more on the rebalance, read on.

[A spreadsheet of all names and impacts is attached at the bottom of the insight]


Quiddity Weekly H/A:  Nat’l Team Buys MSCI Deletions, Cyclicals Jump; Avg Trade +0.90%, 55+ Recos

By Travis Lundy

This week saw a gentle rebound in Quiddity H/A Share Recommendations (mixed long/short the spreads).

  • Spread momentum was no longer the big factor. The big factors this week were the New Year leading to a) big jumps in spivvy sectors, and b) large selldowns in MSCI deletions of Trump China Military Names and the last-minute deletions of the three China telcos.
  • The National Team / Southbound AGAIN bought the Trump EO names, this week in magnificent size as the MSCI deletions took effect. SMIC (981 HK) and the three names in Industrials (1800 HK, 1766 HK, and 1186 HK) all saw very significant net southbound buying. 
  • Every H-share in a liquid H/A pair in the Energy, Materials, and Utilities space were up. 
  • In addition, the H-shares in Health & InfoTech were up strongly too. 
  • Spreads narrowed in all sectors except Consumer, which saw its average pulled negative due to a wider spread in its least liquid pair. Generically, spreads were tighter everywhere.
  • All four utilities spreads were tighter as all four H utilities gained. It was a party. The discounts in the internationally investable portion (i.e. non-Trump name utilities) are still greater than 50% and could tighten.
  • The fact that the Trump EO China Military names saw huge net buying by southbound, and rebounds in price after the selldown, and the three telcos saw big net buying on Friday before the ADRs pointed up on the last day tells people that there is an effort underway to make the selldowns a success for non-US Person investors. 
  • The flows Friday were telling.

Last week there were 58 delta-neutral spread recommendations which gained 0.90% on average. 

We have 55+ spread recommendations for next week.

The H-Share/A-Share Spread Monitor and Recommendation List is published every weekend for the data ending the last trading day of the previous week. It includes all H-Share/A-Share pairs where the H-Share has a 90-day average daily value-traded of US$1.0mm or more. It shows basic data per H/A spread stock by sector, with H/A Discount, movement in H/A Discount over 5 and 20 days, a 52-week Z-score for the spread, charts with evolution of the H/A spread over the last 20 days, Southbound shares held (mm and %), Net Change in Southbound (Shanghai/Shenzhen combined) shares held (mm), and contribution of Net Southbound Volume to HK-traded volume over the past five days and 20 days, and a chart showing the average sector spread and the individual spreads within each sector over the last three years. 

Trump Executive Order Names

A recent addition is the possible status of H/A-share companies in the monitor which are subject to the Trump Executive Order on Securities Investments that Finance Chinese Military Companies. They are separated into three types (Possible Direct Qualifying Entity, Possible Indirect Qualifying Entity, and 20+%-owned by Qualifying Entity). They are color-coded as below (note that CGN has since moved to co.

For more on the list of Trump names, please see the following insights:

The H/A Spread Market

This past week saw mixed movement in H/A spreads but on average 98 spreads were +0.75% narrower over one week and an average of 1.75% tighter over the past four weeks. Two thirds narrowed on the week. Just under three-quarters have narrowed over the past four.

Consumer Sector

The first sector discussed is Consumer, where liquid H/A spreads widened on average 0.43% this past week. and are now 2.18% wider over four weeks. 

Price movement in the first week of the year was dramatic. BYD (1211 HK) rose 18% in the Hs and similar in the As. Great Wall Motor (2333 HK) and Tsingtao Brewery Co Ltd H (168 HK) were up 11% and 10% respectively in the Hs but only moved just over 1% in the H/A spread. 

BYD and Great Wall Motor are at the narrow end of their 52-week range, but GWM is still reasonably wide and there is a FTSE index event upcoming.

Southbound accounts were decent net sellers on the week, buying Tsingtao Brewery Co Ltd H (168 HK) and Fuyao Glass Industry Group (3606 HK) to 22-23% of volume and net selling Guangzhou Automobile Group (2238 HK) despite it being the auto name to fall in the sector Hs whereas the others rose. 

Last week, I recommended staying long the Great Wall Motor (2333 HK) and Guangzhou Automobile Group (2238 HK) H vs A , and short BYD (1211 HK) H vs A.

Those three trades lost an average of 0.33% on the week with 2 of 3 in negative territory.

For this week’s recommendations on Consumer, and discussion of the Energy, Financials & Real Estate, Health Care, Tech, Industrials, Materials, and Utilities sectors, and all trade recommendations, please read on.


SK Holdings: Sum-Of-The Parts Valuation Analysis & Key Catalysts

By Douglas Kim

In this insight, we provide an updated sum-of-the parts (SoTP) valuation on SK Holdings (034730 KS). There are many moving parts of SK Holdings and it helps to review the main factors that have been impacting its share price. Our base case valuation of SK Holdings is 448,850 won, which represents a 54% upside from current levels. 

We believe that the 6 MOST IMPORTANT FACTORS impacting the share price of SK Holdings are currently as follows:

I. A Big Investment ($1.5 Billion) in Plug Power

II. SK IE Technology IPO

III. Sale of SK Lubricants

IV. SK Telecom’s Higher Share Price Trend

V. Changing values of SK Siltron, SK E&S and other private companies

VI. Changing values of SK Biopharmaceuticals (326030 KS), Sk Materials (036490 KS), SKC Co Ltd (011790 KS), and other public companies


Veolia Steps up Pressure on Suez

By Jesus Rodriguez Aguilar

On 7 January, Veolia Environnement SA (VIE FP)  increased its bear-hug on Suez (SEV FP) by sending an open letter to the Board of Suez on 7 January and appealing to shareholders at the same time.

The offer, which is not formal, values ​​Suez at €11.3 bn, but Suez still considers it hostile and is trying to put pressure, while the French government continues to quietly mediate for an agreement.

Veolia intends to file a voluntary offer at €18 per share – the same price at which it acquired a 29.9% stake from Engie-, which values ​​100% of Suez at c. €11,252 mn, an implied EV of c. €22,180 mn.

  • The price tag for the remaining stake is €7,887.5 mn.
  • This represents a 13.2% premium to the VWAP over the 3 months prior to 7 January, and a c. 8.4% premium to the prior trading session.
  • 3.4x EV/Fwd Revenue, 19.9x EV/Fwd EBITDA and 33.1x P/Fwd EPS (source: Capital IQ consensus).
  • The purchase price will be reduced by any distribution or adjusted to take to account of any capital transaction.

The core of the dispute remains unresolved, and to top it off, there is not yet any agreement between the parties involved as to when that will happen.

Regarding the transfer of the French water assets of Suez to a Dutch foundation, Veolia now has to reverse that move. Veolia could exercise its voting power at the next Suez’s AGM (likely next summer) and replace the Board of Suez. 

Independently of what happens, Veolia will remain a majority shareholder unless it can be bought out at a price higher than €18 per share. The future does not look pretty for Suez’s Board. Both parties should reach an agreement before the AGM.

Recommendation is LONG Suez, TP €18.

  • Suez is trading at a gross spread to the offer of c. 7.7%, which seems adequate given the hostile situation, the time deals in the sector take to complete (all relevant authorisations could take between 12 to 18 months, according to Veolia).
  • The share price of Suez is slowly but steadily approaching €18.

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