Daily BriefsEvent-Driven

Event-Driven: Linklogis, Oil Search Ltd, Milton Corp Ltd, SK Telecom, Xpeng, Alight Inc, GCP Student Living and more

In today’s briefing:

  • Linklogis Short Sheller Report – Some Merit, Some Plain Drama – Mixed Bag
  • Santos/Oil Search: Getting Facts Straight
  • Milton’s Marvelous Arb Meanders Along… Marvelously
  • MSCI Std Korea QIR: SK Telecom Downweight, SK IE Tech, Ecopro BM, SK Bioscience, & Kakao Games
  • Short Seller, Valiant Varriors Says Linklogis Is a Glorified Mortgage Broker
  • Xpeng (9868 HK): Potential HSCEI Inclusion & Impact on 2022 Dividends
  • SPACTalk: Shining ALIGHT On The Process Of Separating the Wheat From The Chaff In The SPAC Space
  • Scape Living & IQ / GCP Student Living: Knock-Out Offer

Linklogis Short Sheller Report – Some Merit, Some Plain Drama – Mixed Bag

By Sumeet Singh

Linklogis, a technology solution provider for supply chain finance in China raised around US$1bn in its Hong Kong IPO in Apr 21. It was subject of a short-seller report by Valliant Varriors which was published yesterday, see here.

In this report, we will talk about the points raised by the short sellers.

We have covered various aspects of the deal in our earlier notes:

Santos/Oil Search: Getting Facts Straight

By David Blennerhassett

When questioned by analysts at an investor briefing on the 19 July as to any takeover offers, Oil Search Ltd (OSH AU)‘s chairman Rick Lee denied it had received a change-of control approach.

That wasn’t entirely incorrect. It wasn’t even close. 

The day after that briefing, Santos Ltd (STO AU) confirmed that on 25 June 2021 it had submitted a confidential, non-binding, indicative all-scrip merger proposal to Oil Search’s board.

The proposal, to be implemented through a Scheme, would result in Oil Search shareholders receiving 0.589 new Santos shares for each Oil Search share held. Upon completion, Oil Search shareholders would own 37% of the merged group and Santos shareholders 63%.

The implied transaction price was A$4.25 per Oil Search share, based on Santos’ closing price on 24 June 2021, or a 12.3% premium to Oil Search’s closing price on the same day.

Oil Search agreed there was strategic logic combining with Santos, but that the terms of the combo were “demonstrably not” fair. 

In addition, Oil Search’s MD Kerian Wulff resigned for health reasons and that:

following the receipt of recent concerns and complaints about his (Wulff’s) behaviour …. the Board considered that Dr Wulff had behaved in a manner inconsistent with the standards expected by the Board in relation to his management style.

Lots more below the fold.

Milton’s Marvelous Arb Meanders Along… Marvelously

By Travis Lundy

In mid-late June, the two largest Listed Investment Corporations in Australia – Milton Corp Ltd (MLT AU) and Washington H. Soul Pattinson and Co. Ltd (SOL AU) – announced plans to merge, with SOL (a.k.a. “WHSP”) becoming the surviving entity. 

This was discussed by David Blennerhassett in WHSP’s Proposed Merger With Milton Corp and by myself in Milton Merger Is A Most Marvelous Arb and Milton-WHSP Merger Index Implications and the Marvelous Arb

It is a complicated deal. 

Milton had been trading at a discount to NAV, where NAV was 97% or so listed stocks. WHSP had been trading at a premium to NAV. WHSP agreed to pay a premium to NAV for MLT shares, but the construct provided for some really interesting other optionality (some positive, a little negative) for MLT shareholders. 

In early July, Milton announced its NAV at A$5.50/share and assuming it is exactly A$5.5000/share, the Quiddity Milton Model was off by 0.16%. When it released its top 20 stock and weights list which showed about A$50-60mm of adjustments to positions since 31 Dec 2020 within the top 20 names, that lowered the NAV miss to about 0.07% and that is probably a matter of timing and stray dividend income or a mark on its private assets.

Interestingly, as WHSP rose 10% then came back a bit, and Milton rose with it, but the Milton NAV did not rise much, the “spread to terms” has stayed reasonably stable except for some near-market-close shenanigans at times. 

But it still feels like people don’t get it. 

There’s some really interesting convexity here. Still.

And the supply/demand tilt is remarkable.

MSCI Std Korea QIR: SK Telecom Downweight, SK IE Tech, Ecopro BM, SK Bioscience, & Kakao Games

By Sanghyun Park

August quarterly index review hurdle

The MSCI QIR updates the Global Minimum Size Reference based on the existing Investable Equity Universe (Section The existing Market Investable Equity Universe and the number of existing segment companies do not change. The market cap of the company in the corresponding ranking becomes the Market Size Segment Cutoff (Section And for non-constituent stocks (mostly recent IPOs) to be added in the quarterly review, the same size criteria for fast entry apply.

  • A full market cap hurdle >= Interim cutoff × 1.8x
  • A free float-adjusted market cap hurdle >= Interim cutoff × 0.5 × 1.8.

Recently, MSCI has decided to apply the criteria of the semi-annual index review to all four review quarters. However, the implementation date has not yet been determined. Therefore, it is highly likely that the MSCI will apply the previous criteria to this QIR.

The market cap cutoff for this QIR is estimated at US$2.8B (₩3,220.1B). Therefore, the full market cap hurdle is estimated at ₩5,796.2B, and the float-adjusted market cap hurdle is projected at ₩2,898.1B.

August QIR hurdle
Interim cutoff₩3,220.1B (US$2.8B)
Full market cap hurdle₩5,796.2B (Interim cutoff × 1.8)
Float-adjusted market cap hurdle₩2,898.1B (Interim cutoff × 0.5 × 1.8)
Source: Clepsydra Capital

Short Seller, Valiant Varriors Says Linklogis Is a Glorified Mortgage Broker

By Oshadhi Kumarasiri

Short seller Valiant Varriors may not have hard facts to accuse Linklogis (9959 HK) of clear fraud apart from minor violations of the law by some of the subsidiaries. However, the underlying factor that the short seller highlight is that Linklogis is nothing but a glorified mortgage broker (not a tech-enabled cloud software as a service platform), relying on cheap human labour instead of AI to do the work.

Linklogis fooled many investors, including the biggest investment managers and technology companies like Tencent, portraying itself as a technology company when it was really a mortgage broker. The Chinese government is currently on high alert about these issues in overseas listings and it is possible that Linklogis might result in an extension of crackdowns to Hong Kong and the domestic exchanges.

Valiant Varriors also highlights that Linklogis has consistently lied about its large exposure to the risky real estate market, violated laws related to factoring companies, exaggerated technology capabilities, evaded tax and misled investors by overstating revenues.

We believe all these are very series allegations, and it is hard to refute the basis of the short seller’s arguments and some of the evidence presented.

Xpeng (9868 HK): Potential HSCEI Inclusion & Impact on 2022 Dividends

By Brian Freitas

Xpeng (9868 HK) listed in Hong Kong on 7 July was added to the Hang Seng Composite Index (HSCI) at the close of trading on 20 July. However, being a WVR security, the stock will not be eligible for Southbound Stock Connect till early 2022.

Subject to passing the velocity test, we see Xpeng (9868 HK) as an inclusion in the Hang Seng China Enterprises Index (HSCEI INDEX) at the December rebalance, replacing Evergrande Real Estate Group (3333 HK).

With Hang Seng Indexes treating the stock as a primary listing, HSCEI passive trackers will need to buy a large part of the stock that was offered in Hong Kong. This could push Xpeng (9868 HK) to trade at a premium to Xpeng (XPEV US) and there will be arb opportunities which could result in conversion from the ADS to the HK listing.

The inclusion of Xpeng (9868 HK) in the index will push the Hang Seng China Enterprises Index (HSCEI INDEX) 2022 dividend futures lower. With the recent changes in China to companies looking to list on a foreign exchange, the HFCAA, and other structural changes to the index, we prefer a short position in the HSCEI 2022 dividend futures.

SPACTalk: Shining ALIGHT On The Process Of Separating the Wheat From The Chaff In The SPAC Space

By Robert Sassoon

Back in September 2020, amid a boom in SPAC investing that had never been seen before and against the backdrop of profitless companies (and in some cases years from actual revenue generation) being propelled to insane valuations , we published an insight effectively warning investors to be very wary and selective (cf. MergerTalk: SPACs May Have Become The Hot New Trend, But SPAC Investment Requires A Health Warning. Read more: https://skr.ma/JNmvg ). The fresh supply of SPAC IPOs in the US keeps on coming -the number of completed SPAC IPOs so far this year has already eclipsed the record total set for all of 2020 by 51% (374 vs 248)  and is well on target to surpass the number of traditional IPOs in the US for the second year running – in  2020, there were a total of 227 traditional IPOs with that number standing at 157 so far this year, well behind SPAC IPOs. In 2020, SPACs raised more cash ($83BN) than the total amount raised  over the preceding 17 years. So far in 2021, the cash raised from SPAC IPOs is already approaching 40% higher than 2021 at $114BN.

However, these stats do not disguise the fact that the enthusiasm for SPACs has cooled  since mid-February. A snapshot reflection of this change in mood is the performance of the first 3 SPAC ETFs introduced to the market which began with SPAK at the beginning of October 2020.

The average size of SPAC IPOs this year is 9% lower at $305MN than last year’s ~$336MN. Perhaps more revealing, out of a total of 152 SPACs total that have announced business combinations and are in the process of de-SPACing, 92 (i.e., 61%) are trading below the SPAC IPO price of $10.  Of the 134 SPAC business combinations completed around one half are currently trading above the  SPAC IPO price, and many of those well below their post-merger highs.

As our November insight indicates, we have been somewhat skeptical of the SPAC investment space. We believe that much of the SPAC investment frenzy witnessed in the past 18 months has was driven by  thematic interest over the more diligent scrutiny of the business combination.

The observation is that not all SPAC mergers are created equal and that the majority are prone to value destruction.  It appears that SPAC investors are most excited about transactions in “emerging” trends such as green mobility or pandemic resistant areas such as online gaming and packaged/healthy foods rather than companies with a solid fundamental track record of revenue generation and profitability.

Source: MergerTalk: SPACs May Have Become The Hot New Trend, But SPAC Investment Requires A Health Warning, November 2020

We are not suggesting for one moment that SPAC investing is a passing fad. The SPAC investing community is a far cry from the predominantly roulette table retail investors of yesteryear. Yes, the speculative element in SPACs has been very  much in evidence over the past 18 months, but greater involvement from well established institutional investors/sponsors in the most recent SPAC wave and the prospect of more intense regulatory scrutiny following several high profile investment debacles in the past 18 months will hopefully see this investment class evolve towards greater emphasis on quality rather than quantity. As of today there remains a lot of liquidity chasing SPACs with capital searching for deals. As of today there are 305 pending IPOs, 574 active SPACs of which 425  still need to find companies with which to merge.

While there is certainly a lot of chaff in the SPAC investment space, there are also hidden gems  to be uncovered. Not uncommon in thematic oriented investments, when in fashion, the rising tide raises all ships, whether seaworthy or not. By the same token, when enthusiasm wanes, even the better quality companies can get caught up in the sell-off. This is more so in an investment category where there is still limited research coverage.  Judging from the job postings we have seen, investment banks  and hedge funds are looking to build out their SPAC research capabilities, but the current dearth of quality sell-side coverage of the 100s of active SPACs creates an opportunity for those willing to put in the required research/due-diligence effort to discover potentially lucrative undervalued  businesses.

In this respect,  the simple formula we would follow is to hone in on SPACs with good sponsors backed up by a strong track record, either in the process of executing an Initial Business Combination (IBC) or having recently completed business combination with a company with a fundamentally sound business and strategy, preferably supported by an established operating track record that is already delivering revenues and profitability. There may be a number of other hidden gems to uncover within the SPAC universe, in this insight, we highlight one example of a recently completed business combination which has caught our eye – Alight Inc (ALIT US) which we believe ticks all the aforementioned boxes.

Scape Living & IQ / GCP Student Living: Knock-Out Offer

By Jesus Rodriguez Aguilar

A consortium formed by Scape Living PLC and iQSA Holdco Ltd entered into an agreement to acquire GCP Student Living (DIGS LN) for approximately £969 mn on 16 July, i.e. 213p/share, cum dividend, via a scheme of arrangement.

The consortium is partially funded by equity from their respective primary shareholders, being funds managed by APG Asset Management N.V. and Blackstone. Scape Living and iQ have entered into a separation agreement pursuant to which, it is intended that all existing real estate assets owned by GCP will be transferred to Scape Living and iQ or their respective affiliates.

The transaction is subject to conditions including, approval from not less than 75% GCP Student Living plc shareholders, approval from court, approval from Competition and Markets Authority, approval from third parties.

The GCP Student Living plc directors intend to recommend unanimously that the scheme shareholders vote in favour of the scheme at the court meeting and the resolutions relating to the acquisition to be proposed at the GCP general meeting.

A shortfall of beds relative to student accommodation demand has seen increased interest from money managers in recent years. This business provides predictable income and recurring cash flows, although the alternative use of the assets as apartment or studios is very attractive.

Competitors of GCP, Scape Living and iQ are The Unite Group (UTG LN), the top listed player in the sector (with over 74,000 beds), Empiric Student Property (ESP LN), the Halls of Residence from the University of London and other independent players (Goodenough College, etc.).

At a 9.3% premium to pro forma EPRA NTAV of 195 p/share, this seems to me a knock-out bid. While it may be discussed whether this offer is opportunistic after a period of Covid & Brexit related underperformance, the truth is that as the Board puts it, removes uncertainties. The consortium bets that full occupancy could be achieved soon (consensus does not forecasts it until 2023e).

There has been a high volume of shares traded since announcement, the market seems to bet on a sweetened bid or a competing offer (from Unite, Empire or others). 

GCP closed ay 214p/share on 212 July, a c. (0.5%) gross spread.

BUY on dips.

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