Event-Driven: Japan Exchange Group, FamilyMart Co Ltd, Keppel DC REIT, Tsuzuki Denki, Skyworth Group Limited and more

In today’s briefing:

  • JPX Goes In to Nikkei 225 – Time To Sell
  • Keeping It in the Family: Why Familymart Is Worth so Much More to Itochu
  • STI Index Rebalance Preview – Keppel DC REIT Inclusion Possibilities
  • Tsuzuki Denki (8157 JP): 3 More Days to The Inclusion Event – Prepare to Sell/Short
  • Skyworth (751 HK): Partial Buyback Circular Despatched

JPX Goes In to Nikkei 225 – Time To Sell

By Travis Lundy

When it was reported in the press and subsequently announced by Sony on the 19th of May part way through the day that Sony was going to launch a Tender Offer to take out minorities in Sony Financial Holdings (8729 JP) the immediate reaction of first order thinkers was to buy Sony Financial. The immediate reaction of second-order thinkers was to buy Japan Exchange Group (8697 JP) because taking out minorities in Sony Financial would cause it to be delisted, putting its place in the Nikkei 225 Average up for grabs. 

The moment the news came out the stock was ¥2,080 a share, and quickly jumped. 

The two-hourly chart below shows the evolution of Japan Exchange Group shares against TOPIX, setting the two at the “same” price at the time of the Sony Financial announcement. 

source: tradingview.com, Quiddity

JPX shares closed 3.7% higher that day at ¥2,166, then opened the following day at ¥2,223, traded up, then briefly lower than ¥2,223 a day later before marching higher. The shares are up 37.4% since the moment before the announcement while TOPIX is up 5.9% during the same period. 

The period since the Sony Financial announcement can be split into two parts. 

  1. The period where Japan Exchange was the favorite to replace Sony Financial in the Nikkei 225 Average, starting at the blue vertical line, and 
  2. The period since when the Nikkei confirmed after the close on 15 July that indeed Japan Exchange had been selected. 

During the period prior to the Sony Financial news, Japan Exchange Group announced earnings (April 30 – the E in the red circle at the bottom) and the shares dipped, rebounded, and net did nothing. The subsequent rise in the share price was NOT linked to earnings. Or volume traded in the market, or really anything other than speculation on its inclusion in the Nikkei 225 Average.

This insight carries a bit of analysis, and a trade recommendation. You can guess which way it tilts.

The trade is later today.

More below the fold…

For the precursor to this insight, please see Nikkei 225 – JPX IN, Sony Financial OUT

Keeping It in the Family: Why Familymart Is Worth so Much More to Itochu

By Michael Causton

Itochu’s plans for Familymart are about a lot more than control – it has had effective control for years anyway.

There is a much bigger story: the fact that food is the one last hold out of traditional distribution practices with multiple layers of importers, wholesalers and a fragmented retail sector, resulting in gross inefficiencies. 

Japan’s biggest trading companies, particularly Itochu Corp (8001 JP) and Mitsubishi Corp (8058 JP), have been major beneficiaries of this system, capturing margins at all stages of the channel, from raw material imports to retail. 

Pressure on the food sector to modernise has been building for a decade and this is now happening in the form of retailers building to national scale to finally take on this supply-side dominance and also learning to source direct, cutting out wholesalers. The trading companies know this and are themselves beginning to build what are in effect vertically integrated food distribution businesses, at the same time as pivoting themselves as the main suppliers to Japan’s biggest food-based retailers.

Itochu and Mitsubishi are spearheading this change. This rivalry in the food sector between the two venerable trading firms is as important as the rivalry between their proxies in convenience store retailing, Familymart and Lawson.

Absorbing Familymart is the basis for a much bigger consolidation of Itochu’s interests which include stakes in numerous food retailers as well as role as the biggest food wholesaler when all its subsidiaries are taking into account.

Sadly, current Familymart shareholders won’t benefit from this consolidation nor the likely spike in operating margins as some of the fat in food distribution is finally cut.

In Japan, where food prices have been kept so high for so long by entrenched interests (Japanese love food but the 24% of consumption budgets spent on food (much, much higher than most  equivalent markets) is much more about high prices than being a gourmet nation), the potential to cut costs is staggeringly large.

Even within CVS retailing, Itochu will likely benefit from the continued growth of the big three retailers – despite format saturation.

For the sector as a whole, 2019 saw the highest average daily sales per store so far of ¥590,794, a 12.1% increase on 2010. In the same decade, total store numbers increased by 33.4%, but total sales increased by 50.2%.

CVS have not just expanded in number, but their position and ability to exploit the market have improved dramatically too. Based on METI figures, CVS market share of retailing has expanded from 6% to 8.4% in the same period.

In other words, saturation is important but not that important because CVS are finding new ways to expand both their share of retailing and influence.

STI Index Rebalance Preview – Keppel DC REIT Inclusion Possibilities

By Brian Freitas

The FTSE Straits Times Index (STI) (STI INDEX) is a free float market cap weighted index that tracks the performance of the top 30 companies listed on the SGX. The next rebalance will be effective after the close of trading on 18 September and the changes will be announced on 3 September.

Due to the merger of Capitaland Commercial Trust (CCT SP) and Capitaland Mall Trust (CT SP) expected to be completed by 30 September (the Long-Stop date), there will be a space available to keep the number of constituents at 30. At the current time, Keppel DC REIT (KDCREIT SP) is the highest ranked non-constituent by full market cap and should be included in the index. The timing of the inclusion is uncertain given that CCT and CMT have not announced the dates for the CCT EGM, the CMT EGM and the Trust Scheme Meeting.

If Keppel DC REIT (KDCREIT SP) is not included in the September review, it will go in to the Reserve List and should be included when the CCT/CMT merger is complete.

In this Insight, we take a look at the inclusion eligibility criteria, possible changes and their impact, and propose a trade idea.

Tsuzuki Denki (8157 JP): 3 More Days to The Inclusion Event – Prepare to Sell/Short

By Janaghan Jeyakumar, CFA

On 17th June, Japanese network and system integrator Tsuzuki Denki (8157 JP) confirmed (J-only) they had received approval to move from the Second Section to the First Section of the Tokyo Stock Exchange as of 24th June 2020.

The pre-announcement closing price was ¥1,242 on 17th June – the day on which I published a BUY insight TOPIX Inclusion (8157 JP): Tsuzuki Denki.

The announcement was something of a surprise, as it often is when a stock gets promoted to TSE1 after sitting on TSE2 for many years (10+ years for Tsuzuki Denki), especially without showing any “pre-event” signals like equity offerings prior to the announcement.

On the first day of trading, the stock popped 22.5% closing at ¥1,522. 

Since then, the stock has enjoyed a strong rally, closing at a high of ¥2,146 on 17th July. After a slight correction in the last few days, the stock closed at ¥1,849 today.  

Source: Tradingview.com, Quiddity

If you had bought the stock on the first day post-announcement, you would currently be at least +21.5% up in just over a month.

The Inclusion Event will be at the close of trading on the 30th July 2020 and this will mark the end of dramatic inflow dynamics. With 3 more days to the Inclusion Event, we take a look at the possible trade actions. 

As always, there is more below the fold. 

Skyworth (751 HK): Partial Buyback Circular Despatched

By David Blennerhassett

On the 17 June, Skyworth Digital (751 HK) surprised the market with a partial buyback (& not a full Offer)  – 12.83% of shares out or 392.8mn shares, at HK$2.80/share, a 32.1% premium to last close.

Stephen Wong & concert parties holding 40.88% of shares out and will not tender. Additional directors holding 0.9% have given an undertaking not to tender. With 58.22% of the register (or the Independent Shareholders) subject to the buyback, this implies a minimum pro-ration of 22.04%. The Independent Shareholders are required, by way of a special resolution (75% vote), to approve a whitewash waiver such that Wong is not obligated to make a general offer for shares not held. 

At HK$2.40, minimum pro-ration is a back end at HK$2.29 which isn’t a huge discount, but with 14.9% accretion of EPS and 7.7% accretion of BVPS, the back-end should trade at perhaps 7.7-14.9% above where it was trading.

Separately, Skyworth announced on the 15 July it had submitted a PN15 application to spin-off and list (non-wholly-owned) Shenzhen Coocaa Network Technology Company Limited (Coocaa), an internet-based operator of smart television systems.  There is no guarantee the spin-off will occur or not. Concurrent with the Coocaa announcement, Skyworth announced a positive profit alert.

The New News

On the 2 July, Skyworth announced it had delayed the Offer Document until the 31 July, from 8 July originally. This was largely to be expected. The Offer doc is now out and the Offer is open for acceptances. The SGM (for the whitewash waiver) will be held on the 2 September, with the close of the offer on the 2 September. The IFA considers the Offer to be fair and reasonable.

As always, more below the fold. Plus Ye Olde Arb Grids

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